The Influence of Geographical Proximity and Industry Similarity in a Business Angel’s Investment Choice

Abstract

Business Angels (BAs) play a crucial role in the creation and growth of entrepreneurial ventures. Little is known, however, about their funding criteria. This paper contributes to our understanding of BAs’ funding decisions, by analyzing how their past investments influence the choices of their future investments. We hypothesize that experiential learning processes lead BAs to search for start-ups that are similar to their most recent investments. Using longitudinal data from BAs active in the Internet industry, we find that BAs make trade-offs between geographical proximity and industry similarity when choosing future investments. They tend to invest in ventures that are geographically proximate to their prior investments, but not in the same industry. As geographical distance increases, BAs’ next investment is more likely to be in the same industry sector as the prior investment.