The Effect of Multidimensional Proximity on Business Angel Investments

Abstract: Background: Business angels are a vital source of capital for innovative startup firms in the early development. However, many startups still fail and researchers argue that financial constraint is one of the major reasons for this. Even of those startups that have the potential to fulfill angel investors' expected return on investment, most are rejected during the angel's investment decision process. Information asymmetry, risk, and distrust in the relationship between the investor and the entrepreneur result in investment barriers. The concept of proximity has been proposed as a suitable conceptual foundation to understand how the relationship between angel and entrepreneur might hinder or benefit the investment decision. Purpose: The purpose of this paper is to examine the influence of proximity on investment behavior and answer the research question: What is the relationship between multidimensional proximity and the likelihood of business angel funding for innovative startups Method: This study engages a mixed research design in consideration of the intermediate maturity of the business angel research field. Explorative literature review, confirmative qualitative pre-study and a quantitative survey were carried out. The resulting data is analyzed with structural equation modeling and applied to the theoretical framework of multidimensional proximity. Conclusion: The conclusion of this paper is that multidimensional proximity can partly explain the likelihood of funding. A fully mediating effect of relational proximity regarding the relationship between functional proximity and the likelihood of funding is found. Moreover, social proximity appears to be the strongest determinant for the construct of relational proximity, followed by organizational and cognitive proximity dimensions. Contribution: This thesis confirms conjectures in prior research that the functional proximity between business angels and entrepreneurs is mediated by the relational proximity of the two parties. Contradictory to prior notions we find a fully mediating effect of relational proximity that calls for confirmation in future studies. We test the novel theoretical framework of multidimensional proximity holistically in this research setting for the first time. The findings assist in provisionally explaining the funding of startups by dissecting the investor-founder relationship, and promoting future research directions.