Luiss Open: Financing Innovation
Let's start with the basics: who are business angels, what are BA networks, and why is their role becoming increasingly important?
Business angels (BAs) are individuals who evaluate, select, and potentially finance innovative entrepreneurial projects that they deem most promising. Business angel networks (BANs) are simply associations of business angels, and they serve as the means by which these business angels organize themselves. Networks are important because they act as facilitators and intermediaries, enabling the flow of information from the demand—meaning the entrepreneur proposing the project—to the supply—meaning the business angel financing it.
To better explain why BANs are important, I need to provide a brief “economist's” introduction. The innovation financing market is particularly fraught with friction and imperfections, and this is due to the very nature of the innovation process. Innovation is, first and foremost, an extremely uncertain process, as its outcome is uncertain. It’s also a process where there are significant information issues, meaning there are strong information asymmetries between the entrepreneur seeking funds and the financier who is supposed to provide them. This uncertainty and these information problems mean that traditional financial markets, such as the banking market, are extremely inefficient in these cases. That’s why, in recent decades, “alternative financial markets” for financing innovation have gained traction compared to the traditional credit market. The most notable examples are venture capital and business angels. These markets share some common features: for example, both business angels and venture capitalists provide not only funds but also their expertise—technical or managerial skills and industry knowledge—helping to reduce the uncertainty and information asymmetries we highlighted earlier. Therefore, even though these markets have become more established in some countries than in others, their importance stems precisely from their ability to overcome the inherent frictions in the innovation financing market.