Kelly (continued)

In addition, investors were asked to indicate whether they, or any member of the syndicate, were familiar with: i) the concept itself; ii) the industry in which the venture competed; and iii) the entrepreneur prior to the investment being made. "Familiarity" was measured dichotomously (yes/no) given the difficulties faced in trying to: i) operationalise these variables in a meaningful and consistent way for respondents; ii) accurately measure "depth" of familiarity; and iii) maintain the time commitment required of respondents to a reasonable level.

In all, eight serial investors agreed to participate in our study providing background information on forty-one private investments. The profile of a "typical" serial investor in our sample is as follows:

·a service (55%), manufacturing (25%), or high technology (20%) industry; and usually

FINDINGS

We were surprised to discover that two distinct groups of serial investors emerged; one group choosing to invest on their own all the time (n = 2) while the other almost exclusively invested as part of investment syndicates (n = 6). Compared to the results of earlier studies (Mason, Harrison & Chaloner, 1991; Mason, Harrison & Allen, 1995) which concluded that the majority of UK private investors are independent, a majority of the respondents in our study (70%) invest with others either exclusively or most of the time. Venture capital funds invested alongside private individuals in over one-third of the syndicated deals we reviewed. Freear, Sohl & Wetzel (1990) were the first to provide evidence in support of the "complementarity hypothesis" concluding that private investors typically invest in smaller amounts and at earlier stages than venture capitalists. The relationship between formal and informal venture capital investors was viewed in sequential terms. On the basis of our interviews, we would expand the notion of complementarity to include deals where venture capitalists and private investors invest simultaneously with the latter assuming the role of active and informed monitor based on prior relevant industry and/or new venture experience.

To test propositions 1 and 2, we asked respondents if they, or one of the co-investors to a deal, had prior experience with the industry in which the venture competed. When an investor chose to invest alone, 30% of the deals were in an industry in which the investor had some previous direct experience. For deals which involved a syndicate of investors, more than one-quarter of the investments we reviewed were made in an industry sector in which at least one member of the syndicate had direct experience. While it is evident that serial investors who invest alone do display a slightly higher propensity to invest in industrial sectors which are familiar to them as compared to individuals which choose to invest with others, it is important to note that a substantial percentage of investments made by both groups - in excess of 70% - are in industry settings in which the investor and/or syndicate partner(s) had limited direct previous experience. Through an examination of their actual investment activity, serial investors appear to prefer diversifying their "bets" in a number of industrial sectors foregoing the possible benefits from specialising in industries where they have prior experience. We thus conclude that propositions 1 and 2 are not supported.

That is not to say that investors invest "blindly" into opportunities totally unfamiliar to them. Respondents were asked if they or any member of the syndicate was familiar with the "concept" upon which an investment proposal was based. Irrespective of whether an investor chose to invest alone or with others, 80% of the time the investor and/or a syndicate member reported some degree of familiarity with the concept. In many respects, concept familiarity may be a necessary prerequisite to the decision to invest and reinforces the importance for entrepreneurs seeking funding to communicate their ideas in a clearly understandable and coherent way to potential investors.

We proposed that private investors would choose to deal with agency risk by displaying a propensity to back an entrepreneur known to them personally, to other member(s) of the syndicate and/or to the referrer of the deal. For a majority of the deals backed by solo investors (70%), the entrepreneur was known either by the investor or the referrer; the comparable figure for syndicated investments, including situations where the entrepreneur was known personally by a syndicate partner, was 56%. In general, our data lends support to propositions 3 and 4 which argued that private investors attempt to deal with agency risk by backing "known entities". On the face of it, serial investors display a much stronger propensity to invest in "familiar people" as opposed to "familiar industries"; evidence which lends some support to Fiet's (1991; 1995a; 1995b) conclusion that informal investors are much more concerned about agency as opposed to market or business risk. It is also important to note that, almost as often as not, syndicate serial investors will back entrepreneurs which are personally unknown to them or to other member(s) of the group. Anecdotal evidence suggests that there might be "comfort in numbers" insofar as individuals contemplating making an investment feel comfortable with inherent agency risk secure in the knowledge that a number of other individual investors also have capital at risk in the venture.

In view of the time required for investors to engage in various post-investment activities, we argued that solo investors who eschew the benefits of information and "monitor" sharing through participation in syndicates should have a smaller number of investments in their portfolio. We partitioned the sample into two distinct subgroups - solo investors who exclusively invest on their own and syndicate investors who exclusively or in large measure invest alongside others - as follows:

TABLE 1

(calculated means)	Solo Investors (n=2)	Syndicate Investors (n=6)
Total Number of Private Investments Made	4.00	5.50
Number of Investments Currently in Portfolio	2.50	4.30
Value of Current Portfolio (at cost)	£50,000	£335,000
Average Investment Size	£20,000	£80,000

First, consistent with proposition 5, syndicate investors do have more investments in their current portfolio as compared to solo investors. Second, syndicate investors have made more investments in an absolute sense and invest, on average, four times more per investment. Irrespective of whether an investor chooses to actively or passively monitor a given investment, it seems reasonable to suggest that every investment in a portfolio will require some time commitment on the part of the investor. We asked each investor what constituted a "reasonable" number of investments to maintain in a portfolio at any given point in time. Uniformly, all respondents considered the ideal portfolio size was between four and five investments. On the face of it, the syndicate investors we interviewed would appear to have less capacity to add new investments to their portfolio as compared to solo investors.

SAMPLE AND METHODOLOGY

FINDINGS

TABLE 1