Conceptualising early-stage new venture informal investors as co-entrepreneurs whose actions are socially embedded, we examine the role of social influence and how it interplays with entrepreneurial experience at the individual level leading to informal investment. We extend theories of social homophily and social influence to argue that informal investment decisions are influenced by shared experience and entrepreneurism in peer groups. We test our hypotheses with a multi-level model using first a large cross-country dataset and next in depth within a country. Our analysis reveals that both individual entrepreneurship experience and peer group-embedded experience significantly influence the likelihood that an individual becomes an early-stage investor. Furthermore, these social effects substitute for the lack of individual entrepreneurial experience.

Plain English Summary:

The key role of peer groups in informal investment. In this paper, we use a large multi-country database (Global Entrepreneurship Monitor) to explore what leads people to become an informal investor in new ventures. Informal investors, sometimes referred to in developed economies as business angels but also a widespread phenomenon in developing countries, play a key role in the formation and establishment of new ventures in the early stages, second only to the entrepreneurs themselves. We identify two crucial factors determining the decision to become an informal investor, namely, prior experience as an entrepreneur and membership of a peer group with high entrepreneurial experience (social homophily). Thus, individuals are more likely to become informal investors when their peers, in groups defined by age, gender, education, income and neighbourhood, have higher levels of entrepreneurial business experience. Moreover, membership of an experienced peer group can to some extent substitute for deficiencies in one’s own entrepreneurial experience. Our work highlights the importance of social networks, role models and peer group–based entrepreneurial ecosystems in fostering entrepreneurship in developing as well as developed economies.