Financing small firms in Saudi Arabia: a study of informal investors' characteristics and decision-making behaviour

Recently, informal venture capital investors have been recognised as an important source of financing small & medium sized enterprises(SMEs). Unfortunately, very little research (if any) has been devoted to understanding how these investors fund particular investments in developing countries. This research study conducts the first-ever, detailed investigation in Saudi Arabia of the informal investor's characteristics, and decision-making behaviour across the full investment process. A theoretical framework, based on the asymmetric information that characterises this market, was used. Five hypotheses were developed to see how informal investors behave to reduce the inefficiencies and risks associated with the asymmetric information problem. Data from 156 Saudi informal investors were compiled. To analyze the data, three statistical methods, Factor Analysis, Cluster Analysis and Two-Way ANOVA, were applied. A descriptive picture of the profile and the investment activities of informal investors is presented in Chapter Seven. Research hypotheses related to investors' decision-making were then tested in Chapter Eight. First, the study shows that informal investors in Saudi Arabia depend on personal searches for investment opportunities. This is clearly supports the view that the flow of information between entrepreneurs and informal investors is inefficient. Secondly, in order to select a high quality entrepreneur and venture, investors use specific criteria though clearly the entrepreneur's reputation is the most important criterion. Third, informal investors use staging of finance and involvement in the venture to have access to information and gain better control over the venture. Fourth, informal investors apply the above methods to reduce the risks of the agency problem. However, informal investors in Saudi Arabia prefer to monitor the behaviour of entrepreneurs through outcome-based incentives with moderate use of involvement and behaviour monitoring. In concluding the thesis, recommendations and the possible implications of these findings are discussed. Finally, future research is suggested that may improve the understanding of informal investors but which is beyond the scope of this thesis or which depends on its findings.