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