Business angel early stage decision making

TitleBusiness angel early stage decision making
Publication TypeReport
Year of Publication2011
AuthorsMaxwell, AL, Jeffrey, SA, Levesque, M
TypeCEMI Executive Summary Series
Keywordsbusiness angels, decision making, elimination-by-aspects, qualitative analysis

Maxwell, A. L., Jeffrey, S.A. and Lévesque, M. (2011). "Business angel early stage decision making." Journal of Business Venturing 26(2): 212-225.

Using 150 interactions between entrepreneurs and potential investors, we study early stage business angel decision making. We show that contrary to the majority of past research that suggests they should, angel investors do not use a fully compensatory decision model wherein they weight and score a large number of attributes. Rather, they use a shortcut decisionmaking heuristic known as elimination-by-aspects to reduce the available investment opportunities to a more manageable size. If an opportunity is diagnosed with a fatal flaw, it is rejected in the first stage of the decisionmaking process, but all opportunities with no fatal flaws do progress beyond that stage.

Key Findings:

  • Business angels use elimination-by-aspects (EBA) to trim the set of business opportunities looking for investment.
  • Once the set of business opportunities looking for investment has been trimmed (i.e. after the selection stage), business angels consider different factors and use different decision making processes.

Implications for Managers:

  • Entrepreneurs aware of each of the eightmost common causes for rejection at the selection stage (i.e., a C score for adoption, product status, protectability, customer engagement, route tomarket,market potential, relevant experience, or financialmodel) can findways to eliminate or reduce themprior to pitching their ideas to a potential investor.
  • entrepreneurs are made aware of the importance of these factors, they will likely present more relevant information to potential investors and reduce the potential for rejection due to miscommunication.