Failing Fast: How And Why Business Angels Rapidly Reject Most Investment Opportunities

• Main Author: Maxwell, Andrew Lewis
• Language: en
• Published: 2009
• Subjects: Business Angel; Decision-making; Funding; Entrepreneur; Investor; Management Sciences
• Online Access: http://hdl.handle.net/10012/4253

Seed technology ventures require external sources of debt and equity funding, once they have exhausted founders personal resources, to achieve their potential economic impact. The primary source of equity finance for seed ventures is from Business Angels who invest their own money in the company and frequently provide additional sources of assistance to the entrepreneur. Once seed ventures have completed their business plans, however informally, they pitch their opportunity to potential investors, However, less than three per cent of these pitches to Business Angels are successful. It is suggested that a major reason for this low success rates is a lack of understanding by pitching entrepreneurs of how Business Angels make their investment decisions. Investigating how Business Angels make their investment decisions will identify some of the causes of this high failure rate. In turn this will help to suggest ways for entrepreneurs to increase their likelihood of successful interactions with investors. Real-time techniques that involve observing successive interactions between five Business Angels and 150 pitching entrepreneurs are used to gather data on the investment decision-making process. The technique of observational interaction has been used in psychological research to observe interpersonal relationships and their development within the context of a complex process. This complex process can best be understood by breaking down the process into stages. In this research the initial interaction between entrepreneur and Business Angel is investigated. It is found that initially the Business Angels use a filtering technique to expeditiously reject most opportunities. This allows, allow them to concentrate their limited resources on further investigation of a few promising opportunities that appear to offer the highest potential return. The unique data set used in this research is taken from a reality TV show – CBC Dragons’ Den – where entrepreneurs participate in order to receive real investment from five wealthy individuals known as “Dragons”. Using the video material gathered during the recording of the show it is possible to observe how the five Dragons initially filter out most opportunities, before looking at more positive factors when determining their interest in investing in the few opportunities remaining. This filtering process involves a non-compensatory technique - Elimination-By-Aspects, where the presence of a single one of eight potential fatal flaws is sufficient reason for rejection. While this may not be the most accurate technique, it is the most cost effective approach to decision-making for the investors. To increase accuracy at later stages, the investors adopt a more compensatory decision-making approaches. Improved understanding of the staged nature of the process, and how Business Angels identify fatal flaws at the initial stage of the interaction, provides valuable insights to both investors and entrepreneurs. Armed with this knowledge they can take steps to eliminate such flaws and improve the overall efficiency of the decision making process. This in turn will lead to an increase in successful outcomes of such interactions and consequently the number of seed ventures that are successful in raising third-party funding from Business Angels.