A social-psychological perspective on angel investment decision-making

Abstract

Academics and practitioners have all often claimed that acquiring resources is a challenging task that entrepreneurs need to overcome to develop their ventures (e.g., Stinchcombe, 1965). This challenge is particularly acute for young, high-growth potential ventures because they often involve unproven technologies or business models (e.g., Berger & Udell, 1998). Angel investors are a primary source of early-stage (i.e., seed and startup) risk capital available to such entrepreneurs, and tend to come in after entrepreneurs have depleted their personal savings and money from family and friends (e.g., Drover et al., 2017). Many highly successful companies such as Zoom, Airbnb, Google, Starbucks, The Body Shop, Innocent Smoothies, and Showpad have all been backed by angels. The pitch represents a critical first step towards raising interest among angel investors and securing much-needed funding (e.g., Chen et al., 2009; Kanze, Huang, Conley, & Higgins, 2018; Maxwell, Jeffrey, & Lévesque, 2011). The pitch is a decisive moment in entrepreneurs' quest for money as investors reject 70 to 90 percent of pitches (e.g., Chen et al., 2009; Huang & Pearce, 2015; Maxwell et al., 2011). This dissertation contributes to the growing stream of research that examines angels' investment decision-making. By drawing on theories from social psychology literature, this dissertation seeks to offer a more relational perspective to explore how angels judge entrepreneurs during their pitch and how angel and entrepreneur interact with each other during their first face-to-face meeting. The first paper of this dissertation focuses on the impact of angel's judgment about the entrepreneur on their decision to invest at the end of the pitching phase (i.e., after Q&A session), the second paper focuses on explaining why angels lose interest to invest within the pitching phase (from after the presentation to after the Q&A session) and the third paper focuses on the social interaction between entrepreneur and angel during the Q&A session. More specifically, building on social judgment research and resource allocation theory, the first study explores entrepreneur's warmth and competence as two critical dimensions along which angels perceive and judge entrepreneurs when making investment decisions and how angels' mental resources explain the interplay between perceived warmth, perceived competence and pitch sequence. The second study builds on the Elaboration Likelihood Model as dual-process theory to examine the impact of angel's experience and entrepreneur's verbal and nonverbal behavior on angel's likelihood to lose interest to invest from the presentation to after the Q&A session. In the third study examines the impact of angel's power words when asking questions on entrepreneur's answers.