”Angel investors’ decision-making is strongly related to emotions and social interactions”
Did you know that angel investing is not just about money, calculation and profit? Emotions and human interaction play a major role in an angel investor's decision-making process. Researcher Kirsi Snellman from LUT University has studied the role of emotions in angel investment decisions.
"Do I leave the meeting excited and start thinking about what we could do? I would love my network to meet these guys. I would like to spend time with the team. All of these things. That's what I start to think about after a meeting. That's when my gut feeling says this could be good, right? However, if someone who knows the market says it doesn't make sense, then I don't invest." - Anonymous angel investor
Predicting profitable new venture investments is difficult. Even if calculations and future predictions signal prominence, most investments will not generate the profit entrepreneurs propose in their business plans. What, then, could help investors to make better and more meaningful investments if estimates alone are not sufficient for predicting the future performance of new ventures?
We complement recent research on the hard criteria in decision-making processes and add discrete emotions to the list of tools angel investors can use in their evaluation. This is important since, through their capacity to signal relevance and meaning, emotions can help the angel investor to recognize the most important investment opportunities more effectively. While we acknowledge the role of an angel investor's gut feeling in managing complexity and risk, a great deal of potential remains untapped in understanding the socially embedded nature of an investor's own discrete emotions.
Emotion complements rational analysis
In our research, we explore whether and how angel investors' emotions unfold in the investment opportunity process as the investors interact with the social environment. Drawing on qualitative interviews with angel investors, our analysis has revealed that an investor will grant resources to a new venture only if the following three requirements are met: First, the investment opportunity scores high on most of the multiple criteria (idea/product, entrepreneur/team, market, traction). Second, a rational analysis of the multiple criteria is associated with emotions such as excitement or the fear of missing out. Third, the first two requirements are bolstered by trusted referees and networks, such as other syndicate members.
When angel investors evaluate investment opportunities, they engage in a developmental process characterized by three elements: subjective validation, social validation, and investment decision. In this process, the subjective validation phase mainly highlights action-oriented and embodied characteristics of emotion, while the social validation phase is related to socially situated and distributed characteristics of emotion.
Before a deal can be completed, numerous iterative rounds take place during which the opportunity belief changes and transforms as a result of interaction with relevant others. As one angel investor told us: "I validate team performance with my gut feeling, but the idea and market are validated through my social networks. I need them both." This indicates that although angel investors are allowed to follow their hearts in making these decisions, they are deeply connected with their investor networks.
Takeaways for angel investors
We introduce socially embedded emotion as an important element in rating investment opportunities. Moving beyond treating emotions as autonomous, context-free inner processes, we highlight their capacity to unfold in interactions with the social environment. Capturing emotion as action-oriented, embodied, socially situated, and distributed, we embrace its adaptive, socially situated dynamics.
Valorizing this rich nature of emotions in investment opportunity evaluation, we take a step toward a better understanding of the soft aspects in the relationship development that leads to new venture investments. These results will help investors to home in on their next meaningful investment and entrepreneurs better to grasp why some new ventures obtain private funding while others do not.
Moreover, we hope that these results will inspire policy makers to design new incentives that improve the flow of investments into new, promising, ethical ventures. As one angel investor told us: "Investing should be a matter of the heart and not be associated with the fear of losing money."
Kirsi Snellman is a researcher at LUT School of Business and Management. Her research interests include emotions, decision-making, responsible innovations, and ethical angel investments.
The original blog post was published on the Finnish Business Angels Network (FiBAN) website.