Passion for entrepreneurship or passion for the product? A conjoint analysis of angel and VC decision-making

Passion is important to venture investors, but what specifically do they want entrepreneurs to be passionate about? This study theorizes that angel investors and venture capitalists consider both entrepreneurs' passion for activities related to the product or service the venture provides (i.e., product passion) and passion for founding and developing new ventures (i.e., entrepreneurial passion). We demonstrate that both types of passion become more appealing when the investor perceives that the entrepreneur is highly open and receptive to feedback, suggesting that openness to feedback mitigates potential concerns associated with passion in its extremes. We further find that venture investors differ in their consideration of passion; angel investors and venture capitalists with more investing experience place greater emphasis on the combination of product passion and openness to feedback, whereas those with more entrepreneurial experience emphasize the combination of entrepreneurial passion and openness to feedback.     

Prediction and control under uncertainty: Outcomes in angel investing

Venture investing plays an important role in entrepreneurship not only because financial resources are important to new ventures, but also because early investors help shape the ventures' managerial and strategic destiny. In this study of 121 angel investors who had made 1038 new venture investments, we empirically investigate angel investors' differential use of predictive versus non-predictive control strategies. We show how the use of these strategies affects the outcomes of angel investors. Results show that angels who emphasize prediction make significantly larger venture investments, while those who emphasize non-predictive control experience a reduction in investment failures without a reduction in their number of successes.     

Business angel early stage decision making

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 decision making 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 decision making process, but all opportunities with no fatal flaws do progress beyond that stage.     

Workplace gossip and frontline employees’ proactive service performance

Managers are interested in promoting frontline employees’ proactive behavior because proactivity is crucial for organizational success. This study examined the link between perceived workplace gossip and employees’ (targets’) proactive service performance by focusing on the mediating role of employees’ harmonious passion and the moderating role of perceived job social support. Using time-lagged survey data from 218 supervisor-subordinate dyads in a commercial bank in China, we found that perceived workplace gossip negatively influences employees’ proactive service performance, and that this relationship is mediated by reduced harmonious passion. In addition, perceived job social support attenuates the negative relationship between perceived workplace gossip and harmonious passion, with harmonious passion having a mediating effect on the relationship between perceived workplace gossip and proactive service performance. These results provide new directions for understanding workplace gossip, harmonious passion, proactive service performance, and job social support. The theoretical and practical implications of our findings are discussed.     

Social trust and angel investors' decisions: A multilevel analysis across nations

The decisions made by angel investors are embedded in and influenced by their institutional settings. This paper advances a multilevel model of the direct and indirect effects of social trust on individuals' angel-investment decisions. It is postulated that two dimensions of social trust, namely the level and radius, can enhance information transmission, collaboration, and sanctioning mechanisms within a society. Consequently, they facilitate angel investment and moderate the relationship between it and individual factors. A multilevel model of data from 191,907 individuals across 25 countries shows that individuals in countries with a high level of trust are more likely to make angel investments. Whereas both the level of trust and the radius of trust are found to heighten the positive relationship between an individual's perceived entrepreneurial skills and angel investment, it is interesting to note that these factors weaken the relationship between the perception of new business opportunities and angel investment. These direct and moderating effects are robust after controlling for wealth, cultural values, and other factors. This study contributes to the crossover between research on entrepreneurship and social-trust research.     

Bellwether and the herd? Unpacking the u-shaped relationship between prior funding and subsequent contributions in reward-based crowdfunding

Building on the insights from observational learning and other social influence research, this study challenges the existing literature that proposes a linear relationship between prior funding and subsequent contributions in the crowdfunding setting. Instead, we propose a U-shaped relationship, illustrating a negative relationship between prior funding and subsequent contributions when funding amounts are small and this relationship becomes positive when prior funding amounts are large. Consistent with the rational herding perspective, we assume that individuals do not mindlessly mimic one others' behaviors, but incorporate quality signals into their decision-making. Signals indicating a high quality project such as video quality, as well as the preparedness and passion of the entrepreneur enhance this U-shaped relationship whereas indicators of situational urgency weaken this relationship. Based on a sample of 11,019 daily observations of 333 Kickstarter projects, we find general support for our hypotheses. Our post hoc experiment further supports the mechanisms underlying the U-shaped relationship. This paper extends our understanding of the relationship between past actions and subsequent behavior, and contributes to the literatures of observational learning, crowdfunding, and visual information.Executive summaryWe challenge the extant literature that has proposed, but inconsistently documented, a positive effect of prior funding on subsequent crowdfunding contributions. We argue that such inconsistency is due to the lack of integration of insights from other social influence research, such as observational learning, threshold models, and bystander effects. This research has been limited when postulating that crowdfunding backers simply imitate others' actions in order to mitigate uncertainty producing a linear effect, yet such an effect depends on the intensity of others' actions and may be curvilinear. This research overlooks the fact that backers do not merely passively imitate others' behaviors, but incorporate quality signals sent by entrepreneurs to make such decisions. Thus, it is important to account for potential moderators that may influence the complex relationship between prior funding and subsequent contributions.Based on observational learning research and related models, accrued prior funding may be perceived differently by potential backers: individuals may view accrued funding as a sign of a decreased funding need on the part of a campaign's creators, because others are already backing the campaign or, alternatively, they may see it as a cue of high product quality. These conflicting effects may lead to a U-shaped relationship between prior funding and subsequent contributions at a collective level. At low funding levels, prior funding may be negatively associated with subsequent contributions because such levels indicate there is already support, but that the campaign may not be of high quality. At medium levels, prior funding may have no effect on contributions, aside from halfhearted interest of other backers. At high levels, prior funding may be positively related to subsequent contributions as this sends a robust cue of project quality and convinces prospective donors to contribute. Further, we derive a U-shaped relationship which may be moderated by visual media-based quality signals and situational urgency.To test these hypotheses, we conducted two studies. One was a field study of 333 Kickstarter projects, with 11,019 daily observations of crowdfunding activities from mid-February 2013 through mid-April 2013. We used the Kicktraq website to track Kickstarter projects and recruited 390 participants via Amazon Mechanical Turk (MTurk) to evaluate the video pitches on Kickstarter. Our results suggest a negative relationship between prior funding and subsequent contributions when funding amounts are small. This relationship becomes positive when prior funding amounts are large. Thus, we find a U-shaped relationship between prior funding and subsequent contributions, with an inflection point when prior funding amounts reach between 72% and 80% of the funding goal. This is strengthened in the presence of visual media-based quality signals, such as video quality, as well as the preparedness and passion of the entrepreneur. However, indicators of situational urgency may weaken this U-shaped relationship.We followed up with a post hoc experiment to document the two mechanisms by which prior funding influence subsequent contributions. We found that increases in the prior funding amount increased perceived product quality but decreased perceived urgency. These perceptions were found to jointly influence participants' proposed pledged amounts, supporting an explanation of a complex relationship between prior funding and subsequent contributions.This study is among the first to offer a more complete picture of the relationship between past actions and subsequent behavior under market and institutional constraints (i.e., when market actors observe the censored behaviors of other actors on crowdfunding platforms) and contributes to the literatures of observational learning, crowdfunding, and visual information.     

Valuation of Angel‐Backed Companies: The Role of Investor Human Capital

This article examines how angel investors' human capital affects the valuation of their portfolio companies, based on the pre‐money valuation of 123 investment rounds in 58 Belgian companies. We argue that angel investors with higher levels of human capital will perceive a higher value‐creating potential in entrepreneurial opportunities through their ability to see more value‐creating options, a higher value‐adding potential post‐investment, and an enhanced legitimacy provided to the venture. Economic theories suggest they appropriate these rents through lower valuations, whereas stewardship theory suggests they share value creation with entrepreneurs. Consistent with stewardship theory, we show angel investors negotiate higher valuations when they have higher levels of human capital, more specifically if they studied longer, have a business degree, more entrepreneurial experience, or previous professional law experience. As such, our results contrast with the behavior of venture capital investors who negotiate lower valuations when they have more experience.     

Angel investor network pitch meetings: The pull and push of peer opinion

The angel investing space has transformed as investors have moved from individual deal seeking to more collaborative models of investing. Angel networks are formal investor organizations that pursue investment deals with entrepreneurs, assist with deal screening, and coordinate due diligence. These coordination activities have clear benefits for angel network members, but they also give rise to a dynamic of reliant judgment in which the espoused opinions of network peers are taken as evidence that weighs heavily on the investment decision. In this article, we provide evidence from an experiment set in an angel investment pitch meeting that reveals the positive bias an angel investor shows toward peer opinions. By revealing these potentially hidden forces in angel network deliberations, we raise awareness and, by extension, offer response strategies for angels and angel network directors to properly manage the influence of peer opinion in angel network discussions.     

Obsessive passion and the venture team: When co-founders join,and when they don't

We investigate how potential co-founders' perceptions of a founder's obsessive passion (OP) influence the decision to join a venture team. Using a conjoint experiment with a primary sample of 116 founder-entrepreneurs and validating it with an additional sample of 59 founder entrepreneurs, we found that potential co-founders were more likely to join if they perceived that the founder had OP for developing ventures. Potential co-founders were less likely to join if they perceived OP for founding ventures. Further, we found significant interactions between perceived OPs, as well as interactions between perceived OP and potential co-founders' own OP.     

Investment Patterns of Informal Investors in the Alberta Private Equity Market*

This study identifies three main types of informal investors in private equity markets: relationship investors, opportunity‐based investors, and angel investors. We find evidence that the first two investor types are a major total source of capital and they prefer to invest smaller amounts close to home and in the context of existing relationships. With respect to angel investors, we find evidence of stratification in their desired investment amount which is consistent with a model where their investments evolve though a life cycle of investing. We also find evidence that changes to capital market regulations that allow for lower investment amounts by this type of investor increase the amount of capital available for early‐stage firms.     

Engaging in unpaid jobs out of free will: an attribution theory perspective on the effects of supervisor support attributions on volunteers' service quality

This study explores the differential effects of perceived supervisor support causal attributions (genuine and self-serving) on volunteers' role mastery (role clarity and self-efficacy), harmonious passion, and volunteers' quality services. Dyadic data from 273 service volunteers-customers of nonprofit service organizations in Ghana were analyzed using a structural equation model. This study finds support for the genuine and self-serving support attributions on volunteers' harmonious passion through role clarity. However, the result shows that only genuine support attributes relate to self-efficacy but not self-serving support attributes. It was also revealed that role clarity, self-efficacy, and harmonious passion significantly mediate the relationship between genuine supervisor support and volunteers' quality services. The outcomes from this study have reflective implications for both theory and practice. The findings support the attribution theory by implying that genuine supervisor support can be used as a tool in managing volunteers’ service quality effectively by enhancing their role mastery and harmonious passion.     

The influence of dispositional affect and cognition on venture investment portfolio concentration

We explore how an investor's dispositional affect and cognitive style influence venture investment portfolio concentration. Based on a field study using a sample of 128 judges from a business plan competition, we find that high positive affectivity investors construct more concentrated investment portfolios than their low positive affectivity counterparts, whereas high negative affectivity investors construct more diversified investment portfolios than their low negative affectivity counterparts. Further, investors who rely on analytical decision making display a weaker relationship between negative affectivity and investment diversification whereas investors who rely on emotion-based decision making display a stronger relationship between positive affectivity and investment concentration.     

Policies of promoting entrepreneurship and Angel Investment: Evidence from China

Using a sample of angel investments in China from 1994 to 2013, we examine effects of government policies that are favorable to start-ups on angel investment. Our findings show that positive effects of these policies on the amounts of angel investments are more significant in provinces with higher economic growth than those in provinces with lower economic growth. Policies that promote entrepreneurship affect the returns from high-amount angel investments more than those from low-amount ones. These findings indicate that such policies help to shape the new venture market in China and guide angel investors in making more efficient investments.     

Startup Success Factors in the Capital Attraction Stage: Founders’ Perspective

Only a small percentage of startups attract capital from venture capital investors. To determine the factors which owners of startups consider the most important for attracting seed venture investments, the founders of 40 startups in Latvia and Russia were questioned. The researchers compared organizational and financial factors’ importance for two groups of entrepreneurs: those who succeeded and those who failed in attracting funding. The results of the study indicate certain differences between the viewpoints of founders and investors regarding success factors. Based on the factor and regression analysis, the authors developed a model to forecast success in capital attraction.     

FX Market Returns and Their Relationship to Investor Fear

This note examines the relationship between changes in levels of investor fear (measured by the implied volatility index) and foreign exchange market returns. Our empirical results indicate a negative relationship between daily returns on high‐interest rate (investing) currencies and changes in the implied volatility index, while the association is positive for low‐interest rate (funding) currencies. That is, investing (funding) currencies tends to depreciate (appreciate) when investor fear increases. A sequential breakpoint test identifies a significant change in this relationship in the period following the 2008 collapse of Lehman Brothers, and another in 2012 following the resolution of the European sovereign debt crisis, which suggests that the relationship is linked to financial system liquidity. During the crisis period, currency returns are much more sensitive to changes in investor fear, and this is particularly so for funding currencies that are perceived to present a safe‐haven. The results have important implications for international finance, and those looking to speculate via the carry trade.     

Brand expertise and perceived consistency reversals on vertical line extensions: The moderating role of extension direction

Vertical line extensions are a valuable growth strategy for many retail service sectors. Correctly positioning a new vertical line extension in the price/quality spectrum is an important decision that has considerable implications for bottom line profits. This paper examines the moderating role of extension direction on the effect of perceived consistency on vertical extension evaluations. In two studies, we show that a lack of perceived consistency acts as a reminder to consumers that the brand may be stretching beyond its expertise, increasing perceived performance and financial risks for upscale extensions but not for downscale extensions. As a consequence, higher consistency results in higher upscale extension favourability whereas evaluations of downscale extensions are similar regardless of their perceived consistency with the parent brand.     

The influence of emotions on customer's cognitive evaluations and satisfaction in a service failure and recovery context

The aim of this paper is to explore the relationship between customers' negative emotions after a failure, their cognitive evaluations of the recovery process, and the overall or cumulative satisfaction in a service context. Two different constructs measure a customer's cognitive evaluations of the recovery process: disconfirmation of expectations and perceived justice. The proposed model is tested on a sample of financial service customers who suffered some type of failure. The results indicate that emotions have an indirect effect on overall or cumulative satisfaction through cognitive evaluations.     

Can you hear me now? Engendering passion and preparedness perceptions with vocal expressions in crowdfunding pitches

The voice is often the only continuous channel of expression in pitch videos. We isolate the influence of entrepreneurs' vocal expressions on funding by examining how valence (positivity/negativity) and arousal (activation) shape funders' perceptions of passion and preparedness. We show that an entrepreneur's high-arousal vocal expressions, whether positive or negative, increase perceptions of their passion. Entrepreneurs are perceived as more prepared when the valence and arousal of their vocal expressions are congruent. We test our hypotheses in the context of rewards-based crowdfunding, using both an experiment and a speech affect analysis of real-world crowdfunding pitches.     

Firm Linkages to Scandals via Directors and Professional Service Firms: Insights from the Backdating Scandal

We examine market reactions to the stock options backdating scandal in a slightly unusual way, but focusing on firms who were not perceived to have had a backdating concern, but were instead linked to firms who did have a backdating concern. These linkages can be found via board interlocks and the roles those directors perform. In addition we examine the linkages which occur from shared professional services firms, such as auditors and outside legal counsel. That these potential conduits are available is not in question, but rather, do investors perceive the conduits are used to pass along information about backdating stock options? We then ask if affiliation with dominant audit and legal services firms ameliorates or exacerbates those investor market reactions. We find that firms linked to the scandalized firms also face negative reactions, which are worsened when they also are serviced by professional services firms who are themselves are also linked to the managerial practice.     

User entrepreneurs' multiple identities and crowdfunding performance: Effects through product innovativeness,perceived passion,and need similarity

This study examines the performance of user entrepreneurs in acquiring financial resources via crowdfunding. User entrepreneurs are thought to have better performance than non-user entrepreneurs, but the theoretical underpinnings of these differences are unclear. We propose a baseline hypothesis that claims of user entrepreneurship serve as a signal of capability and commitment to potential backers. In addition, building on three distinct identities of user entrepreneurs, we argue that user entrepreneurs' perceived passion, product innovativeness, and need similarity with potential backers mediate the relationship between user entrepreneurship and crowdfunding performance. Our results from a field study using a sample of crowdfunded ventures support these assertions. We validate these results and measures using both survey and experimental methods. This is one of the first studies to develop a multi-theoretical framework for user entrepreneurship, and the first to provide an underlying theoretical explanation for the superior crowdfunding performance of user entrepreneurs.