Building an equity story: the impact of effectuation on business angel investments

Abstract

This study investigates the effects of the decision-making style of angel investors on their investee businesses’ valuations with a particular focus on the early post-investment phase. Business angels not only provide new ventures with financial resources. By assuming different value-added roles, they also contribute considerable non-financial value to their investee companies during the post-investment phase. They not only act entrepreneurially through their hands-on involvement, but also often have their own distinct entrepreneurial experience. We hence draw on the emerging entrepreneurial decision-making theory of effectuation to explain their investment outcomes in an environment of uncertainty. This study links angels’ decision-making styles to their ventures’ valuations in the period between their initial investment and the first external follow-up investment in an investee business. Based on a sample of 73 angel investments, this study finds that informal investors experience a significant increase in their investments’ valuation if they emphasize the effectual principle of means-orientation in their decision-making.

Appendix A: Information on effectuation construct

Effectuation (Brettel et al. 2012)—pretested, adapted wording, translated to German for survey and re-translated to English for report
Please indicate on a scale from 1 to 7 with which of the following statements you agree more (fully agree with statement 1 = 1, fully agree with statement 2 = 7) when you think about your activity as investor and active business angel
Dimension 1: Means-orientation (a = 0.91; CR = 0.91; AVE = 0.68)
	1: Causal Statements (goal orientation)	2: Effectual Statements (means orientation)
Item (1)	My decisions are based on given targets	I reach decisions on the basis of given resources
Item (2)	The goal of my investments is clearly defined from early on	The targets of my investments are vaguely defined in the beginning
Item (a)	Starting point of my activity is concisely given targets	Starting point of my activity is available resources
Item (4)	Starting with given targets, the required means/resources were defined	I define targets based on available resources
Item (5)	A clearly defined goal is the starting point for my investment activity	Available resources are much rather the starting point for my activity than concisely defined target
Item (6)	Precise targets strongly influence the scope of my investment activity	Available resources strongly influence the scope of my investment activity

Dimension 2: Affordable loss (a = 0.88; CR = 0.89; AVE = 0 0.66)
	1: Causal Statements (expected return)	2: Effectual Statements (affordable loss)
Item (1)	Decisive for the selection of my investments are considerations about potential returns	Decisive for the selection of my investments are considerations about potential losses.
Item (2)	The selection of my investments is mostly based on calculations of potential returns	The selection of my investments is mostly based on risk reduction (i.e. limitation of costs)
Item (3)	I mainly consider the potential chances of an investment	I mainly consider the potential risk of an investment
Item (a)	My investment volumes are primarily based on potential returns	My investment volumes are primarily based on potential losses

Dimension 3: Partnerships (a = 0.92; CR = 0.92; AVE = 0. 79)
	1: Causal Statements (competitive analysis)	2: Effectual Statements (partnerships)
Item (1)	I try to identify risks thorough market analyses	I try to reduce risks of investments through internal or external partnerships and agreements
Item (2)	I reach decisions on the basis of systematic market analyses	I jointly make decisions together with partners/stakeholders on the basis of our competences
Item (a)	My focus is rather on the early identification of risks through market analyses in order to be able to adopt my approach	My focus is rather on the reduction of risks by approaching potential partners and customers
Item (4)	In order to reduce risks, I focus on market analyses and forecasts	In order to reduce risks, I start partnerships and receive early pre-commitments

Dimension 4: Leveraging contingencies (a = 0 0.91; CR = 0.91; AVE = 0.68)
	1: Causal Statements (overcoming contingencies)	2: Effectual Statements (leveraging contingencies)
Item (1)	New surprising events and findings are only considered when the original investment strategy	Even at the expense of the original investment strategy, new surprising events and findings are always considered in the most beneficial way
Item (2)	My mode of operation is focused on executing the original strategy without any delay	My mode of operation is focused on being able to adjust my investment strategy at any time to new surprising events and findings
Item (3)	New surprising events and findings have no influence on my investment strategy	New surprising events and findings do have an influence on my investment strategy
Item (a)	I always plan my approach ahead for a considerable time horizon	I essentially plan my approach in small steps
Item (5)	I first of all take care of reaching initially defined targets without delays caused by unforeseen events	Despite potential delays, I make sure that a venture can develop according to new opportunities
Item (6)	I always pay attention to reaching initial target and meeting the time plan	I make sure that a business can take an advantage out of new events and findings, also at the expense of the original business idea

1. (a) Item has been elimintated during factor analysis