Bridge over ocean
20 June 2019 CFA Institute Journal Review

The Angel Investment Decision: Insights from Australian Business Angels (Digest summary)

  1. Peter Eickelberg, CFA

Angel investors generally rely on four basic considerations when deciding whether to invest: personal experience, trust, desire to contribute, and realistic expectations. All four considerations come into play at each investment stage. Policymakers and those seeking funding can benefit by understanding how these drivers affect the investment decision.

What Is the Investment Issue?

The authors begin by clarifying the stages of angel investing already published in other research. They then analyze the private equity drivers at each stage. Those seeking angel investment can be aided by understanding how angel investors think.

How Did the Authors Conduct This Research?

The authors choose a semi-structured, qualitative interview format for their research. All respondents are in Australia. Recognizing that angel investors willing to participate (and speak honestly) might be difficult to find, they also interview related practitioners to flesh out the study. They do not require angel investors to meet high-net-worth criteria, and they do not count “sweat equity” contributions as angel investing.

Although a broad-based sample of only angel investors would be ideal, the additional perspectives provide a nuanced understanding of the process. The interviewers kept notes on how they locate each participant to help contextualize responses during the analysis.

The semi-structured interview format allows the interviewers to ask specific, scripted questions but also to follow up with additional questions to ensure the answers are complete. They take a somewhat skeptical approach to interview answers and use their own knowledge at times to challenge or clarify participant responses. This process helps counter the potential of ego-driven exaggeration by angel investors.

The authors then transcribe the interview responses into NVivo, a software program for organizing and annotating qualitative information. Structured analysis of the NVivo data allows the authors to identify new “nodes” of the decision-making tree.

What Are the Findings and Implications for Investors and Investment Professionals?

Angel investors generally rely on four basic considerations when deciding whether to invest:

  • personal experience,
  • trust,
  • desire to contribute, and
  • realistic expectations.

A referral from a trusted source can override reservations about the line of business. Understanding investors’ desire to contribute could allow potential investment targets to arrange for meaningful involvement in the business. Targets can also use the authors’ research to set proper expectations about “sweat equity” versus monetary investment to avoid a mismatch between investor and target.

The authors believe policymakers can draw on their insights to create conditions favorable to angel investment. In the Australian market, so-called angel networks and pitch events did not result in meaningful deal flow during the period of study. The authors reference the Australian federal government’s National Innovation and Science Agenda as well as other initiatives that indicate a demand for research to guide government policy.

Abstractor’s Viewpoint

The authors’ expanded stages of the angel investment process, which blend published research with additional “nodes” they discover during their data analysis, is especially helpful.

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