Heuristics, learning and the business angel investment decision-making process

ABSTRACT

This paper extends the literature on the investment decision-making of business angels.

Using insights from the emerging body of research on entrepreneurial learning processes, particularly the use of heuristics and the nature of learning from meagre experience, we explore whether angels learn from experience, how they learn and what they learn. These issues are addressed using verbal protocol analysis, a methodology for examining decision-making in real time, with three groups of business angels with differing levels of investment experience, and with follow-up debriefing interviews with these angels. This reveals some differences in the speed of decision making and the emphasis given to various investment criteria. There is some evidence for the use of heuristics in the decision making process, and for the critical role played by vicarious learning from the experience of others. Learning in the individual angel decision making process is a social as well as an individual phenomenon.

Key words:

• business angels
• investment decisions
• experiential learning
• vicarious learning
• heuristics
• verbal protocol analysis

Notes

² The terminologies were taken from an earlier analysis of the character of the Scottish business angel market (Paul et al 2003).

³ This definition of super angels is with respect to the stage of development of the business angel market in Scotland, which in common with the rest of the UK, is characterised by a large number of relatively infrequent investors, many of them recent entrants into the market, and a few significantly more active investors, some of whom will have many more investments than this minimum threshold. This contrasts with, for example, the more mature angel market in the US, where super angels can be defined as those making 50 or more investments (Sudek, May and Wiltbank 2011).

1. It is, of course, possible that our more experienced investors (super angels) are not sufficiently experienced to warrant the title of ‘expert’ in the sense used in verbal protocol studies in other domains, calling into question the extent to which the angel market in Scotland, although extensive, is knowledgeable (Gregson et al 2012).