Opening the black box: triggers for shifts in business angels’ risk mitigation strategies within investments

Abstract

We open up the black box of business angel risk mitigation within investments, exploring triggers that force angels to shift strategies to overcome performance and relationship risks. Primary data were collected from 32 interviews with four matched business angel–entrepreneur dyads. Extensive iterative theory and cross-case comparisons reveal that business angels often shift strategies over the course of an investment cycle due to internal or external context-specific triggers, rather than factors associated with a particular investor, entrepreneur, or investment-related characteristic. Moreover, entrepreneur responses significantly impact business angels’ subsequent risk mitigation strategies. Two triggers emerging particularly strongly from the data were: (i) a shift in the angel’s perception of the entrepreneur’s ability and (ii) the entrance of new investors. We theorize on these findings and derive four novel propositions.

Keywords:

• Business angels
• post-investment control
• relationship risks
• performance risks
• entrepreneurs
• case study

Acknowledgments

We would like to thank colleagues at seminars at Stockholm School of Economics, at Babson conferences, and reviewers from the Academy of Management for helpful comments and discussions. All errors remain our own.

Funding

Söderblom and Samuelsson gratefully acknowledge the financial support from VINNOVA and Handelsbanken’s Foundations.

Notes

1. Our reasoning to some extent follows the ideas of Maxwell and Lévesque (2011), who use the term ‘behavioral control’ to describe the activities undertaken by business angels to reduce information asymmetry, vs. ‘output control’, which describes activities intended to reduce the likelihood of moral hazard.