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Investor mindset
Business angels are the second most important source of capital for high-growth ventures. Understanding how business angels make investment decisions is critical for entrepreneurs who want their money. Business angels approach investment opportunities using a boundedly rational approach, where they minimize decision-making effort. They first look at objective venture factors like market size, barriers to entry, and financial viability, then use individual subjective factors to reject opportunities. When assessing risk, business angels examine inherent risk, performance risk, and relationship risk. They also consider the entrepreneur's experience, expertise, and characteristics to assess performance risk, and use behavioral cues to evaluate long-term relationship risk. Business angels also consider the potential exit when making investment decisions.
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Investor mindset
- 1. UNDERSTANDING THE INVESTOR’S MINDSET AndrewMaxwell. MBA, PhD, PEng Director Bergeron Entrepreneurs in Science and Technology
- 2. WHY BUSINESS ANGELSARE IMPORTANT BUSINESS ANGEL DECISION MAKING UNDERSTANDING HOW THEY MAKE DECISIONS GETTING BUSINESS ANGELS TO INVEST
- 3. BUSINESS ANGELS THE SECONDMOST IMPORTANT SOURCE OF CAPITAL FOR HIGH GROWTH VENTURES 3
- 4. BUSINESS ANGELS UNDERSTANDING HOWTHEY MAKE DECISIONS IS CRITICAL IF YOU WANT THEIR MONEY 3 CHALLENGING WHEN THEY DON’T KNOW THEMSELVES
- 5. BUSINESS ANGELS ARE MOTIVATEDBY PSYCHIC AND FINANCIAL NEEDS 3
- 6. BUSINESS ANGELS APPROACH INVESTMENT OPPORTUNITIESUSING A BOUNDEDLY RATIONAL APPROACH 3 The concept of boundedly rational comes from Herbert Simon.. who talks about decision making effort THIS MEANS THEY MINIMIZE DECISION EFFORT
- 7. BUSINESS ANGELS LOOK ATOBJECTIVE FACTORS BEFORE SUBJECTIVE FACTORS 3 THEN USE INDIVIDUAL FACTORS AS REASON TO REJECT
- 8. WHAT ARE THEOBJECTIVE VENTURE FACTORS? 3 MARKET SIZE BARRIER TO ENTRY ENTREPRENEUR EXPERIENCE FINANCIAL VIABILITY EASE OF ADOPTION MARKET READY VALUE PROPOSITION ROUTE TO MARKET
- 9. BUSINESS ANGELS EXAMINE THREETYPES OF FAILURE RISK 3 INHERRENT RISK (INC. MARKET RISK) PERFORMANCE RISK (INC. OPERATIONAL RISK) RELATIONSHIP RISK
- 10. BUSINESS ANGELS EXAMINE THREEASPECTS OF THE ENTREPRENEUR TO ASSESS TOTAL PERFORMANCE RISK 3 EXPERIENCE EXPERTISE CHARACTERISTTICS
- 11. BUSINESS ANGELS USE BEHAVIOURALCUES TO INFORM ASSESSMENT OF LONGTERM RELATIONSHIP RISK 3 SPECIFICALLY TRUST BUILDING, DAMAGING AND VIOLATING
- 12. BUSINESS ANGELS CONSIDER THEEXIT WHEN MAKING INVESTMENT 3 MANY DEALS FAIL BECAUSE OF DISAGREEMENT ABOUT VALUATION
- 13. UNDERSTANDING THE INVESTOR’S MINDSET AndrewMaxwell. MBA, PhD, PEng Director Bergeron Entrepreneurs in Science and Technology www.bestlassonde.ca bestmax@yorku.ca
Editor's Notes
- #4 The most important source – especially for consumer products – is customers – can be through kickstarter Bas are doubly important because they provide advice, guidance and networks Bas are als critical in accessing VC funding, as VCs don’t generally ahead without Angels.
- #5 The most important source – especially for consumer products – is customers – can be through kickstarter Bas are doubly important because they provide advice, guidance and networks Bas are als critical in accessing VC funding, as VCs don’t generally ahead without Angels.
- #6 Psychic needs often the main driver, need to give back, need to have impact, need to be involved in a second start up. Need to help, need to achieve social status. Their financial needs are somewhat simpler, they have an expected annual rate of return….of about 35%, and a tolerance for risk, which is manifest as failure (not a distribution of possible outcomes).
- #7 This means they approach each investment opportunity with an expectation that they will reject most opportunities as quickly as possible using a sequential elimination process. They don’t consider all the information available, and instead rely on a few cues that allow them to reject opportunities…..if they can not reject quickly using these clues they will look at more complex factors.
- #8 Objective factors require less effort to assess than subjective factors, so they look at them first…..they only look at the subjective factors if they have not been able to reject because of the objective factors. Importantly they initially don’t make trade offs between these factors – because this requires effort – rather they use an elimination by aspects approach
- #9 1. Compelling value proposition A new business is challenged to persuade existing competitors’ customers to switch to those offered by the new company. If there is no current competitor, then the challenge is to persuade the customer of the benefits of purchasing a product or service at all. Changing potential customer behaviors is one of the biggest challenges faced by a new venture, and requires the new venture to provide evidence of significant benefits over current solutions or non-consumption, and do they outweigh the costs and risks of changing. In other words, is there evidence of a compelling value proposition that will motivate adoption of the new product or service? 2. Market Readiness – Time to first customer Launching a new product or service has inherent technology and development risk related to direct performance of the product/service and the supply chain (ability to deliver the solution). At the point that an idea moves from a research project to a venture, what evidence is provided to demonstrate that the product or service is very close to being “market ready”? 3. Barrier To Entry – product`s uniqueness A new product or service has to have a sustainable competitive advantage otherwise existing or new competitors will subsequently enter the new venture’s market and drive down price and service, reducing long-term profitability. There are many ways in which a company can create a sustainable barrier to entry, that makes it much more difficult for competitors, but without one, long-term profitability of the new business will reduce to zero. 4. MARKET Adoption – overcoming user inertia It must be easy for first customers to adopt the product, without needing to fundamentally change their behaviours. Alternatively a compelling value proposition motivates changes in what users do and how they behave. Identifying a potential first customer, and evidence they are likely to adopt is important. 5. Distribution/Channel to Market All new products/services require a route to market. In many cases, channel partners are an essential component in getting a new product/service to mainstream customers, yet these potential partners may not be motivated to engage with a new venture. A new venture must show it has a good understanding of what it takes to get the product or service to market, and either a cost effective way of doing this without partners, or a qualified partners that is willing to distribute/endorse the product/service. 6. Market Size A viable business must be able to earn sufficient profit to pay its employees (including its founders if they are involved on a full time basis), and if it is looking for investment, sufficient financial return for its investors. The ability to generate sufficient profit is a function of revenue, which in turn are a function of market share and market size/growth. Creating a new venture is only viable if the market opportunity is sufficient to allow required overheads to be covered and sufficient returns generated. 7. Entrepreneur Experience There is a direct link between the likelihood of venture success and the experience of the venture founders, together with the complementary experiences of the advisors and management team. Evidence of relevant experience in team members increases the likelihood that the company will be able to anticipate and manage risk, take advantage of opportunities, and attract the necessary partners and resources for success. 8. Business Model - Financial VIABILITY The most common reason for early stage venture failure is running out of cash, often due to the fact that the company: raises insufficient to fund the anticipated negative cash flow ahead of revenues, negative cash flows associated with cost overruns or time delays, gross margins don’t support cash flow required for operations (even in high growth scenarios).
- #10 The environment in which the decision is made influences the decision (as well as the reactions of other investors). BAs knowledge of a domain influences their decision processes, sometimes positively. Their ability to help the venture (afterwards) is also critical - sometimes as a member of the team, often in terms of finding customers or subsequent rounds of funding. Relationship risk in part a function of not replacing entrepreneur and long term nature of relationship
- #11 The environment in which the decision is made influences the decision (as well as the reactions of other investors). BAs knowledge of a domain influences their decision processes, sometimes positively. Their ability to help the venture (afterwards) is also critical - sometimes as a member of the team, often in terms of finding customers or subsequent rounds of funding. Relationship risk in part a function of not replacing entrepreneur and long term nature of relationship
- #12 The environment in which the decision is made influences the decision (as well as the reactions of other investors). BAs knowledge of a domain influences their decision processes, sometimes positively. Their ability to help the venture (afterwards) is also critical - sometimes as a member of the team, often in terms of finding customers or subsequent rounds of funding.
- #13 The environment in which the decision is made influences the decision (as well as the reactions of other investors). BAs knowledge of a domain influences their decision processes, sometimes positively. Their ability to help the venture (afterwards) is also critical - sometimes as a member of the team, often in terms of finding customers or subsequent rounds of funding. Relationship risk in part a function of not replacing entrepreneur and long term nature of relationship