What’s the role of emotions in angel investing? Here’s what research has to say
September 05, 2019
[GUEST BLOG] What’s the role of emotions in angel investment decisions? This is what Kirsi Snellman and Gabriella Cacciotti have studied in their research on ‘The role of angel investors’ emotions in socially situated investment opportunity evaluation’. Now we get to hear some highlights of the matter of hearts in angel investing by researcher Kirsi Snellman.
”Do I leave the meeting excited and start thinking about what we could do? I would love my network to meet these guys. I would like to spend time with the team. All of these things. That’s what I start to think after a meeting. That’s when my gut feeling says this could be good, right? However, if someone who knows the market says it doesn’t make sense, then I don’t invest”
– Anonymous angel investor
Predicting profitable new venture investments is difficult. Although calculations and future predictions would signal prominence, most of the investments will not generate the profit entrepreneurs proposed in their business plans. What then could help the investors to make better and more meaningful investments, if estimates alone are not sufficient for predicting the future performance of new ventures?
We complement recent research on the hard criteria in decision-making processes, and add discrete emotions to the list of tools angel investors can use in evaluation. This is important, since through its capacity to signal relevance and meaning (Brundin, 2002), emotion can help the angel investor to recognize the most important investment opportunities more effectively. While we acknowledge the role of angel investors’ gut feel in managing complexity and risk (Huang and Pearce, 2015; Huang, 2018), there is a lot of untapped potential in deeper understanding the socially embedded nature of their own discrete emotions.
Emotion complements rational analysis
In the research, we explore whether and how angel investors’ emotions unfold in the investment opportunity process as they interact with the social environment. Drawing on qualitative interviews of angel investors, our analysis revealed that resources will be granted to the new venture only if the following three requirements are present.
First, the investment opportunity scores high on most of the multiple criteria (idea/product, entrepreneur/team, market, traction). Second, a rational analysis of the multiple criteria is associated with emotions such as excitement or fear-of-missing out. Third, the first two requirements are bolstered by trusted referees and networks such as other syndicate members
When angel investors evaluate investment opportunities, they engage in a developmental process characterized by three elements: subjective validation, social validation, and investment decision. In this process, subjective validation phase mainly highlights action oriented and embodied characteristics of emotion, while social validation phase is related to socially situated and distributed characteristics of emotion.
Before a deal can be completed, numerous iterative rounds take place, during which the opportunity belief changes and transforms as a result of interaction with relevant others. As one angel investor told us: “I validate team performance with my gut feeling, but idea and market are validated through my social networks. I need them both.” This indicates, that although angel investors are allowed to follow their hearts in making these decisions, they are deeply connected with their investor networks.
Takeaways for angel investors
We introduce socially embedded emotion as an important element in rating investment opportunities. Moving beyond treating emotions as autonomous, context-free inner processes, we highlight their capacity to unfold in interactions with the social environment (Mitchell et al., 2014). Capturing emotion as action oriented, embodied, socially situated, and distributed (Smith and Semin, 2004), we embrace its adaptive socially situated dynamics.
Valorizing this rich nature of emotions in investment opportunity evaluation, we take a step toward better understanding of the soft aspects in the relationship development that lead to new venture investments (Landström, 2007). These results will help investors to find their next meaningful investment and entrepreneurs to better understand why some new ventures get private funding, while others do not.
Moreover, we hope that these results will inspire policy makers to design new incentives that improve the flow of investments into promising ethical new ventures. As one angel investor told us: “Investing should be a matter of heart and not be associated with fear of losing money.”
The original publication: ‘Snellman, K., & Cacciotti, G. (2019). The Role of Angel Investors’ Emotions in Socially Situated Investment Opportunity Evaluations. Emotions and Leadership (Research on Emotion in Organizations, 15), 179-207. www.emerald.com/insight/content/doi/10.1108/S1746-979120190000015013/full/htm
Interested in hearing more on how angel investors’ emotion effect on investment decisions? Join the FiBAN Angel Day on the 19th of November to participate in an interactive lecture by Kirsi Snellman. Read more at www.fiban.org/angelday.