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Building an equity story: the impact of effectuation on business angel investments

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  • Sebastian Schmidt

    (RWTH Aachen University)

  • David Bendig

    (RWTH Aachen University)

  • Malte Brettel

    (RWTH Aachen University)

Abstract

This study investigates the effects of the decision-making style of angel investors on their investee businesses’ valuations with a particular focus on the early post-investment phase. Business angels not only provide new ventures with financial resources. By assuming different value-added roles, they also contribute considerable non-financial value to their investee companies during the post-investment phase. They not only act entrepreneurially through their hands-on involvement, but also often have their own distinct entrepreneurial experience. We hence draw on the emerging entrepreneurial decision-making theory of effectuation to explain their investment outcomes in an environment of uncertainty. This study links angels’ decision-making styles to their ventures’ valuations in the period between their initial investment and the first external follow-up investment in an investee business. Based on a sample of 73 angel investments, this study finds that informal investors experience a significant increase in their investments’ valuation if they emphasize the effectual principle of means-orientation in their decision-making.

Suggested Citation

  • Sebastian Schmidt & David Bendig & Malte Brettel, 2018. "Building an equity story: the impact of effectuation on business angel investments," Journal of Business Economics, Springer, vol. 88(3), pages 471-501, May.
    • Handle: RePEc:spr:jbecon:v:88:y:2018:i:3:d:10.1007_s11573-017-0868-2
    DOI: 10.1007/s11573-017-0868-2
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    Cited by:

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    2. Alexander McKelvie & Gaylen N. Chandler & Dawn R. DeTienne & Anette Johansson, 2020. "The measurement of effectuation: highlighting research tensions and opportunities for the future," Small Business Economics, Springer, vol. 54(3), pages 689-720, March.
    3. Cowden, Birton & Karami, Masoud & Tang, Jintong & Ye, Wenping & Adomako, Samuel, 2023. "The gendered effects of effectuation," Journal of Business Research, Elsevier, vol. 155(PB).
    4. Eiteneyer, Nils & Bendig, David & Brettel, Malte, 2019. "Social capital and the digital crowd: Involving backers to promote new product innovativeness," Research Policy, Elsevier, vol. 48(8), pages 1-1.
    5. Laurence Cohen & Kirsten Burkhardt, 2019. "Entrepreneurs (novices vs. experts) and investors: Interaction and rationality dynamics (effectual vs. causal) [Entrepreneurs (novice vs. expert) et investisseurs : interactions et dynamique des ra," Post-Print hal-02177388, HAL.
    6. Franziska Schlichte & Sebastian Junge & Jan Mammen, 2019. "Being at the right place at the right time: does the timing within technology waves determine new venture success?," Journal of Business Economics, Springer, vol. 89(8), pages 995-1021, December.

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    More about this item

    Keywords

    Entrepreneurship; Effectuation; Means-orientation; Venture capital; Business angels; Valuation;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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