INVESTMENT MANAGEMENT APPROACH AND ANGEL INVESTOR RETURNS
Robert
Wiltbank, University of Washington
Stuart Read,
University of Washington
Saras
Sarasvathy, University of Maryland
Principal Topic
More than 75% of investment in new ventures comes from a non-institutional and diverse category of private investors, commonly referred to as Angels. Despite their force in the entrepreneurial economy, little attention has been paid to the manner in which Angels approach investing and the results they are able to achieve. Drawing on principles outlined in the theory of effectuation (Sarasvathy 2001), this study seeks to answer part of the question “Why do some angel investors outperform others?” The theory of effectuation outlines three principles that may more effectively guide actions in the uncertain environments that entrepreneurs and early-stage investors regularly face. These principles include (1) screening actions out where the possible losses are unaffordable, (2) establishing partnerships to create a market rather than simply try to identify a market “out there,” and (3) maintaining options and flexibility to benefit from completely unpredictable contingent situations. Additionally, effectuation suggests an important distinction where commitments are made based on the means of the entrepreneur and their new venture, rather than to their goals. The emphasis is on “what can I do with these means?” rather than “what ought I to do given this goal?”
Method
This study leverages a national sample of approximately several thousand active angel investors This group will receive a survey instrument that measures the extent to which they approach their investments in an effectual way, and combines this assessment with return information on those Angels’ investments. Using rigorous pre-testing, design, factor analysis, and structural equation modeling we hope to characterize the connection between performance outcomes and acting “effectually” in this entrepreneurial setting.
Results and Implications
This study is the first pure empirical performance study of the principles of the theory of effectuation, and represents an important opportunity to understand at least one aspect of the causes of differential angel investor performance. The contribution to researchers lies in the rigorous empirical assessment of a significant theory in entrepreneurship, as well as a thoroughly developed and applied “measure of effectuation.” To practitioners it provides empirical analysis that may identify the performance implications of many of their effectual practices.
CONTACT: Robert Wiltbank, University of Washington; (T) 206-616-7187; roberwil@u.washington.edu
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