When things go wrong: Business angels' use of cues in judging their investment relations
2008 (English)In: International Journal of Business Strategy, ISSN 1553-9563, Vol. 8, no 2, 48-58 p.Article in journal (Refereed) Published
Business angels play an important role in the development and growth of many entrepreneurial ventures. They provide not only capital, but also much needed business know-how and connections to customers and other financiers that are pivotal for the success of the firm. The relationship between the business angel and the entrepreneurial team evolves over time, starting with a due diligence process and the formulation of a contract. In this paper we are interested in the post-investment phase of the relationship, and how the business angel abstracts different cues that the relationship is experiencing problems. From interviews with experienced business angels in very different settings and from very different backgrounds, six different cues have emerged as indicators that something is amiss in the relationship. These cues have the following themes; the outright rebellion, the strange report, missing deadlines, history revision, changing information flows and going underground. The majority of the business angels that we have interviewed claimed that these cues have different meanings and that some are more detrimental to the relationship than other. For instance, the outright rebellion and the urge to re-negotiate the contract are looked upon as serious breaches of the trust in the relationship. Strange reports and missing deadlines on the other hand, tend to activate the business angel and trigger some kind of action on his part, but initially with sustained trust.Earlier studies have used either the agent-principal approach or the procedural justice perspective when they have studied the relationship between investor and entrepreneur. Usually papers take one or the other as their point of departure for a study, where the first focuses on control and monitoring and the other on trust building initiatives. However, from our interviews it seems as though they complement each other in the relationship over time. When everything is going as planned the control and monitoring activities are kept at a minimum, with weekly or monthly progress reports, instead the trust building activities dominate. When a cue emerges, the trust building process comes to a halt and the control and monitoring activities gain the upper hand. Before the business angel has identified the problem and together with the entrepreneurial team worked out a solution, everything else is put on hold. Some time after the incident, control and monitoring activities will be higher than usual, before everything gets back to normal.The findings in this paper fit well within the theoretical framework put forward by Shepherd and Zacharakis (2001). In their model, they see communication as a moderating factor on the other three; commitment and consistency, being fair and just and obtaining a good fit between investor and entrepreneur. In our interviews it is clear that an open and frequent communication is a necessary condition for the development of a trusting relationship. Hence, most cues of a deteriorating relationship have to do with problems in communicating with each other.
Place, publisher, year, edition, pages
2008. Vol. 8, no 2, 48-58 p.
Business Angels, Entrepreneurs, Relationship, Trust, Cues
IdentifiersURN: urn:nbn:se:kth:diva-50726OAI: oai:DiVA.org:kth-50726DiVA: diva2:462498