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Mentoring the CEO or monitoring the ROI?: The business angel’s interrole in the venture relationship
KTH, School of Architecture and the Built Environment (ABE), Centres, Centre for Banking and Finance, Cefin.ORCID iD: 0000-0003-0920-6585
2014 (English)Report (Other academic)
Abstract [en]

In its normal context, a mentor is a trusted senior person who provides guidance and support to the protégé by keeping the best interest of the protégé in mind at all times. Earlier research has indicated that business angels are perceived as mentors by venture members, especially CEOs. An argument put forward in this paper is that an investor does not always have the protégé’s best interests in mind and, at times, prioritizes the return on investment instead. In some situations, this role conflict might become severe. If the business angel continues in the mentor role, the protégé might take the venture on a very costly and risky course of action, whereas if the business angel switches to the investor role and simply vetoes the idea of the CEO through the authority of being a major owner, the venture might be saved from the same costly adventures, but the protégé can be severely dismayed. Presumably, switching from the role of mentor to that of investor in this fashion would destroy the trust held by the protégé that the business angel really had the protégé’s best interests in mind, and would have repercussions on the relationship for a long time afterwards. This role conflict between being both an investor and a mentor is explored in the paper. Based on information gathered from semi-structured face-to-face interviews with 9 business angels, an image emerges wherein the business angel remains in the mentoring role for as long as possible, given the perceived costs. The paper suggests that in order to understand what perceived costs mean for an investor, the concept of affordable loss (Sarasvathy, 2001) is of great use.One of the implications of affordable loss for an entrepreneur is envisioning the worst-case scenario and the money lost in that case (Dew, Sarasvathy, Read, & Wiltbank, 2009). For a business angel, affordable loss could mean the same: the business angel could picture the cost of the worst-case scenario by studying the current course of action and decide whether it is affordable or not. As long as the worst-case cost associated with a certain course of action is lower than the affordable loss, the business angel will continue to fulfill the role of mentor in support of the venture chief executive officer (CEO). However, if the cost exceeds the affordable loss limit, the business angel will switch to the monitoring role, thereby prohibiting this course of action.

Place, publisher, year, edition, pages
Stockholm: KTH Royal Institute of Technology, 2014. , 34 p.
, Working Paper Series, Department of Real Estate and Construction Management & Centre for Banking and Finance (cefin), 14:7
Keyword [en]
mentoring, business angels, role conflict, relationship, affordable loss
National Category
Business Administration Economics and Business
URN: urn:nbn:se:kth:diva-154725OAI: diva2:758324

QC 20141029

Available from: 2014-10-27 Created: 2014-10-27 Last updated: 2014-11-04Bibliographically approved
In thesis
1. Noncontractual Governance Strategies of Business Angels in the Post-Investment Venture Relationship
Open this publication in new window or tab >>Noncontractual Governance Strategies of Business Angels in the Post-Investment Venture Relationship
2014 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

Business angels fulfil an important economic role in society by getting involved in early-stage ventures. This dissertation aspires to advance our knowledge of the governance strategies used by business angels in the venture relationship, based on the idea that the choice of governance strategies depends on the individual venture but is also shaped by the strategies adopted by any business angel network (BAN) the business angel is part of.

Major findings are twofold. First, the analysis suggests that governance strategies are role-contingent. The role of the business angel vis-a-vis the venture changes, typically from outsider to insider, as the relationship transitions through different stages. Business angels should only use governance strategies that are perceived as legitimate for their role. Moreover, all strategies do not mix well and some may even neutralize each other when used together. The impact of the BAN on the action of the individual business angel is not straightforward: the formalization of a BAN will certainly restrict individual action, but, on the other hand, it seems that the BAN can also be useful for managing conflicts.

Second, results indicate that conceptualizing the long-term dynamic of the investor-venture relationship in terms of any single theoretical perspective, be it agency theory, procedural justice, or norm-based influence, is too simplistic. The utility of each theoretical perspective is role-contingent: a business angel in the outsider role is better understood with agency theory, whereas a business angel in the insider role is better understood with norm-based influence theory.

The empirical data on individual business angels comes mainly from 30 interviews with 21 business angels, and some supplementary data. The analysis of BANs is made differently and based on a different data set consisting of approximately 150 interviews with BAN members, civil servants, politicians, banks, accountants, and entrepreneurs.

Place, publisher, year, edition, pages
Stockholm: KTH Royal Institute of Technology, 2014. 93 p.
TRITA/KTH/CEFIN-DT, ISSN 1654-9376 ; 10
business angels, post-investment, relationship, governance, role contingency, mentoring, investor roles, venture
National Category
Business Administration
Research subject
Business Studies
urn:nbn:se:kth:diva-155318 (URN)978-91-87111-01-3 (ISBN)
Public defence
2014-11-14, F3, Lindstedtsvägen 26, Stockholm, 15:00 (Swedish)

QC 20141104

Available from: 2014-11-04 Created: 2014-11-04 Last updated: 2014-11-04Bibliographically approved

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