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Noncontractual Governance Strategies of Business Angels in the Post-Investment 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)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.
Series
TRITA/KTH/CEFIN-DT, ISSN 1654-9376 ; 10
Keyword [en]
business angels, post-investment, relationship, governance, role contingency, mentoring, investor roles, venture
National Category
Business Administration
Research subject
Business Studies
Identifiers
URN: urn:nbn:se:kth:diva-155318ISBN: 978-91-87111-01-3 (print)OAI: oai:DiVA.org:kth-155318DiVA: diva2:760722
Public defence
2014-11-14, F3, Lindstedtsvägen 26, Stockholm, 15:00 (Swedish)
Opponent
Supervisors
Note

QC 20141104

Available from: 2014-11-04 Created: 2014-11-04 Last updated: 2014-11-04Bibliographically approved
List of papers
1. Business angel post-investment activities: a multi-level review
Open this publication in new window or tab >>Business angel post-investment activities: a multi-level review
2014 (English)In: Journal of Management and Governance, ISSN 1385-3457, E-ISSN 1572-963XArticle in journal (Refereed) Epub ahead of print
Abstract [en]

In this article, empirical research on post-investment activities of business angels is reviewed and conceptualized as five distinct governance processes: boundary spanning, structuring, leadership, doing, and monitoring. These processes have the potential to reduce the exposure of business angels to relational risk and market risk. The identification of these governance processes also contributes towards understanding the social aspect of business angels’ post investment involvement. In particular, it is shown how the recognition of the cognitive/institutional dimension opens up for new questions about post-investment involvement. Finally, it is proposed that venture performance can be enhanced in practice if business angels and venture members develop skills that are connected to the governance processes.

Keyword
Review, Business angels, Post-investment involvement, Governance processes, Organizational membership
National Category
Business Administration
Research subject
Business Studies
Identifiers
urn:nbn:se:kth:diva-153936 (URN)10.1007/s10997-014-9296-7 (DOI)2-s2.0-84958057934 (Scopus ID)
Note

QC20141017

Available from: 2014-10-09 Created: 2014-10-09 Last updated: 2017-12-05Bibliographically approved
2. Mentoring the CEO or monitoring the ROI?: The business angel’s interrole in the venture relationship
Open this publication in new window or tab >>Mentoring the CEO or monitoring the ROI?: The business angel’s interrole in the venture relationship
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.
Series
Working Paper Series, Department of Real Estate and Construction Management & Centre for Banking and Finance (cefin), 14:7
Keyword
mentoring, business angels, role conflict, relationship, affordable loss
National Category
Business Administration Economics and Business
Identifiers
urn:nbn:se:kth:diva-154725 (URN)
Note

QC 20141029

Available from: 2014-10-27 Created: 2014-10-27 Last updated: 2014-11-04Bibliographically approved
3. When things go wrong: Business angels' use of cues in judging their investment relations
Open this publication in new window or tab >>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
Abstract [en]

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.

Keyword
Business Angels, Entrepreneurs, Relationship, Trust, Cues
National Category
Business Administration
Identifiers
urn:nbn:se:kth:diva-50726 (URN)
Available from: 2011-12-07 Created: 2011-12-07 Last updated: 2014-11-04Bibliographically approved
4. Business Angel–Venture Negotiation in the Post-Investment Relationship: The Use of the Good Cop, Bad Cop Strategy
Open this publication in new window or tab >>Business Angel–Venture Negotiation in the Post-Investment Relationship: The Use of the Good Cop, Bad Cop Strategy
2014 (English)In: Venture Capital: an International Journal of Entrepreneurial Finance, ISSN 1369-1066, E-ISSN 1464-5343, Vol. 16, no 4, 309-325 p.Article in journal (Refereed) Published
Abstract [en]

The paper reports on the utilization of the ‘good cop, bad cop’ negotiation strategy in ongoing investor-venture relationships. Four cases of business angel – venture involvement are studied over several years’ time. Earlier research on the good cop, bad cop strategy has described its efficiency in obtaining maximum distribution in short-term distributive bargaining. This has been explained as a result of the emotional contrast effect unlocked by the sequence of interaction with the bad cop followed by interaction with the good cop. In an ongoing investment relationship, other rules apply. The present findings suggest that only a business angel who is already trusted can become a good cop – by virtue of introducing a bad cop. This is explained as a way of conducting negotiations without destroying the trust that has been built over time in the business angel – venture relationship. The strategy provides a scapegoat for the negativity associated with the negotiations. The bad cop assumes the blame, while the good cop is still trusted and can remain in the relationship, with less risk of being the target of any retained hostility.

Place, publisher, year, edition, pages
Routledge, 2014
Keyword
Business angel, ‘good cop, bad cop’, negotiation, reciprocal exchange, attribution
National Category
Business Administration
Research subject
Business Studies
Identifiers
urn:nbn:se:kth:diva-153937 (URN)10.1080/13691066.2014.974884 (DOI)2-s2.0-84920567082 (Scopus ID)
Note

QC 20161006

Available from: 2014-10-09 Created: 2014-10-09 Last updated: 2017-12-05Bibliographically approved
5. The impact of financial capital, human capital and social capital on the evolution of Business Angel Networks
Open this publication in new window or tab >>The impact of financial capital, human capital and social capital on the evolution of Business Angel Networks
2013 (English)In: International Journal of Corporate Governance, ISSN 1754-3037, E-ISSN 1754-3045, Vol. 4, no 3, 209-228 p.Article in journal (Refereed) Published
Abstract [en]

Business angels are very important for the growth and development of start–ups as they contribute much needed capital and competence to these firms. During the past decades the formation and growth of Business Angel Networks (BANs) has become an increasingly common phenomenon and an important issue for policy–makers in most Western economies. In this paper, we follow the inception and development of three local BANs. The data in this paper come from in–depth interviews with the founders of the networks as well as bankers, civil servants, entrepreneurs and local politicians. The results indicate that capital alone will not guarantee success in a BAN rather it is a combination of the financial capital, human capital and social capital among the founding partners of the network.

Place, publisher, year, edition, pages
Inderscience: , 2013
Keyword
business angels, networks, investments, financing, entrepreneurship, Sweden
National Category
Business Administration
Identifiers
urn:nbn:se:kth:diva-137375 (URN)10.1504/IJCG.2013.056259 (DOI)
Note

QC 20140207

Available from: 2013-12-13 Created: 2013-12-13 Last updated: 2017-12-06Bibliographically approved

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Fili 2014 fulltext(586 kB)625 downloads
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