Huang and Pearce (2015). Managing the Unknowable: The Effectiveness of Early-stage Investor Gut Feel in Entrepreneurial Investment Decisions

Laura Huang – University of Pennsylvania Wharton
Jone Pearce – University of California Irvine Merage School of Business

Timothy Hubbard – University of Georgia Terry College of Business
Cole Short – University of Georgia Terry College of Business

Article link: <a href=";

Question 1. This is a great example of a mixed-methods paper showing the full path from inductive theory building through testing of that theory. In your inductive study, were there other emergent sets of topics that you considered, but chose not to focus on, those that might not have fit with the emerging theory? If so, have those informed other studies that you have done or plan to do? Are there specific lessons you learned from conducting the inductive study that you can recommend to others considering such studies?

Thanks – that is one of the things that we found the most challenging, but also rewarding – trying to write a mixed-methods paper where each study really built on the other, but where each study also was strong enough on its own to provide interesting findings. In the end, we felt we really needed each study to tell the full story. In the inductive study, there was a lot that emerged that was more exploratory in nature, and the rest of the studies helped us disentangle what was happening. We really started out with an inductive study to examine how investors broadly made investment decisions. One of the first things that emerged was that almost all of the investors mentioned the role of their gut feel. From there, we started targeting exactly what their gut feel was composed of. This is something that will absolutely inform other studies that we would like to do.

Question 2. You limited your inductive study to active and experienced angel investors. Do you think your findings are indicative of the behaviors of less experienced angel investors. That is, do you think they get better or worse over time? Or, that they favor one driver over another—e.g. they favor business viability more early in their investing? You have listed that you had a robustness check in Study #3, but range restrictions precluded you from drawing conclusions.

Yes, we were particularly interested in the schemas and prototypes of experienced angel investors, which is why we focused on that. The role of experience is definitely in interesting one and something that we’d love to look into further.

Question 3. Are there other populations that you would expect would have similar cognitive schemas/heuristics as early-stage angel investors? Are there groups that should, but don’t have such heuristics? Are there lessons here for other situations—for example managers and executives of larger firms?

In some other work, we have looked at high-level managers and how they make decisions under uncertainty. In this paper, however, the context makes so much of the difference, so we would not expect to see the same effects. Here, the angel investors are truly seeking out risky investments and are fine making wrong decisions, because they believe that is how they can find the “diamond in the rough”, or the homeruns.

Question 4. Which part of the deal-making process do you foresee having the highest impact on gut feel decisions from investors (e.g. the presentation, due diligence process, investor-CEO interactions)?

This is a great question. We were actually interested in this question as well, and one of the other projects that was happening at the same time as this one was about the investor-entrepreneur interpersonal relationship and trying to tease apart some of the questions about stage of the company and the effect of the relationship that an entrepreneur has with an investor. The paper is now forthcoming at Academy of Management Review.

Question 5. Study #2 investigated what factors—business viability and/or positive perceptions of the entrepreneur—lead to likelihood of investment and amount of investment. The pivot to Study #3 seems to be the efficacy these factors on the success of the venture, highlighted in your observation that “after all, most of their decisions result in total loss of their investment.” Can you tell us more about the process of developing the experiments after Study #1? Did reviewers bring up the need for Study #3, or was it a natural extension that was done before submission?

The Study 3 field study had always been a part of the paper, but place the focus on how gut feel affected the outcomes of these firms was something that was included after the first round of reviews.

Question 6. What were the prerequisites for entrepreneurs to pitch their ideas to the group of angel investors within your sample? Had any of the executives who gave pitches owned previous businesses (successful or unsuccessful)? Had they raised any previous capital? Were the investors aware of this?

The entrepreneurs in Study 3 had already gone through a vetting process by the pitch competitions before being invited to present. In this way, they were all above a threshold level of quality, which we wanted.

Question 7. From your experience interviewing angel investors, do you have any recommendations for graduate students or young researchers seeking to do the same? That is, do you have recommendations on how to ask questions of investors in a way that helps them open up and communicate more freely? Is there a way of framing your research questions to better accommodate the interests of these individuals?

We tried to keep things very semi-structured. We had a set list of questions, but then we really tried to let the investors tell their stories and give their examples however they wanted. One thing that helped them open up was to specifically give them cues to continue providing details. We repeatedly asked things like, “… and then what happened…”, “… and then what did you do…”, “so, then what…” to allow them to communicate freely and give their own views without being influenced by our line of questioning.

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