Crowdfunding: Implications for Angel Investment
Qualitative research on how Angels make use of Crowdfunding
Master thesis Business Administration – track Entrepreneurship and Innovation
Written by: Roel de Jong
Student number: 10875743
Date of submission: 19-08-2016
Qualification: MSc Business Administration
Track: Entrepreneurship & Innovation
Institution: University of Amsterdam
Supervisors: Roel van der Voort & Ton Gruijters
Statement of originality
This document is written by Roel de Jong, who hereby takes full responsibility for the contents of this document. I (Roel de Jong) declare that the text and the work presented in this document is original and that no sources, other than those mentioned in the text and those referenced, have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of the completion of the work, not for its contents.
Index
Abstract ... 4
Acknowledgements ... 5
1. Introduction ... 6
2. Literature ... 8
2.1 Introduction to crowdfunding ... 92.2 Crowdfunding compared to traditional forms of finance ... 10
2.3 The angel investment process ... 11
2.4 Why investors participate in crowdfunding ... 13
2.5 The concepts of trust, risk and information asymmetry ... 14
2.6 The crowdfunding platform ... 15
2.7 Reflection on theory - sensitising concepts – conceptual model ... 16
3. Methodology ... 19
4. Analysis ... 22
4.1 Results ... 22
4.1.1 The angel investment process ... 22
4.1.2 Motivations ... 26 4.1.3 Crowdfunding information ... 29 4.1.4 Trust ... 30 4.1.5 The platform ... 32 4.1.6 Undesirable conditions ... 33 4.2 Findings ... 34
5. Conclusion ... 36
5.1 Research contribution ... 386. Research limitations - Discussion ... 39
7. Recommendations ... 40
References ... 41
Appendix ... 47
Abstract
Crowdfunding is a nascent phenomenon and its implications and consequences have yet to be discovered. In contemporary literature, angel investment has yet to be connected to crowdfunding. Angels come in all forms with various preferences and are an important factor for a company’s success. Angels are classified as one of the most important actors in building a successful venture, as angels function not only as financial backers, but also as sources of experience, knowledge and networks. Therefore, it is worthwhile to examine the angel’s perspective on crowdfunding. This research explores the implications of crowdfunding for angel investment and the focus lies in how angels can make use of crowdfunding. Given angel’s heterogeneity, it is found that they make use of crowdfunding in different ways, which are uncovered in this research.
From the data from 11 interviews with angels from a Dutch matchmaking agency (i.e. an angel-entrepreneur intermediary), the opinions and beliefs of the angels are presented. The patterns that are found build on the literature that touches upon the links between angel investment to crowdfunding mechanisms. From the angels, two groups emerge with specific characteristics and preferences. These groups are labelled angels X and angels Y. angels X are more traditional angels that are interested in early stage ventures and want strong interference in the company after investment. These angels are mostly interested in ventures that have finished a successful reward-based crowdfunding campaign. The other group, angels Y, are less straightforward in their preference. They are more all-round angels with a strong focus on diversifying their capital. They are not refined to strong involvement after their investment. Moreover, these angels prefer to monitor (most of) their investments from a distance. They are both interested in both debt and equity-based crowdfunding and are more concerned with risk reduction and returns on investment. The most important similarity between the two groups of angels is their desire to get as much information as possible about the investment opportunity and more specific information about the entrepreneur.
Key words:
Angel investment, Angel investment process, Crowdfunding, Reward based crowdfunding, Debt based crowdfunding, Crowdfunding platform, Traditional angel investment
Acknowledgements
This thesis had two different supervisors as the first one retired half way through the process. First, Ton Gruijters helped me remember my old knowledge on qualitative research. He showed me how much I like the activity of extracting patterns out of data. Next, Roel van der Voort helped me during the last part of my research with ‘to the point’ feedback and hands-on knowledge. I would like to thank both Ton Gruijters and Roel van der Voort for a fruitful collaboration.
Second, Investormatch has been a major help in providing me with the angel database and giving me the freedom to meet with the angels during my internship. I would like to thank Peter van Meersbergen, managing director at Investormatch, for taking me in as graduate intern in the summer of 2015. I didn’t only get the opportunity at Investormatch to interview the angels for my research, but I also got the experience of participating in a small business where entrepreneurship and finance are present.
Then, there were some people in my environment that helped me by letting me talk and present my thesis subject and by providing me with feedback. My mother Philine Berns was always available to me to give me feedback when necessary. She has given me useful insights on appropriate qualitative research conduct and always made time to listen to my questions. Lastly, Billy Bruffey accompanied me to many cafés in Taipei, where he gave me intrinsic feedback, and moreover, let me use his tremendous English vocabulary for finding the most suitable words during the writing process.
1. Introduction
“Whosoever desires constant success must change his conduct with the times” (Niccolò Machiavelli,
n.d.)
Machiavelli aptly illustrated a perspective on success as being a process rather than a moment. As times change, the environment develops and in order to stay successful one has to adapt. In the contemporary digital area, crowdfunding has arisen as a financial vehicle and it is up to its stakeholders to use this new phenomenon to its full potential.
This research will examine angel1 investment, a neglected yet highly valuable field of study regarding venture finance (C. M. Mason & Harrison, 2002; Paul, Whittam, & Wyper, 2007). According to Feeney, Haines Jr, & Riding (1999a), “angels are wealthy individuals who invest their personal funds directly in the small businesses of other individuals” (Feeney, Haines Jr, & Riding, 1999a). Small business ventures traditionally use angels as a source of finance, expertise and networking (Wiltbank, Read, Dew, & Sarasvathy, 2009). More recently, crowdfunding has been used more frequently as a new finance vehicle that offers various new ways in which entrepreneurs can generate finance for their venture. Moreover, it opens up the practice of investing directly into a company for investors of all kinds. Angels are aware of this change and have their own opinions and beliefs on this development. What are the implications of crowdfunding for angel investment? As angels are the central object of this present study, the main research question is: How can angels make use of crowdfunding?
The popularity of crowdfunding is rising as a finance vehicle for companies and investors of all sorts are able to invest money directly. This is undoubtedly a positive trend for firms looking for funding. However, crowdfunding is still a nascent finance mechanism and is not without potential risks. This study asks how angels can make use of crowdfunding and, from the perspective of the angels, the implications of crowdfunding will be discussed.
The angels were found at Investormatch, one of the largest intermediaries for small and medium business funding in the Netherlands. Investormatch uses its angel network to match companies that are looking for risk capital with the appropriate angel(s). Over 500 angels use this platform to access interesting investment opportunities.
Recently, Investormatch started to utilise crowdfunding. As the literature states (Agrawal, Catalini & Goldfarb, 2011; Mollick, 2014; Schwienbacher & Larralde, 2010a), angel investment overlaps with traditional crowdfunding from family and friends. As Investormatch’s business lies in serving their
1 Angels, Business Angels, and Angel Investment are used interchangeably
2 Hereby it is chosen to refrain from quantitative research terminology (e.g. ‘variables’).
angels, this research aims to discern the implications of crowdfunding for traditional angel investment at Investormatch.
When it comes to early-stage financing, angels are an interesting field of study. The following two considerations support this view: First, angels generally have a high net worth and a large sum of money to spend (Freear, Sohl, & Wetzel, 1994; Lindsay, 2004). Second, they have experience in starting a business so they are considered as experts when it comes to evaluating business cases (C. Mason & Stark, 2004). If angels determine that an opportunity is fruitful or reliable, trust is built for other investors. With lack of funding as the main reason for start-up failure (A. Riding, Madill, & Haines Jr, 2007), it is worth examining the implications of crowdfunding for these angels. Furthermore, if a crowdfunding campaign is successful, the company is more interesting for the next round of finance by (other) angels, Venture Capitalists (VCs) or banks (Mollick, 2014). Additionally, if Investormatch knows how to approach their angels for crowdfunding, they become more interesting as a crowdfunding platform for entrepreneurs in search of finance.
In essence, this research aims to study the angel’s perspective on crowdfunding. As will be shown in the literature review, there are many factors that link angel investment to crowdfunding. For instance, angels can use crowdfunding to find investment opportunities. Also, the platform on which crowdfunding is accessed (e.g. the website) has an important role in the presentation of crowdfunding projects and overcoming possible barriers for investors. Therefore, finding how to approach angels in order to entice them to invest in crowdfunding will have practical relevance for Investormatch.
As the implications of crowdfunding for angel investment are yet to be uncovered, this study is, in part, explorative in nature. Angels are the main object of this study and in order to not limit the possible findings, no criteria for the type of crowdfunding included in this present study were made. As such, many types of crowdfunding have been included in this present study and the angels that were interviewed were very diverse. This results in the numerous variables that arise from the angel’s heterogeneity, which are impossible to test with numerical data. Therefore, the main question is best studied by qualitative research2, by discovering patterns and building a theory from qualitative data, as
proposed by Glaser and Strauss (2009), Eisenhardt (1989), Boeije (2005) and Punch (2013).
This present paper will start by introducing the existing literature on crowdfunding and angel investment in section 2. The concept of crowdfunding will be introduced and the important mechanisms for the angel investment process will be presented. Then, this knowledge will be used to ask whether the capital market for angel investments can be linked to crowdfunding. Trust is an important concept in this connection. In section 2.7, the literature contribution is reflected upon, which results in a conceptual model, which functions as a guiding model for gathering data in order to answer the research question. Section 3 presents the methodology, which contains a description of the process of data gathering and data analysis. In section 4, the concepts that could influence the angel
investment process and are deemed important for the angel’s use of crowdfunding are analysed. This analysis is divided into a result section, where the data is presented, and a findings section, which discusses the results in relation to the research question. A more comprehensive discussion is presented in the conclusion (section 5), which will also present the research contribution. Lastly, sections 6 and 7 consider the scientific and practical recommendations, and the research limitations of this present study.
2. Literature
Both angel investment and crowdfunding will be discussed in order to shape a framework for connecting both concepts. As angels are the main object of this study, it is important to understand the angel’s investment process.
First, the concept of crowdfunding will be explained. A definition will be given and different types of crowdfunding will be presented. Then, section 2.2 will elaborate on different forms of finance and crowdfunding will be compared to more traditional forms of finance. Section 2.3 will discuss angel investment as a form of finance. From the angels’ perspective, the most important criteria will be explained in angels’ decision-making. Then, the existing literature that addresses possible motivations to invest through crowdfunding will be presented. Next, the concepts of trust, risk and information asymmetry will be examined. These are three interconnected concepts that are important factors in any investment. Further, the role of the crowdfunding platform as an actor in the field of crowdfunding needs to be discussed. The platform is an important actor to overcome the issues that arise during the investor’s decision-making process. Lastly, a reflection on all of the above literature will examine how the concepts relate to each other and this relation is demonstrated in a conceptual model. How the theoretical concepts discussed in this literature review are used as sensitizing concepts for this research is also presented.
2.1 Introduction to crowdfunding
2.2 Crowdfunding compared to traditional forms of finance 2.3 The angel investment process
2.4 Why investors participate in crowdfunding
2.5 The concepts of trust, risk and information asymmetry 2.6 The platform
2.7
Reflection on theory - sensitising concepts – conceptual model2.1 Introduction to crowdfunding
In the initial phase of business development, it is most common for an entrepreneur to source money from friends, family or from their own savings (Gompers & Sahlman, 2002). If the business is established and the venture is growing, professional parties such as banks, venture capitalists (VCs) and business angels (BAs) can provide money (Schwienbacher & Larralde, 2010a). New technologies have led to ‘Web 2.0’, where the internet is not only a place to send and receive information, but also to react to it and make amendments. It has become a place of interactive communication. This has led to new interactions between firms and their consumers (Kleemann, Voß, & Rieder, 2008a). Companies can make use of ‘the crowd’ for cost-reduction purposes. This is the main principle of crowdsourcing (Schwienbacher & Larralde, 2010a). Mollick’s (2014) definition of crowdfunding provides specificity while allowing room for the continued evolution of the concept: “Crowdfunding refers to the efforts by entrepreneurial individuals and groups - cultural, social and for-profit - to fund their ventures by drawing on relatively small contributions from a relatively large number of individuals using the internet, without standard financial intermediaries” (p. 2).
Crowdfunding can be viewed as an element of crowdsourcing (Rubinton, 2011) and is a novel method for entrepreneurs to finance their ventures (Ibid). In the Netherlands in particular, money raised via crowdfunding platforms has increased by 100% in 2015 (compared to the year before) (Douw & Koren, 2016).
As Belleflamme, Lambert and Schwienbacher (2013) state, an important characteristic of crowdfunding is the extra private benefits that funders enjoy by participating in the crowdfunding mechanism. These benefits vary with the form of crowdfunding and are determined by the choices of the entrepreneur and the characteristics of the crowdfunding platform. Four forms of crowdfunding can be distinguished: Donation, reward, loan and equity-based crowdfunding.
With donation-based crowdfunding, entrepreneurs do not offer anything in return for investors’ contributions. Most crowdfunding platforms use this model as an addition to reward-based projects. An example of a platform that combines these two systems is voordekunst.nl.
The reward-based model offers a non-financial return to the contributor. Usually, a model of pre-ordering is used. Contributors receive the first product that the entrepreneur is making, usually for a discounted price (Bradford, 2012). Also, rewards can be in the form of a membership or a special ‘thank you’ (Belleflamme, Lambert, & Schwienbacher, 2014). Usually, the entrepreneur offers more rewards for funders that contribute a larger amount of money.
With loan-based, or lending-based, crowdfunding, the investor3 expects a financial reward
(Rubinton, 2011). The entrepreneur has to repay the investor with additional interest. Loan-based crowdfunding is a form of debt finance.
Last, equity-based crowdfunding issues securities to the investor. The investor invests in the company by buying shares. In the Netherlands, regulatory issues make is difficult to use equity-based crowdfunding. The only platform in the Netherlands that offers equity-based projects is Symbid.
Angels might be interested in all forms of crowdfunding as they are by definition profit-driven individuals looking for investment opportunities (Stedler & Peters, 2003) and all types of crowdfunding can generate investment opportunities. However, angels might have different preferences regarding the type of cases as they are linked to different types of crowdfunding.
2.2 Crowdfunding compared to traditional forms of finance
Crowdfunding, as an alternative mode of finance, is usually linked to ventures or small businesses. It can function as an addition to a first (traditional) round of finance from friends and family and is also often used to validate the market. This implies that the selling of the product has yet to start. Kappel (2008) makes a distinction between ‘ex post facto’ crowdfunding and ‘ex ante’ crowdfunding. With ex post facto crowdfunding, the product has already been completed. Ex ante crowdfunding, on the other hand, means that the product has not yet been produced. Ex-ante crowdfunding is more suitable for a new company that wants to validate the market before the commencement of manufacture.
Other more traditional forms of finance, next to friends and family, are finance from business angels, venture capitalists (VC), or banks. The latter usually provides debt-capital when the company is more mature and consistent revenue streams have been established. When it comes to start-up funding, angels and VCs are the most appropriate.
Prowse (1998) studied the angel investment market. As mentioned in the introduction, “angels are wealthy individuals who invest their personal funds directly in the small businesses of other individuals” (Feeney et al., 1999a). Sudek (2006) adds that the angels mostly have experience in building a business. Even though angels refer to persons, the concept also entails the act of investing. For a starting company, friends, family and personal savings act as the first round of finance and angel investment often makes up the second (Prowse, 1998).
The VC investment market has been studied more systematically than the angel investment market (Paul et al., 2007). In general, VCs provide finance in the stage following angel investment (Sudek, 2006). Lerner (1995) defines venture capitalists as “general partners or associates at venture capital organisations that are either unaffiliated with any other organisation or else affiliated with a financial
3 Contributor is used for a funder of crowdfunding projects with non-financial returns. Investor is used for a funder of a crowdfunding project with financial returns.
institution” (p. 310). In contrast to angels, the partners or associates operate in the name of the venture capital organisation.
VC finance with angel finance have been compared and well studied many times over. In the case of angel investors, angels invest their own money. This means that they are less accountable (Benjamin & Margulis, 2000) and they invest more opportunistically (Sudek, 2006). Additionally, they tend to conduct a less extensive due diligence. As Benjamin and Marguilis (2000) state, angels are more involved in the companies in which they invest. The motivation behind their investment is different to VCs and they tend to be less demanding (Van Osnabrugge & Robinson, 2000) as they care relatively less about the returns on their investment. Instead, they care more about the personal relationship with the entrepreneur (Van Osnabrugge & Robinson, 2000), which is in contrast to a VCs’ main objective, which is the return on their investment. This means VCs are less emotionally attached (Sudek, 2006).
For entrepreneurs, finding appropriate investors is a difficult task. As the literature shows, angels and VCs have a wide range of preferences and when an investing partner is found, the due diligence process is arduous and time-consuming. Therefore, crowdfunding has become a serious alternative to circumvent this difficult task in the early stages of investment (Kleemann, Voß, & Rieder, 2008b; Schwienbacher & Larralde, 2010b).
2.3 The angel investment process
Even though angels have been a topic of interest for many researchers, there are still parts of the angel’s activities that are under-researched, such as the angel investment process (Paul et al., 2007). Maxwell, Jeffrey and Lévesque (2011a) emphasise that angels are the most important investors for ventures in their nascent stage, since they are willing to buy an amount of equity stake in companies with a higher perceived risk rate. Lipper and Sommer (2002) also underline the impact of angels for venture capital. In the US, angels invest approximately $30-40 billion a year (Ibid.). Furthermore, VCs, Banks and other angels are more likely to invest in ventures that have already received investments from angels in an earlier stage (Maxwell, Jeffrey, & Lévesque, 2011b). To associate crowdfunding with angel investment, it is important to understand the angel’s investment process.
The angel’s investment process is influenced by a wide variety of factors (Paul et al., 2007; Prowse, 1998). As stated by Prowse (1998), the business angel market appears to be very heterogeneous and angel characteristics are diverse. Their background explains this. Some angels obtained their wealth through building and selling their own successful businesses, others inherited their wealth (Ibid.). In addition, their motivations to invest might differ, depending on their interest and the time they have to devote to it. A typical, initial financing round for an angel ranges from $100,000 to $2 million, but it could also amount to little more than $25,000 (Bradford, 2012: p. 103).
Prowse (1998) makes a distinction between active and passive angels. Active angels get more involved in the company after their investment. They monitor the firm closely and advise if necessary. Active angels are often ex-entrepreneurs, usually with management experience in small or big companies. Alternatively, passive angel investors do not tend to get involved in the company, they merely provide capital. These angels monitor their investment from a distance and are less concerned with being involved in the company.
Existing research is not completely undivided about the most important factors in evaluating a business case. Many factors are discussed: sales; evidence of market place acceptance and size; patent protection (C. Mason & Stark, 2004) and personality characteristics, such as openness, honesty, realism and integrity, work ethic, and business understanding (Feeney, Haines Jr, & Riding, 1999b; Haines Jr, Madill, & Riding, 2003). The first time these factors are presented to a possible investor, it is through a business plan. As Shepherd (1999) mentions, the business plan is the first substantial contact between entrepreneur and (possible) investor. Others (Hodgetts, Kuratko, & Kuratko, 1998; C. Mason & Stark, 2004) second the importance of a business plan in starting a business and raising funds (with a business angel).
Many studies suggest that the entrepreneur is the most important factor when evaluating a start-up (MacMillan, Zemann, & Subbanarasimha, 1987; Sudek, 2006; Van Osnabrugge & Robinson, 2000). Prowse (1998) reiterates this view, specifying the importance of trust in the entrepreneur. A later study by Feeney et al. (1999c) also supports this notion; the entrepreneur has to be known and trusted directly by the investor or indirectly through associates of the investor. The second criterion proposed by Prowse (1998, p. 789) is a comprehensive business plan.
Other literature claims the management team as the most important factor (Shepherd, 1999). Van Osnabrugge and Robinson (2000) conducted research into start-up funding in Europe. They found that enthusiasm and trustworthiness out of the 27 criteria were the most important factors for angels.
Maxwell et al. (2011b) argue that the results from existing research about these criteria are too complex and therefore not satisfying enough to make conclusions about entrepreneurs and investors. Also, researchers (Landström, 1998; A. L. Riding, Madill & Haines Jr, 2007) claim that the decisive criteria for making an investment may vary over the decision-making process. Thus, different points in the process may need different levels of attention. The importance of focusing on the process in human decision-making was also stressed in Sandberg, Schweiger and Hofer (1988); perceptual, emotional and cognitive processes underline the choices for a decision. Therefore, it is not sufficient to solely examine the outcomes.
Last, the empirical research in Maxwell et al. (2011a) is oriented towards the process of angels’ decision-making. They indicate that existing theories wrongfully suggest normative criteria for angels to assess business opportunities. In practice, angels use cognitive shortcuts, known as heuristics, to determine whether or not to invest. These heuristic can be characterised as ‘elimination-by-aspects’. In this case, the angels use certain moments in their investment process to judge on the investment
opportunities and exclude the cases that don’t qualify for a possible investment. In this manner, only a few cases remain that are evaluated extensively (Ibid.).
2.4 Why investors participate in crowdfunding
Gerber, Hui and Kuo (2012) build on motivations for participating in crowdfunding for both the creators (entrepreneurs) and funders from a psychological marketing perspective. They found that a close personal relationship motivates many funders. Further, a connection with the cause of the project is an important factor. From a marketing perspective, this is linked to the concept of ‘identity’. The characteristics of a funder’s identity have to be consistent with the project’s cause in order to generate funding. Another motivation for funders to participate in crowdfunding is to engage in a community. Throughout a crowdfunding campaign, funders get more involved in the project and feel a part of the business mission of the entrepreneur.
Agrawal et al. (2011) present five incentives to invest in or contribute to a crowdfunding campaign: First, crowdfunding provides investors with investment opportunities. It is another source for investors to detect ideas and projects. Agrawal et al. (2011) state that opportunities that are not linked to funding from friends and family are only suitable for accredited investors. However, with crowdfunding, these opportunities are accessible to all investors.
Second, crowdfunding provides investors with early access to new products. If investors believe a product is worth investing in, they can do this even before the product is produced. Also, doing so will increase the value of the company.
Third, Agrawal et al. (2011) describes community participation as an incentive for investors. They explain that investors commit their money as a means to gain more inclusion and closer access to the entrepreneur. Moreover, they want to be part of the entrepreneurial initiative (Ibid. p.15).
Fourth, investors can also fund a project without tangible rewards. It is the motivation to support a product, service or idea for philanthropic reasons.
Fifth, funders use crowdfunding because it is a formalisation of contracts. This last incentive to use crowdfunding is linked to investments from family and friends, who are usually in a close relationship with the entrepreneur. The crowdfunding platform is a welcome intermediary that formalises the financial contract and avoids interference with the social relationship between investor and entrepreneur (Agrawal et al., 2011).
Additionally, alongside the aforementioned five incentives, Agrawal et al. (2011) propose broadly that investors in general are interested in the ‘information’ that is generated from a crowdfunding campaign. It is expected that these elements are also interesting for angel investors. This information includes ‘ideas for product modifications’, ‘extensions from potential product users’, ‘market validation’ and ‘interest from other investors’. In essence, the crowdfunding campaign is a method of
initial marketing research, allowing angels to assess the demand and viability for a certain market, product or service.
Gerber et al. (2012) also provide an explanation as to why people give money in a virtual setting, which this present paper finds useful for suggesting generic motivations for investing, such as personal connection or product affinity. However, the research by Gerber et al (2012) is more explorative and also includes non-financial crowdfunding, which is less applicable to angel investment. Agrawal et al. (2011) offer more relevant research findings with regards to angel investment, since it is focused on crowdfunding with a financial return (both equity and non-equity).
2.5 The concepts of trust, risk and information asymmetry
Every interpersonal (financial) transaction consists of trust (Olsen, 2008a). Also, Clark-Murphy & Soutar (2004) shows that personal trust is important for building a relationship between investor and client. Rousseau et al. (1998) define trust as “a psychological state comprising of the intention to accept vulnerability based upon positive expectations of intentions and behaviour of others” (p. 395). This definition entails the presence of risk. Investors have to take a ‘leap of faith’, which is fuelled by the positive expectations and intentions of others. The unpredictability is what makes trust necessary (Olsen, 2008). That is to say, in order to take the risk, trust needs to be established. Therefore, risk and trust are inseparable. Investors also welcome the presence of indeterminacy in the world of financial investments. The risk implies a financial gain in the future for the investor.
Trust is determined by cognitive and affective attributes. These concepts are derived from research in social psychology (Rempel, Holmes, & Zanna, 1985) but are also applicable to consumer relationships (Johnson & Grayson, 2005a; Olsen, 2008b):“Cognitive trust arises from accumulated knowledge that allows one to make predictions, with some level of confidence, regarding the likelihood that a focal partner will live up to his/her obligations” (Johnson & Grayson, 2005: p. 501). In the context of this present paper, uncertainty is balanced by the predictability of the partner that is to be trusted. These positive predictions can emerge from earlier encounters or from recommendations by others and as such, the person becomes reliable (Johnson & Grayson, 2005b; Johnson-George & Swap, 1982). Williamson (1993) labels this as calculative trust. Another type of trust is affective trust, which is the confidence one places in a partner on the basis of feelings generated by the level of care and concern the partner demonstrates (Johnson & Grayson, 2005: p. 501). Thus, affective trust is based on emotions. Frowe (2005) states that in a professional context, the type of trust is dependent on the availability of information and the judgment of the professional. Both cognitive and affective trust is present. But, when less knowledge is available, affective trust becomes predominant.
Agrawal et al. (2011) associate trust and risk with ‘information asymmetries’. This is an important factor that often causes difficulties when investing in crowdfunding. As every investment contains
risk, investors use a personal relationship with the entrepreneur and a process of due diligence to analyse the feasibility of the investment and to decide whether risk and return rates are appropriate. With crowdfunding, information asymmetry is amplified for the following reasons: First, the asymmetry concerns the feasibility of the entrepreneur’s ability to deliver the product (Ibid, p. 7). This would be the case for ex ante crowdfunding. Next, investors are concerned with the entrepreneur’s ability to build a lucrative business. This is supported by Bradford’s (2012: p. 107) statement that the investor has little information about what is to come and little control over what the entrepreneur does. Moreover, crowdfunding implies online communication with a geographical distance between investor and entrepreneur (Agrawal et al., 2011). This exposes difficulties in relationship building and in exercising due diligence. Due to these information asymmetries, propositions are perceived with a higher risk.
2.6 The crowdfunding platform
Bradford (2012) elaborates on crowdfunding from a legal perspective. He comments on a platform’s involvement in the transactions. First, the platform is involved when the entrepreneur and investor come together and communicate. The platform is an important facilitator in this process. According to Bradford (2012), the platform’s role is closely related to that of a broker, as the platform transmits funds and investment documents between entrepreneur and investor, in return of a transaction based compensation (i.e. the platform’s revenue). However, in both the USA and the Netherlands, crowdfunding platforms do not give recommendations on where to invest. In the Netherlands, all debt-crowdfunding platforms contain an overview of project ratings to provide clearness on the quality of the loan. The thoroughness of these ratings varies for each platform but they usually include information about the company, the entrepreneur’s so called BKR-rating4 and the available financial
documents.
Different crowdfunding platforms act differently, usually according to the type of crowdfunding offered on the site. For instance, Kickstarter’s interference in assessing the project’s creator is less intrusive than crowdfunding platforms offering propositions with a financial reward. Agrawal et al. (2011) state that the platform can function as a trustworthy intermediary that facilitates trust between marketplace participants (i.e. investor and entrepreneur). They state that it is advisable for platforms to certify projects with a verifiable quality level, as honest ratings can generate trust for both investor and entrepreneur.
Bradford (2012) discusses the role of the platform as gatekeeper. He states that it is difficult for platforms to verify the amount of money the entrepreneur has raised through outside sources. The platform can merely monitor the cash flows that go through their site. In order to build trust, Bradford
(2012) states that the platform should meet standards designed to protect investors. Four clear conditions are discussed. First, a platform should strive for transparency: “Crowdfunding sites should be open to the general public and should provide publicly accessible communication portals that allow potential investors to communicate about each offering” (Bradford, 2012: p. 133). As Agrawal et al. (2011) state, investors have to gather information and monitor the progress from a distance. This requires a platform that is equipped with the tools to show information adequately and monitor the progress accordingly. Second, Bradford (2012) suggests platforms only allow investors to invest after watching an educational video or taking a short quiz. This should warn and teach unsophisticated investors about the pitfalls and commonalities of investing through crowdfunding. Third, the entrepreneur’s project should present a clear funding goal and should only be allowed to close the offering if that goal has been met. If the goal is not met, investors can still decide to invest, or withdraw their investment.5 Fourth, platforms should not be allowed to rate or advise on investment
opportunities. Bradford (2012) warns that platforms should withhold from these activities, as they are not registered as brokers or investment advisors.
To reduce catastrophic losses, most platforms set an investment limit and Bradford (2012) argues for either a fixed amount of $500, or a yearly limit of 2% of the investor’s net worth or annual income. When it comes to crowdfunding, even unsophisticated investors are allowed to participate. Therefore, it is debatable what each individual can afford to lose. However, a percentage of an investor’s income is more difficult for the platform to monitor. In the Netherlands, most crowdfunding platforms limit the amount an investor is allowed to invest in each campaign.
2.7 Reflection on theory - sensitising concepts – conceptual model
From the literature on crowdfunding and angel investment emerge expectations and questions that have yet to be answered. An examination of the central concepts results in a more complex map of factors that may influence the process of crowdfunding and angel investment. Will angels participate in crowdfunding? Will angels use crowdfunding in their search for opportunities or will crowdfunding and angel investment be completely separate institutions? As angels are a heterogeneous group (Prowse, 1998), influenced by a wide variety of factors, there are no unambiguous answers to these questions. Also, there is no clear theory that can be used to find the relations between the constructs that are connected to crowdfunding and angel investment. Figure 1 is a model of the connection between the given concepts that provides structure and focus for analysing the empirical data from the interviews with the angels. Five general concepts derived from the literature review will be used to
5 Many platforms allow investors to commit to a certain amount that has to be invested if the project has reached 90% of its goal.
assemble this guiding conceptual model, i.e. the angel investment process, motivations, crowdfunding information, trust and the platform.
First, there is the construct of the angel investment process as discussed in section 2.3. This is the main object of study, as it is directly related to the angels’ opinions and beliefs. It is expected that this process is where the angel’s possible participation in crowdfunding is found. Prowse (1998), Feeney et al. (1999), Paul et al. (2007) and Mason and Stark (2004) present important factors that angels pay attention to when finding and evaluating an investment opportunity. On participation in crowdfunding by investors in general, Agrawal et al. (2011) cover most concepts broadly, but more explorative research about the position of crowdfunding and the benefits and opportunities for investors is welcome. It is expected that many angels would participate in crowdfunding in an unconventional manner. Agrawal et al. (2011) take a first step towards presenting the benefits of crowdfunding and have come up with five incentives6 for participating in crowdfunding (that are not limited to investing
a small amount). These incentives can also be applied to angels that want to participate in crowdfunding from a meta-perspective (e.g. find investment opportunities or get in contact with the entrepreneur). This concept is labelled ‘participation in crowdfunding’ in figure 1.
Second, the angel’s motivations largely determine the angel’s investment process and whether (and how) angels will make use of crowdfunding. As Prowse (1998) stated, the preferences and characteristics of angels are diverse. The implications of crowdfunding for angel investment are not limited to angels who use crowdfunding to invest. Positive implications of crowdfunding such as market validation and investment opportunities, as mentioned by Agrawal et al. (2011), can also be of use to angels, whether angels invest in crowdfunding or not. Also, though not specified as such by Agrawal et al. (2011), it is expected that the five incentives to invest in crowdfunding are directly applicable to angel investment. The overall concept of the angels’ needs and preferences are presented in figure 1 as ‘motivations’.
Third, there is the concept of the ‘information’ generated from a crowdfunding campaign. This is broadly discussed in Agrawal et al. (2011) and it is expected that these elements are also interesting for angels. This information includes (but is not limited to) market validation, investment opportunities or more specific product modifications, extensions from potential product users, and interest from other investors. In essence, the crowdfunding campaign is the first marketing research, assessing the demand for a certain (not yet existing) product or service. The information that is generated by crowdfunding can be of great use for angels and is presented in figure 1 as ‘crowdfunding information’.
Fourth, both Agrawal et al. (2011) and Bradford (2012) give clear directions for crowdfunding platforms. The platform should intend to create the best value for the crowdfunding market. Where Agrawal et al. (2011) focus more on the generation of trust as a third party or intermediary, Bradford
(2013) focuses more on platform transparency to enhance the wisdom of the unsophisticated crowd and to ensure the provider of capital (the investor) should be protected and informed. Both studies contradict each other on their views on the interference of the platform. Agrawal et al. (2011) propose more interference by rating the project, in order to generate trust for both parties and Bradford (2012) claims that the platform should beware the risk of becoming an investment advisor. Both studies strive to diminish information asymmetries as much as possible in order to reduce the risk of market failure. It is evident that the platform has a big role to play in this matter. Furthermore, even though angels might not require the educational video that Bradford (2012) proposes7, the role of the platform is expected to be of great influence for angels’ participation in crowdfunding. It remains unclear how the intrusiveness of platforms affects angels in their decision-making. It is expected that angels welcome a platform that can function as a gatekeeper who takes over a big part of the time consuming due diligence processes. Figure 1 incorporates the idea that the platform influences the angel’s motivations and trust, and influences crowdfunding information. This concept is labelled ‘platform’ in figure 1.
Fifth, there is the concept of trust. As the literature shows, trust, risk and information asymmetry are interconnected concepts. It is expected that these have an influence on whether (and how) angels participate in crowdfunding. Figure 1 presents trust as an independent variable. Motivation and trust are also expected to influence each other and as such, are presented in the same box.
The conceptual model (figure 1) has been derived from the literature review and shows that crowdfunding generates information for angel investors, which results in the various ways in which angels can make use of crowdfunding. The crowdfunding information is a concept that contains factors that are linked to characteristics of crowdfunding. These may influence the angel investment process. In addition, motivations and trust are more connected to the angel as a person and might influence the angel’s opinions and beliefs on crowdfunding. Lastly, the platform or intermediary influences the presentation of the crowdfunding project. As the literature shows, the platform can have an influence on how the investor perceives the crowdfunding information. Therefore, the platform can influence both the crowdfunding information and the angel’s motivation and trust.
Figure 1. How angels make use of crowdfunding: Model of sensitising concepts8
3. Methodology
This research aims to uncover and explain the meaning of the theories behind the processes, feelings and behaviours that lie behind the concepts presented in figure 1. These are best explained through the use of soft data (Mintzberg, 1979), which is best executed by qualitative research. It starts from the premise that there is no existing theory that can be used to test the relations between angel’s decision-making and crowdfunding. This approach to theory-building research appears in Eisenhardt’s (1989) article on how to build a theory from case study research. The five constructs described in section 2.7 are linked to the research problem and are stated as potentially important variables. Although these theoretical constructs (figure 1) are tentative, the literature supports the motivation to gain more relevant data. As Mintzberg (1979: p. 585) poses: “we go into organisations with a well-defined focus – to collect specific kinds of data systematically.” Therefore, it is important to describe the existing
8 Figure 1, as a conceptual model, has no purpose to prove the expectations of this research. The nature
of the connection between the theoretical concepts is indefinite. It is purely an instrument to clarify the theoretical constructs that are presumed to be important for this research. It will generate a topic list in order to aid the process of data gathering and data analysis.
literature of the central constructs beforehand. It generates expectations and help guide the researcher through the vast amount of data collected from interviews, observations and archives in the field. Moreover, it enables a more accurate measurement of the central constructs. As Eisenhardt (1989: p. 536) states, when the constructs are proven to be important, there is a firmer empirical grounding for the emergent theory.
The topic list (attachment B) that was used to interview the angels was derived from the theoretical concepts. The angel investment process was the main theme during the interviews, as it is directly linked to how an angel might use crowdfunding. The other concepts were also used as topics to evaluate this process and enough space was also left open for the angels to mention elements that were not pre-selected from the theoretical concepts. Thus, the topic list guided the interviews with Investormatch’s angels but it was not rigidly stuck to if the angels wanted to talk about something else. These angels were all Dutch and linked to Investormatch, based in Amsterdam. It takes into consideration that all angels were linked to Investormatch, as this might bias the results in terms of external validity, although, the angels at Investormatch are taken to be typical Dutch angels. Furthermore, Investormatch is located in Amsterdam, a city where startups and modern companies emerge and where angels are expected to be more up-to-date with new forms of finance such as crowdfunding. This results in angels that can give deeper insights into this topic, which is positive, in terms of internal validity. However, this should be taken into consideration if this research is reproduced elsewhere (e.g. more conservative areas). Altogether, it is not expected that findings from angels elsewhere will relate differently to the theoretical constructs that are presumed to be important for this research.9 For the sake of discussing crowdfunding and angel investment at Investormatch, it is
practical to examine angels that know of Investormatch’s business as both a crowdfunding platform and as an intermediary for angels and entrepreneurs. It is expected that the selected angels serve as a model for the population of angels at Investormatch.
During the research there was an overlap of data-collection and data-analysis for the purpose of constant comparison, a common triangulation method for qualitative data (Glaser & Strauss, 1967). Specifying the population results in more valid conclusions from the data. The angels were chosen for theoretical (and not for statistical) reasons. As Eisenhardt (1989: p. 537) states, it is important to define the limits for generalising the findings. As this research is not an experiment, it aims to produce valuable claims about angels from qualitative data. These are explorative steps towards building a theory of the connections between crowdfunding and angel investment.
The angels for the first four in-depth interviews were randomly selected from Investormatch’s database, based on availability. As the different types of angels emerged (i.e. investment preferences), the next four angels were chosen according to these findings. That is to say, they were chosen on the basis of their preference for either only equity investments or other and debt-based investments. The
last three angels were selected to polarise the results and get out-of-the-box insights that broaden the breadth of the spectrum (i.e. provide examples of polar types) to extend the emergent theory and search for serendipitous results (Eisenhardt, 1989).
In total, 11 angels were interviewed. Each interview consisted of an average of 40 minutes of audio (except for the final three). All interviews were recorded and transcribed. All data was coded using categories and labels (attachment A). The concepts from the theoretical framework were translated into categories that are applicable to the data from the interviews. This process started with assigning labels to the data (e.g. to individual words, or small or large chunks). The function of these labels was to provide meaning to the data, to index the data and to allow more advanced coding (Punch, 1998), Boeije (2005) describes this as an axial coding strategy, in which one starts with an open coding method (i.e. the first labels) and then select more specific, definite labels. Each category had its own specified code, derived from the data itself, in order to uncover the meaning of the data. Later, from the categories that emerged, the data was put back together to make connections between categories (Ibid.), or as described by Punch (1998), to discover regularities.
During the interviews, the questions were constructed based on the theoretical constructs of the angel investment process, motivations, crowdfunding and participating in crowdfunding, trust and the platform. All interviews started with questions about the background of the angel. Next, each angel was asked about his or her typical investment process. Then, the concept of crowdfunding was extensively discussed, with regards to trust, the platform and motivations. To guide this process, the angels were asked to look at the two first crowdfunding cases of Investormatch: Cowboy’s Inc. and Print3d Matters. The former is an established company (since 1987), with a yearly revenue of 14 million euros and focuses on selling leather. Cowboys moved its production to Mexico and changed its customer focus to a ‘higher-end’ consumer (i.e. more expensive products). The latter is a growing 3D print shop, both B2B and B2C, which wants to expand due to a growing demand for projects. The aim of the use of these projects was to get the angels’ opinions on these specific cases, to trigger a calculated opinion by thinking about specific crowdfunding cases. Lastly, angels were more generally asked to share their opinion on crowdfunding. For example, they were asked if they would use it, what will happen in the future and what should the role of Investormatch/the platform be?
The quantification of the codes that appear in the interviews is presented in attachment B. If the value of the code in the table is 1 or higher, it means this code was discussed in the interview. The higher the value, the more quotes are labeled with the specific code, which means the subject linked to the label was discussed more extensively in the interview.
- Research problem: implications of crowdfunding for angel investment - Data sources: interviews, observations and archives
- Investigator: single investigator
- Output: conceptual framework that shows Investormatch’s angels perspective to uncover possibilities for and problems of crowdfunding.
4. Analysis
The analysis is separated into ‘results’ and ‘findings’. The results section presents the first steps in extracting the most important structures from the data. They are structures that are based on five topics, which were derived from the conceptual model (figure 1): the angel investment process, motivations, crowdfunding information, trust and the platform. The first section presents general information on the angels’ investment process, as it is the heart of the angel’s perspective. From here, the relevant topics, as presented in figure 1, will be analysed to see how they relate to the investment process. ‘Undesirable conditions’ is added as an extra section to present the angels’ perspective on risks towards their investments. This topic is not presented in section 2.7, but turns out to offer important insights into the angel’s perspective on crowdfunding. Subsequently, the findings are presented in section 4.2, in a more specific way, in order to answer the research question.
4.1 Results
The starting point of this section is an explanation of the angel investment process. As mentioned before, this process was the main theme during the interviews. Therefore, starting from this point will bring about a more coherent structure of the analysis. This section is divided into subparagraphs to comprehensively present the stages of the investment process. Hereafter, the concepts (motivations, crowdfunding information, trust, the platform and undesirable conditions) are analysed in terms of how they influence the angel investment process and the angels’ use of crowdfunding.
4.1.1 The angel investment process
An investment is a term that can be taken in a broad sense. It means committing money in order to generate more money in the future. This can be done in various ways (e.g. stocks, bonds, equity, real estate, funds, etc.). With regards to diversification, an important investing technique, it is expected that all angels invest their money in different ways. For instance, four angels mentioned that they put money in an investment fund. Three of these angels are linked to a certain fund that represents the angel’s interest of finding fruitful investment opportunities. In the case of a fund, the angel’s investment is ‘indirect’ as the fund acts as an in-between, between the angel and the investment. However, the angels’ investment process will be defined as the process of the angels’ ‘direct’ investment in a company (both debt and equity).
To start the data presentation, the angel’s background is presented. As the data shows, the angels’ background is linked to the angels’ motivations and preferences in the investment process. This process is divided in two subparagraphs, which follows the chronological steps of an investment. First,
the finding of investment opportunities is presented and second, how angels evaluate the investment opportunity is discussed.
How angels become an investor
Although four of the angels still had a regular job, all angels had gathered a significant amount of money to not be fully dependent anymore on their income as an employee. All angels acquired their money from one, or a combination, of the following sources: From their own jobs over the years, from being a successful entrepreneur, from family funds or from the stock market. Having a high net worth doesn’t make one an angel. At a certain point they started investing their money. As one angel describes, he started investing with a group of friends. Together they funded early stage ventures that emerged in their personal network. Another angel got his first case from his accountant, which triggered his first interest in investing before doing it full time. Three angels started with an investment from their personal network and after this first investment, they decide to establish a lifestyle where investing is their main activity. This doesn’t hold for all angels as four of the angels still practice a day-to-day job. The following is a quote by Respondent 5. He describes the process of becoming an investor: “This made me think on what to do after… I wanted to keep doing
entrepreneurial activities, but at the same time, I didn’t want to lead a company. Then I started looking at investing. First very broadly and later with more focus, to find the kind of investments that suit me best” (Respondent 5)10. Respondent 5 has a strong focus on being entrepreneurial, prefers equity investments and has a strong interference in the company after the investment.
How and why the angels acquired their money often influences their investment preferences. Respondent 8 had been a successful freelance worker. After his mother died and left him money, he decided to stop his day-to-day job and start investing: “…So I did that for a while. But also some other
interim jobs. In 2013 my mother died and I inherited some money. It was an option to put it in the bank for 1 percent and keep doing what I am doing now. Or I can invest it and try to get a better return”. With this foundation, he is more concerned with less risky investments to secure a constant
return and income. This angel also has a work-hobby as a sports reporter, for which he is frequently required to travel around the world. Therefore, he prefers debt investments with little interference. With his net worth, his money will generate enough income out of the interest and his main aim is to keep this revenue flow running. As he is not available for strong involvement in a company, he avoids high-risk equity investments.
One angel first came across investing with kiva.org11 and his original motivation was philanthropic. This offset a stream of investments, both crowdfunding and traditional debt investments. This angel
10 All quote’s are translated to English
11 American initiative for micro-financing. With small amounts (<€100) of debt investment, entrepreneurs in third world countries are supported in starting businesses.
searches for opportunities that he deems to have a positive influence on society and are sustainable in usage.
How angels find investment opportunities
The angels find their investment opportunities from various sources. As all the angels in this study are linked to Investormatch, they all mention Investormatch as an intermediary to find cases. However, the angels’ personal networks are the most important sources of opportunity. They receive phone calls and emails, and are approached at events or on social media.
Ten angels mentioned their own professional experience as a source for finding investment opportunities. Their background (studies, current or past jobs) contributes to their expertise, which influences their preferences (e.g. certain branches or startup-needs). For example, when an angel has been working in strategic marketing, he or she feels better equipped to evaluate business opportunities in this field. Accordingly, the angels have strong opinions on the subjects that they are familiar with and will, therefore, assess the business most strictly on these topics. Also, this evaluation stage is when the angel adds most value to a venture and when he or she decides to take on the investment or not. For instance, an angel that has worked for 15 years in communication technology might believe that they recognise opportunities and grow-perspective of companies in communication technologies or related branches.
The angels in this study were not clear to what degree they search for investment opportunities themselves or if the opportunities find them. Five angels described a more active search for opportunities: “…There are also opportunities available in the network. Sometimes I get a call with a
question such as ‘would you like to participate in this or that?’ Which is of course very interesting and fun. I also look a lot for them myself and many of those times, with regards to crowdfunding, I take a crowdfunding platform or project, on Kickstarter or Symbid and I look at what they offer and what the ideas are and then, instead of crowdfunding them, I call them” (Respondent 2). This quote shows how
an angel uses crowdfunding platforms to find investment opportunities. The angel uses phone calls for both receiving and persuading cases. It is remarkable that she doesn’t participate in crowdfunding as it is offered on the platform, but tries to contact the entrepreneur(s) directly.
Evaluating the investment opportunity
The data collected in this present study shows clear patterns in the start of the angel’s investment processes. First, angels have to be intrigued by an investment opportunity, which is often presented to them by way of a plan on paper or through a pitch. However, the most important part is the meeting with the entrepreneur(s): “… I always want to see something on paper first. An email with slides or
whatever. As soon as I’ve seen that, then I want to arrange an appointment with the entrepreneur as soon as possible. From there, well, you can see whether there is a connection or not. It is very important to connect on a personal level, that you understand each other” (Respondent 5). This quote
shows how the angel approaches an investment opportunity. The first step, as this angel describes, is a first connection on paper, in order to screen opportunities. Shepherd (1999) also mentions this first step; the business plan is the first substantial contact between the investor and the entrepreneur. This step occurs prior to a possible meeting. Next, he mentions a personal connection. This is an important factor for most angels when evaluating the entrepreneur in the first meeting. Six angels talk about a ‘personal connection’ in this regard. Considering the years to come, working with this person has to be pre-evaluated in a short amount of time. This personal connection is, in the first instance, explained as an indicator of whether the entrepreneur’s approach is in line with the angel’s ideas. It is also an indicator of trust in the entrepreneur.
A personal connection also gives rise to the feeling that the angel will be able to work together with the entrepreneur in the future. In this regard, another angel mentioned that he gives immediate feedback on the business plan and states how he wants to proceed in terms of strategy. He stated that this radical attitude shows the entrepreneurs that he wants a big influence on the company’s strategy. Only if the entrepreneur complies with the angel’s vision, does he deem the opportunity interesting. This supports the concept of personal connections being a pre-evaluation of a future professional relationship between angel and entrepreneur.
In the evaluation stage, product affinity and financial assumptions are also important. Product affinity emanates from the angel’s own expertise and interests. In this regard, the angels mentioned scalability (three angels), grow perspective (seven angels) and a personal understanding of the case (four angels). Financial assumptions are a means to assess whether the entrepreneur has a realistic perspective. Also, the financials show the stage the venture is at (e.g. sales, customers revenue, salaries). The angels’ evaluation process of the investment, prior to the investment, shows similarities to the cognitive shortcuts presented in Maxwell et al. (2011). The angels themselves also mentioned various aspects of the business plan, strategy or personal characteristics of the entrepreneur that can be a deal-breaker. This is similar to the ‘elimination-by-aspects’, as described in Maxwell et al. (2011).
With regards to the personal connection and the ability of the entrepreneur, the most important factor for evaluating the business opportunity is the entrepreneur (or management team) themselves. The angels that were interviewed indicated numerous factors that they pay attention to. First is the background and knowledge of the entrepreneur. If the entrepreneur has been successful with a previous business, this is taken as a good indicator for the angel. One angel specifically mentioned that the entrepreneur needs to be equipped with relevant expertise for the proposed business opportunity. This is assessed during the explanation (i.e. ‘pitch’), where the entrepreneur presents the business opportunity to the angel, based on an explanation of the business plan. Also, the completeness of the management team is important because a complete team has more control over the execution. If the entrepreneurs need to outsource important tasks, this is taken to be a negative sign for the angel as the entrepreneur loses control. Next, emphasis lies on the entrepreneur’s approach or strategy, for which the angel wants clarity. In the interviews, they showed preference for an entrepreneur with a plan that
shows a clear structural execution. Again, the angels use examples that link their personal expertise to the evaluation of the entrepreneur.
Another important result is the finding that the angels put focus on their own time when it comes to evaluating business cases. Four angels mentioned they couldn’t do a full assessment on every business opportunity because it takes too much time. Therefore, investment opportunities have to be screened. As mentioned before, angels will do an initial screening from their own expertise and background based on a file such as a business plan. Next, once the opportunity has their interest, an extensive evaluation will take place. Angels differ on this evaluation. Some angels will evaluate every business extensively before investing. In this case, the initial screening is more rigorous. Other angels let the extent of the evaluation depend on the amount they are going to invest. As one angels puts it, “when the investment surpasses a certain amount, I want to know everything about the people and the company.” As crowdfunding is known for small investments among many investors, three angels argue that the time-consuming screening of investments is a reason to avoid crowdfunding. These angels find extensive evaluation not worth the time for the eventual investment. Also, it is difficult as it is usually impossible to speak directly to the entrepreneur. On the other hand, some angels were also interested in investing smaller amounts. For these angels it is important that the propositions are clear and easy to evaluate quickly.
4.1.2 Motivations
As stated by Prowse (1998), the angel investment market appears to be very heterogeneous. This is also found with the Investormatch angels. How they become an angel is linked to personal situations and their context is a strong factor in their motivations/investment preferences. In the search for structures and connections, the most important profiles and their opinions are presented. The angels’ general motivations and preferences evolve from their personal background. More micro-level preferences are found in an angel’s personal process of evaluating a business case.
The data from this present study found that angels are conscious about their background and skills. As the angels’ motivations often evolve from their personal background, their current job or old job are an important factor in this, as it defines an angel’s field of expertise. What separates one angel from another, and puts them into these two groups, is that their motivation for investing involves a preference for either strong involvement in a company after they have invested in it, or not.
Seven angels preferred strong involvement in the project and are looking for projects that are linked to their own field of expertise. Four of these angels wanted to use this experience in their investments. The following quote is from an angel that has become a full time angel investor together with her husband and they both have their own field of expertise from previous jobs and investments:
