Business Angels and Entrepreneurs: exploring how Social, Ecological and Economic values are created and why Business Angels invest

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Business Angels and Entrepreneurs: exploring how

Social, Ecological and Economic values are created

and why Business Angels invest

Master Thesis

MSc International Business and Management

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ABSTRACT

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1. INTRODUCTION

The world faces complex and persistent sustainability issues. We need to move to a sustainable economy and multiple research therefore is written on how social and

environmental values should be at the core of businesses. Porter and Kramer (2012) state in their theory of Creating Shared Value (CSV) that a company should advance the economic and social conditions in the communities in which it operates to create a competitive

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social or ecological values are only distracting the firm from its main purpose and therefore will eventually drive these firms out of business. Both, startups with Traditional business models and Impact Startups, are often funded and guided by Business Angels that help these startups to achieve high growth. A Business Angel (BA), a high net worth individual, invests his or her own money in return for shares in these startups. One of the key characteristics of Business Angels is their role after their investment in a startup. Generally, Business Angels take an active involvement in the business and interact frequently with the entrepreneur. This thesis explores the motives of Business Angels to either invest in an Impact Startup or a Traditional Startup. Further in this thesis it is explored how Entrepreneurs and Business Angels together can stimulate the Value Creation of a startup and how this is done differently within Impact Startups and Traditional Startups. With the results of these explorations is looked how Porters’ theory of ‘Creating Shared Value’ manifests itself in the business models of Startups and whether the market, which in this case are the Business Angels, have

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create value compared to Entrepreneurs and Business Angels in Traditional Startups, might help us to understand whether the ideas around ‘Creating Shared Value’ and ‘New Business Models’ are too good to be true or that startups can really increase their economic value by creating ecological and social values for society. If this appears to be true, this can encourage future Business Angels and Entrepreneurs to invest in or start companies that create

Ecological or Social Impact, because they would still benefit from an increase in the economic value of the firm as well.

2. LITERATURE REVIEW

In this section, theories concerning Traditional Startups versus Impact Startups are discussed and an overview of the literature on Business Angels is given. Further, the theory Creating Shared Values is explained since this concept is analyzed at the business model level perspective of the Startups.

2.1 Traditional Startups and Impact Startups

At first, we need to define the term startup. According to Natalie Robehmed (2013, Forbes) a startup is a business started by individual founders or entrepreneurs to search for a repeatable and scalable business model. Startups are started with the intend to grow large beyond the solo founder. In this fact, that the purpose of a startup is to grow and scale quickly, it differentiates from small businesses as for example restaurants.

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and ‘On The Rocks’ came up with an environmental friendly alternative that is popular among their growing number of customers that care about environmentally friendly products. In this example we see that, a New Business Model, a model that is not purely focused on profit, can create social and environmental improvements while at the same time generating a profit that keeps the business sustainable.

In this paper the Impact Startups of which the founders or Business Angels are interviewed need to fulfill the following requirements of a For-Profit Social Venture given by Dees and Anderson (2003):

1. Firms are legally incorporated as for-profit entities, with one or more owners who have a formal right to control the firm and who are entitled to its residual earnings and net assets. For-profit forms include proprietorships, partnerships, corporations, limited liability companies, and cooperatives.

2. Explicitly designed to serve a social purpose while making a profit. Having a social purpose involves a commitment to creating value for a community or society rather than just wealth for the owners or personal satisfaction for customers.

Startups that do meet the first criteria but are not explicitly designed to serve a social purpose, and therefore do not meet the second criteria are seen as Traditional Startups.

2.2 Business Angels & Entrepreneurs

The word entrepreneur comes from the French verb ‘Entreprendre’ which means to undertake (Girard, 1962). One of the mostly used definitions of an entrepreneur is the definition

developed by Schumpeter (1934). He defines an entrepreneur as follows:

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good; 2) the introduction of a new method of production; 3) the opening of a new market; 4) the exploitation of a new source of supply; and 5) the carrying out of the new organization of any industry”

Kirzner (1978) defines an entrepreneur as someone who acts upon market opportunities and actually is an arbitrageur. The entrepreneur sees an opportunity and uses that opportunity to create value. Both, Entrepreneurs of Impact Startups and Entrepreneurs of Traditional Startups, fit in the definitions given above. However, it is interesting to see how these Entrepreneurs of different types of Startups create value differently.

When researching Business Angels, a clear choice of definition is important. To understand the definition of a Business Angel, the distinction between venture capital investors and Business Angels needs to be made. Mason and Harrison (2008) gave the following definition of the Venture Capitalist (VC) Industry.

The institutional VC industry comprises full-time professionals who raise finance from pension funds, insurance companies, banks and other financial institutions to invest in entrepreneurial ventures. Institutional venture capital firms take various forms: publicly traded companies, ‘captive’ subsidiaries of large banks and other financial institutions, and independent limited partnerships.

The following definition of a Business Angels is given by Mason and Harrison (2008)

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For this thesis the definition of Mason and Harrison (2008) is used to define a Business Angel. But within this definition there is still enough room for different Business Angels with a different motivation to invest.

In this research the motives of Business Angels to invest in either Traditional Startups or Impact Startups are explored, and it is explored which values are created by startups and how Business Angels interact with Entrepreneurs to stimulate this value creation. The motivations of a Business Angel to invest can be seen as a characteristic of that particular Business Angel. Characteristics of Business Angel were the first thematic area that emerged in the Business Angel research. However, these papers were mainly concerned with how a typical BA could be portrayed (Tenca, F., Croce, A., & Ughetto, E. 2018). According to Wetzel (1983) a typical BA could be portrayed as a male, high net worth, middle-age individual, with

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(2018) state in their proposed research agenda that more research should be directed to

explore whether investors that share certain soft characteristics value opportunities differently and add value differently to the Startups in which they invested. In this thesis these soft characteristics are explored by identifying differences in the motives of Business Angels that invested in Traditional Startups and Business Angels that invested in Impact Startups. After the exploration of the motives, it is interesting to see whether these differences in motives also result in a different way of adding value to the startups by the business angels. To do this, in this thesis is also looked at the relationship between Business Angels and Entrepreneurs and in particular it is explored how Business Angels interact with the Entrepreneurs to stimulate the value creation of the startup. This relationship between Business Angels and

Entrepreneurs is not yet researched enough. Given that a key characteristic of Business Angels is their post investment role, there is surprisingly little research on the relationship between Business Angels and entrepreneurs. Therefore, in the Business Angel research review and new agenda of White & Dumay (2017) they propose this relationship should be further investigated. In this thesis it is explored how the relationship between Business Angels and Entrepreneurs can contribute to an increase in the Value Creation of the Startup.

2.3 Creating Shared Value

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corporate profits are aligned. Driver (2012) defines shared value as the ability to both create economic value and social or societal benefit simultaneously. Shrivasta and Kennely (2013) state that creating shared value entails the simultaneous creation of economic value for the firm and social and environmental value for the places in which they do business. Many big corporations, like for example Nestle, adopted the concept of shared value (Nestle, 2014). According to Porter and Kramer (2012) CSV differs from Corporate Social Responsibility (CSR), since CSR is mostly focused on the reputation of the company and has limited connection to the business itself, while creating Shared value is on the other hand integral to the profitability of a company and it adds to the competitive position. The resources and expertise of the company are used to create economic value by creating social value. The concept however has also been criticized. Crane et al. (2014) for example stated that the concept of CSV ignores the tensions between social and economic goals. According to them CSV does not deal adequately with tradeoffs between economic and social value creation. According to the theory of CSV economic value is created if social or ecological value is created, however, Crane et al. argue that there are many situations where social and economic outcomes are not aligned. Vogel (2005) already argued in his article in 2005 that the belief that corporate virtue pays is both attractive and influential, but that unfortunately, his review which included several academic studies of the relationship between profitability and

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profitable in the end. However, the authors that are more skeptical on the concept of CSV would argue that such claims should be more nuanced. These authors would state that Impact Startups could indeed be more profitable, but this would only be the case in specific

circumstances.

2.4 Research Question

As stated before, at the moment the world faces complex and persistent sustainability issues. We need to move to a sustainable economy and several theories have been developed that explain how to do this. Porter & Kramer (2011) state that firms should make social and ecological goals their main priority. Further, Jonker (2014) states that the creation of ecological and social values should be at the core of the business model. Startups can be a driver for change in society and these new firms are often supported by Business Angels. Business angels spend a significant amount of time working with entrepreneurs. Therefore, it is reasonable that the nature of this relationship should be investigated. According to my knowledge, this relationship has not been explored yet. Next to this, according to Dembek et al. (2015) the concept ‘shared value’ is now often analyzed at project or initiative level, therefore there is a gap in the literature on ‘shared value’ from the organization or business model level perspective. Therefore, this research is aimed to fill these gaps in the literature by using a qualitative and exploratory research to answer the following question:

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To answer the main research question, the following sub-questions need to be answered first:

1. Which values are created by the Traditional and Impact Startups? (Economic, Ecological, Social?)

2. What drove Business Angels to invest in an Impact Startup and what drove Business Angels to invest in a Traditional Startup?

3. How do Business Angels and Entrepreneurs interact to stimulate value creation of the Startup and how does this differ in Impact Startups and Traditional Startups?

4. How does the concept of ‘Creating Shared Value’ manifest itself in the Business Models of Startups? Are there tensions between the social and economic goals of the Startups?

Based on the answer to the main research question stated above, it can be indicated whether

Impact Startups already attract ‘Traditional’ Business Angels which would indicate that they recognize that these startups truly create social and ecological value without compromising on the economic value of the firm.

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3. METHODOLOGY

In this chapter the data collection and data analysis methods used in this research are described. In the first section the research objective is explained. In the second section, the research methods are explained. In the third section it is explained how the cases were selected. In the fourth section the data collection method is described. Moreover, the fifth section discusses how the analysis on the collected data is done.

3.1 Research Objective

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3.2 Research Design

For this research a qualitative multiple case study is chosen, since according to Yin (1994) case studies should be used when “how” or “why” questions need to be answered. In this research is looked at “why” Business Angels invested and “How” value is created; therefore, this method is suitable. Semi-structured interviews with Business Angels and entrepreneurs can give reliable insights into the different values that are created and the different motives there are to invest in either an Impact Startup or a Traditional Startup. Since, understanding motives and understanding the way of value creation can be quite abstract, context around the subject is needed, and this context can be derived via these semi-structured in-depth

interviews. Further, multiple case studies enable one to understand the similarities and differences among cases from different sample groups, namely, Impact Startups and

Traditional Startups. Since, the relationship between Business Angels and entrepreneurs and the way their interaction stimulates value creation is not much researched before, exploratory research is needed. This exploratory research will not give a final conclusive solution to a problem, but the goal of this research will be generating new and additional insights that lead to a better understanding of how Business Angels and Entrepreneurs create value together and how this is done differently for startups that create multiple values and startups that are purely focused on creating economic value. With a qualitative approach it is possible to understand aspects of a relationship that are not yet uncovered (Eisenhardt, 1989).

3.3 Case Selection

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predict either similar results or contrasting results. For this research, the entrepreneurs and Business Angels that were selected that belonged to the same group, either an Impact Startup or a Traditional Startup, were predicted to give similar results. At the same time the results that were derived from the two different groups, Impact Startups and Traditional Startups, were predicted to contrast each other. Since the research is focused on the relationship between Business Angels and entrepreneurs, only entrepreneurs were interviewed that received funding from a Business Angel. The Business Angels that were interviewed needed to fit the definition given above by Mason and Harrison (2008). The entrepreneurs needed to fit the definition given by Schumpeter (1934).

To find the right cases a list of 136 angel investors was analyzed that was provided by AngelAcademy (www.angelacademy.eu). The websites of the startups in which these Business Angels invested gave an indication whether the startup would be creating multiple values (Economic, Ecological and Social) or just Economic value. This list mostly provided Business Angels that invested in Traditional Startups. Business Angels and Entrepreneurs from these Traditional startups were approached via LinkedIn and asked for a face to face interview on a location they preferred. Since, Impact Startups were scarce on this list,

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creating economic value and five entrepreneurs and Business Angels that tried to create multiple values (Economic, Ecological, and Social) were interviewed. So, as can be seen in Table 1 in total eleven interviews were held until no significant new findings were revealed. The names of the Entrepreneurs and Business Angels that were interviewed are not included in this version of the thesis which is publicly available, but for the version sent to the

supervisor and co-assessor the names of the interviewees were included. This is for privacy concerns, but also because the names can only be distracting, and it is only important for the reader to know whether the interviewee is a Business Angel or Entrepreneur and whether the interviewee belongs to an Impact Startup or a Traditional Startup.

Table 1: Overview of Selected Cases

Case Startup Interviewee Code

Group 1, Business Angels of Impact Startup

1 Breast Cancer 3D Scanner

Impact BA 1 2 Multiple Impact Startups Impact BA 2 3 Relievr (Reducept) Impact BA 3

Group 2, Entrepreneurs of Impact Startup

4 Lightyear Impact ENTR 1

5 On the Rocks Impact ENTR 2

Group 3, , Business Angels of Traditional Startup

6 Olisto Traditional BA 1

7 Plot Projects Traditional BA 2

8 LipoCoat Traditional BA 3

Group 4, Entrepreneurs of Traditional Startup

9 LiveTours Traditional ENTR 1

10 Live on Demand Traditional ENTR 2

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3.4 Data Collection

For the purpose of this study, a “case” is defined as a single, in-depth interview with a Business Angel or an entrepreneur. The data collection was designed as follows:

First, the research topic was introduced to the Business Angel or entrepreneur that was being interviewed. After that, the research process was explained to the respondent and the

respondent was asked for permission to record the interview. After that, an in-depth, semi-structured interview that lasted about 30-60 minutes was held with the respondent. The interviews were guided by an interview guide, which can be found in appendix 1. By using this standardized interview guide, it can be certain that all interviewees cover the correct material. In this way semi-structured interviews counteracts researcher biases and increases the internal validity of the research (Eisenhardt, 1989). However, the interviews were not completely structured, to keep the opportunity open to ask more in depth about new insights that were revealed during the interview. This is important since the goal of the interviews is not just to summarize what different interviewees react to the questions. The goal is to come up with new theory and therefore if a new data collection opportunity arises or a new line of thinking emerges, it is important to be free to alter the data collection by adding or changing a certain question.

3.5 Data Analysis

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Of course, the real analysis must be done by the researcher, but ATLAS.ti is a program that facilitated the analysis. First, the interviews were transcribed and after that ATLAS.ti was used to code the data. At first, open coding was performed. All phenomena talked about in the interviews were identified, named and categorized. To do this, each sentence was read and was looked at with the question “What is this about?”. All the important quotes and statements were categorized into groups as far as that was possible. These groups gave a schematic overview of which topics were covered and which category of answers there were. For example, Business Angels mentioned a lot of different motives to invest and all these different motives eventually fitted in multiple categories. After this a frequency analysis was performed to see which code groups occurred the most. Next, Cross-Case Analysis was performed. With a Cross-Case Analysis, different categories are compared to each other among different cases. So, for example, how Business Angels and Entrepreneurs interacted to create a certain value, was compared between the cases for the Impact group and the

Traditional group.

4. VALUE CREATION

In this section an overview of all cases is given and for every Startup is explained which values the startup creates. The created values can either be Social, Ecological or Economic. The goal of this section is to explain which values are created, how these values are created and how different startups are designed to create different sorts of value. Further, this section explains why a Startup was defined as a Traditional Startup or an Impact Startup.

4.1 Which values are created by the startups?

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However, Traditional startups and Impact Startups can be separated with the second

requirement given by Dees and Anderson (2003) for For-Profit Social Ventures. “For-Profit

Social Ventures” are explicitly designed to serve a social purpose while making a profit. Having a social purpose involves a commitment to creating value for a community or society rather than just wealth for the owners or personal satisfaction for customers”. If a startup is

explicitly designed to create Social or Ecological value together with Economic Value, it is defined as an Impact Startup. If a startup is not explicitly designed to create Social or Ecological value, but it is designed to create Economic value or personal satisfaction for the customers, a startup does not qualify as an Impact Startup and is seen as a Traditional startup. To determine which values a startup creates, the different definitions of Social, Ecological and Economic value need to be clear. Social value is created if one of the three core values of development described by Todaro and Smith (2011), sustenance, self-esteem, or freedom from servitude, is created and is provided to people that otherwise would not have this level of development in their life. Sustenance is created if a startup provides in the life-sustaining basic human needs which include food, shelter, health and protection. Self-esteem is created if a company provides people with a sense of worth and self-respect. Lastly, freedom from servitude goes beyond physical incarceration and labor exploitation. This dimension includes the ability to choose from a wide range of options in a wide range of areas in one’s life such as education, products, housing, etc. Further, ecological value is created if the business model of the Startup is aimed at reducing the perceived ecological impact of human activities

(Boons, 2008). Lastly Economic value is created if the activities of the Startup result in an increase of the Economic Value of the firm.

Case 1 (Impact BA 1, Breast Cancer 3D Scanner)

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breast cancer in a very early stage and in a painless manner. The patient needs to lie down on the scanner and the scanner makes a full body scan within 12 seconds. The scan is painless and does not require a medical assistant to place the woman’s breast between two plates, which is normally necessary to compose a breast scan. Impact BA 1 states that he only invests in startups that are distinctive, sustainable and create a positive Impact. According to Impact BA 1 these companies often bear less risks, have a solid growth and will eventual create high economic value as well. This startup creates social value since it provides sustenance by providing in the life-sustaining basic need Health. Further, the Startup makes it possible that women do not need to undergo a painful and sometimes humiliating breast examination which actually means that the startup provides the users with more self-esteem which is part of social value creation as well. Since this startup in which Impact BA 1 invested is explicitly designed to create social and economic values, this startup is categorized as an Impact

Startup.

Case 2 (Impact BA 2, Social gaming company)

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Case 3 (Impact BA 3, Relievr)

Impact BA 3 invested in Relievr and Sustainer Homes. Relievr is a company that makes virtual reality health games for people with chronic pain. These health games are currently used in hospitals and by physiotherapists. Impact BA 3 invested to make a positive Impact.

“A lot of people that are in pain, move less, do less and have less social contacts. If we can do something about the pain, you see that people will get a higher quality of life.” Since, with

this investment, Impact BA 3 tries to create the life-sustaining basic need Health, this startup is creating social value. Next to this investment, Impact BA 3 invested in Sustainer Homes which is a startup that builds energy neutral homes. The Startup Sustainer Homes creates ecological value since it reduces the ecological impact of people. According to Impact BA 3 the creation of Economic Value is positively related to the creation of Social and Ecological value. If you can have a positive impact on millions of people, the economic value of your startup will automatically increase as well. Since the startups in which Impact BA 3 invests are explicitly designed to create social, ecological and economic values, these startups are categorized as Impact Startups.

Case 4 (Impact ENTR 1, Lightyear)

(Impact ENTR 1) is one of the founders of Lightyear, the first commercially sold electric car that charges itself with sunlight. The building of the car is still in its development stage. “Due

to the fact that our electric car does not need a lot of electricity since it drives on solarpower, we have less Impact on the electricity grid. Further, we create ecological value since we try to reduce the total co2 emissions.”. So, Lightyear is developing an innovative car which will

reduce the ecological impact of the human activity ‘transportation’ and therefore Lightyear creates ecological value. Next to Ecological value, Economic value is created by the startup.

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future positive Impact this Economic Value can have. I would rather see that Lightyear becomes a very rich company than that Shell stays rich. This is because with our policy, with our vision, with our DNA, I am arrogant enough to say that we can make a better Impact than Shell.” Since Impact ENTR 1 founded a startup that is explicitly designed to create

Ecological and Economic values, this Startup is categorized as an Impact Startup.

Case 5 (Impact ENTR 2, On the Rocks)

Impact ENTR 2 is the founder of On the Rocks, which is a company that has the goal to change the paper and stationary industry into a sustainable industry. The paper industry is one of the most polluting industries in the world. The main reason for this is the intensive use of water, energy, and trees in the production process. On the Rocks produces notebooks that are made of stone pulp, which is an environmentally friendly way of production. These notebooks are sold to companies and consumers to show them that an alternative product can be very good as well. So, by selling these environmentally friendly notebooks, they tell the story of the polluting paper and stationary industry and create awareness that change is needed. Next to these ecological values, On the Rocks is creating economic value as well. Since Impact ENTR 2 founded a startup that is explicitly designed to create Ecological and Economic values, this Startup is categorized as an Impact Startup.

Case 6 (Traditional BA 1, Olisto)

Traditional BA 1 invested in Olisto, which is a company that develops the technology and software that is used to let several electronic devices connect to each other. This software will help with making electronic devises smart. Which means that these devices can be connected to other devices or networks via different wireless protocols such as NFC, WiFi, LiFi,

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software of Olisto is already being licensed to a few big companies like Philips, Siemens, and Eneco. Even though the software is still in development, the economic value of the startup is already increasing. The Startup Olisto, is however not explicitly designed to serve a social or ecological purpose, and therefore the Startup Olisto is categorized as a Traditional startup and not an Impact Startup.

Case 7 (Traditional BA, Plot Projects)

Traditional BA 2 invested as a Business Angel in the startup Plot Projects. Plot Projects started as a company that developed software for location-based advertising. With the

software of Plot Projects, companies can target their customers based on the physical location of their customers. Companies can send customers a discount notification as soon as they are close to their store. The business model changed and currently Plot Projects is specialized in analyzing the location of customers and providing companies with insights they derived from this. Traditional BA 2 mentioned that the growth of the economic value of this company is not high. According to the Business Angel this is the result of strategic choices made by the entrepreneurs that didn’t work. The Business Angel states that the idea is still brilliant, but maybe they were too early with their idea. Further, (Traditional BA 2) mentioned that the company is not doing anything with corporate social responsibility. According to the BA it is very difficult to create social or ecological value when your core business is in app

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Case 8 (Traditional BA 3, LipoCoat)

Traditional BA 3 invested in LipoCoat as a Business Angel. LipoCoat is developing a biomedical coating which makes it possible to disinfect medical equipment in hospitals and with that infections can be prevented. The business model of the company is that they can earn money by providing the coating to hospitals. Traditional BA 3 believes the health insurer companies would be willing to pay for this product. On first sight it looks like this startup is an Impact Startup, however, Impact Startups need to be explicitly designed to serve a social purpose and should not be designed to create wealth for the owners. Traditional BA 3 and the founders of this startup did start this company to create financial wealth for themselves. “The

founders and I are driven by the same motives. We want to create a success, have a lot of fun, and at the end of the ride earn a whole lot of money”. Due to this, this startup is categorized

as a Traditional Startup and not as an Impact Startup.

Case 9 (Traditional ENTR 1, LiveTours)

Traditional ENTR 1 is the founder of LiveTours. LiveTours is a startup that is developing a mobile application that can help tour guides to do their tours. With the application, the people that are following the tour can listen to the guide via the earphones of their own phone and also multimedia can be shown on the phones of these people. At the moment LiveTours is at the end stage of the development and soon they will go to market with their service.

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Case 10 (Traditional ENTR 2, Live On Demand)

Traditional ENTR 2 is the founder of ‘Live On Demand’, which used to be a platform where artists could be crowdfunded. Fans could start a crowdfunding campaign and if there were enough fans willing to pay for the artist, ‘Live On Demand’ would arrange a show. However, the current artist agencies were too powerful in controlling the agenda of the artists that this system didn’t work. Currently, ‘Live On Demand’ changed their business model to organizing business events. The values that are created with this business model are economic value for the startup and value for their customers. However, there is not a social purpose in the business that involves creating value for a community or society that is broader than the customers of the startup. Also, the values that are created for the customers are not seen as values that create sustenance, self-esteem, or freedom from servitude as defined before. Therefore, this startup is categorized as a Traditional startup.

Case 11 (Traditional ENTR 3, FC Urban)

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In Table 2 an overview can be found of the Values that are created by the startups. All Impact Startups create Social or / and Ecological value next to Economic value and all Traditional Startups mainly create Economic Value.

Table 2: Overview of Selected Cases and values created by each startup

Case Interviewee Code Startup Values Created by Startup

Group 1, Business Angels of Impact Startup

1 Impact BA 1 Breast Cancer 3D Scanner Economic & Social 2 Impact BA 2 Ecological Impact Game Economic & Ecological

3 Impact BA 3 Relievr, SustainerHomes Economic, Social & Ecological

Group 2, Entrepreneurs of Impact Startup

4 Impact ENTR 1 Lightyear Economic & Ecological

5 Impact ENTR 2 On the Rocks Economic & Ecological

Group 3, , Business Angels of Traditional Startup

6 Traditional BA 1 Olisto Economic

7 Traditional BA 2 Plot Projects Economic

8 Traditional BA 3 LipoCoat Economic

Group 4, Entrepreneurs of Traditional Startup

9 Traditional ENTR 1 LiveTours Economic

10 Traditional ENTR 2 Live on Demand Economic

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5. ANALYSIS AND RESULTS

Now that is explained which values are created by the Startups in this section for both groups of Startups the motives of Business Angels to invest and the way Business Angels and

Entrepreneurs stimulate value creation of the Startup are explored.

5.1 Business Angels’ motives to invest

“People have many motives. These motives give direction and intensity to their behavior. Theoretically, each act has a corresponding motive or motives” (West & Uhlenberg, 1970). One of the goals of this research is to define whether Impact Business Angels and Traditional Business Angels have different motives to invest and how these motives differ. After the interviewees spoke about which values are created by the startup, the interviewees were asked what motivated them or their Business Angel to invest.

Frequency Analysis Business Angels’ motives to invest

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Table 3: Frequency Analysis of motives to invest in Traditional Startups M ot ive s to in ve st T rad it ion al S tar tu p (C as e 6) T rad it ion al S tar tu p (C as e 7) T rad it ion al S tar tu p (C as e 8) T rad it ion al S tar tu p (C as e 9) T rad it ion al S tar tu p (C as e 10) T rad it ion al S tar tu p (C as e 11) S cor e Financial Return on Investment X X X X X X 6

For pleasure / have something

to do X X X X X 5

To learn from entrepreneurs X X X 3

For new business opportunities X X X 3 To help entrepreneurs, mentor X X 2 Feeling meaningful X 1

Create a positive Impact on the world (Ecological or Social)

0

Personal connection ENTR 0

To Help Woman

Entrepreneurs 0

For adventure 0

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investing gives a feeling of meaningfulness and this motivated to invest as well.

Table 4: Frequency Analysis of motives to invest in Impact Startups

M ot ive s to in ve st Im p ac t S tar tu p ( C as e 1) Im p ac t S tar tu p ( C as e 2) Im p ac t S tar tu p ( C as e 3) Im p ac t S tar tu p ( C as e 4) Im p ac t S tar tu p ( C as e 5) S cor e

Create a positive Impact on the world (Ecological or Social) X X X X X 5 Financial Return on Investment X X X X 4 Feeling meaningful X X X 3 To help entrepreneurs, mentor X X 2

Personal connection ENTR X 1

To learn from entrepreneurs X 1

For new business opportunities X 1 For adventure X 1 To Help Woman Entrepreneurs X 1

For pleasure / having something to do

0

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frequently mentioned were to help entrepreneurs, to create a personal connection with the entrepreneur, to learn from entrepreneurs, to create new business opportunities or for adventure. To show how the mentioned motives to invest differs for Business Angels of Traditional Startups and Business Angels of Impact Startups a frequency analysis for both groups together was created (Table 5).

Table 5: Frequency Analysis of motives to invest Impact and Traditional Startups

M ot ive s to in ve st Im p ac t S tar tu p ( C as e 1) Im p ac t S tar tu p ( C as e 2) Im p ac t S tar tu p ( C as e 3) Im p ac t S tar tu p ( C as e 4) Im p ac t S tar tu p ( C as e 5) T rad it ion al S tar tu p (C as e 6) T rad it ion al S tar tu p (C as e 7) T rad it ion al S tar tu p (C as e 8) T rad it ion al S tar tu p (C as e 9) T rad it ion al S tar tu p (C as e 10) T rad it ion al S tar tu p (C as e 11) S cor e Financial Return on Investment X X X X X X X X X X 10

Create a positive Impact on the world (Ecological or Social)

X X X X X 5

For pleasure / have something to do

X X X X X 5

Feeling meaningful X X X X 4

To help entrepreneurs,

mentor X X X X 4

To learn from entrepreneurs X X X X 4

For new business opportunities

X X X X 4

For adventure X 1

Personal connection ENTR X 1

To Help Woman Entrepreneurs

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In the Table above (Table 5) the main differences between the ‘motives to invest’ of Business Angels in Traditional Startups and Impact Startups can be seen. For both groups almost, all Business Angels indicate that Financial Return on Investment is a driver to invest. Further, only the Impact group mentions that positive impact creation is an important motive and only the Traditional group mentions that pleasure / having something to do is an important motive to invest. To feel meaningful, which of course can be linked to creating a positive impact, is mostly mentioned by Impact Business Angels. Next to these differences, the desire to help / mentor entrepreneurs and to learn from entrepreneurs is experienced by both groups.

Cross-Case Analysis

According to Khan & Van Wynsberghe (2008) new knowledge is produced by accumulating case knowledge, and after that comparing and contrasting this case knowledge. This

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Table 6: Cross-Case Analysis ‘Motives to invest’ Traditional Startups Motives to invest Traditional BA 1 Traditional BA 2 Traditional BA 3 Traditional ENTR 1 Traditional ENTR 2 Traditional ENTR 3 Summary Financial Return on Investment “I am successful as a BA angel if I make a good return on my investment”

“I invested because I thought this startup was a golden egg”

“I invested one hundred thousand euro in this startup and I expect a minimum return of a couple of million”

“Our BA’s invest for the financial return. They at least want to double their investment.”

“And financially seen there was a chance on success. Not more than that.” “Our BA hopes for an increase of his investment in the coming 5/10 years.”

For all BA’s that invested in traditional Startups return on investment was important. For pleasure / have something to do “For me a big part of being a BA is about that I like it.” “I became a BA because I had a bank account that was filled with money and I just sold my company and didn’t want to sit at home doing nothing”

“I have a simple motto. I want to have fun every day and earn money every day. Every day is the same. I need to have a laugh and I need to earn money.”

“Further, the BA’s like to invest in us, since it is

something else than their day to day jobs. The BA’s like to talk with friends about that they invested in a startup.”

“After their exit they might go golfing or sailing for half a year, but after that these entrepreneurs all get very bored. They want to get back in the action.”

Most BA’s

mentioned that they are BA’s because they like it. It gives them something to do and they like the interaction with entrepreneurs.

To learn from

entrepreneurs “For me it is important to stay connected to new

developments and innovation.”

“With investing in another business, you learn how investors look at your own business.”

“Our BA wants to gain learnings and knowledge from being involved in our startup.“

By investing BA’s learn from the Startup. This can help them in their other businesses. For new

business opportunities

“I want to learn from my investments and use that knowledge in my own company.”

“He was the owner of sublime fm and thought he could connect the startup to sublime fm ” “Our BA wanted to learn from us how to get involved in this ‘new economy’.” Some Business Angels use the Startup to create other business opportunities. To help entrepreneurs / To mentor

“I like to help young people, that is important

“I started investing because I just liked it and thought I could

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Table 7: Cross-Case Analysis ‘Motives to invest’ Impact Startups

Motives to invest Impact

BA 1 Impact BA 2 Impact BA 3 Impact ENTR 1 Impact ENTR 2 Summary Create a positive impact on the world (Ecological or Social) “ I really am not money driven, but I am driven by the impact the

companies make.”

“I always said, you know what, it is all about the impact that we are making.”

“For me it is way more important that we reach millions of people and help them to deal with the pain they have.“

“They invest because they think our mission is very important”

“He did not invest for the return on investment. His only reason was the positive impact we make as a

company.”

For all Business Angels that invested in Impact Startups creating social or ecological value was the most important reason they invested.

Financial Return on Investment

“Financial return comes second, the positive impact is most important and after that comes the return on

investment”

“I do investments (not charity) which means that I expect a

financial return”

“Financially seen, it is great if the company grows and my share value grow with it, so I earn back my investment a few times.”

“The mission is most important, but of course also, every investor expects a financial return”

Almost all Business Angels mentioned that financial return was important as well. However, all stated that this was subordinate to the creation of social or ecological values. Feeling meaningful “Investing enriches

my life. All the things I do and learn and how I see people grow enrich my life.”

“Creating social and ecological returns along with financial returns is a real reflection of my personality.”

“They want to use their money to make sure that their motives in life can come to fulfillment in our company”

Some Business Angel mention that investing in impact startups makes them feel meaningful.

To help

entrepreneurs, mentor

“Today I received a text message with the text: ‘you are the best mentor ever’. I really like that.”

“He had a lot of help during his startup and he wants to give this help back to a new generation of entrepreneurs.”

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This was how the analysis to explore the motives of Business Angels to invest was done. Further elaboration on and interpretation of these results can be found in the following sections.

Reflections on motives to invest Traditional BA

The Business Angels that invested in Traditional Startups were asked what motivated them to invest in their startups. Eventually three main drivers were found that, according to the Business Angels themselves and the Entrepreneurs, stimulated the Traditional Business Angels to invest. Namely, 1) To generate positive financial returns on their investment, 2) To

have something to do / for pleasure, and 3) To learn and to create new business opportunities.

All quotations on the motivation of Traditional Business Angels can be found in appendix 3.

1. To generate positive financial returns on their investment.

The Traditional Business Angels always mentioned that the return on their investment was an important motivation for them to invest their money. Some mentioned that it would be very odd if you would not expect a financial return and that you then are missing the point of investing. “I invested because I thought this startup was a golden egg” (Traditional BA 2). Traditional BA 3 mentioned that his motto was to earn money every day and that this was a reason for him to be a Business Angel. “I have a simple motto. I want to have fun every day

and earn money every day. Every day is the same. I need to have a laugh and I need to earn money.” (Traditional BA 3). Not only the Business Angels themselves, but also the

Traditional Entrepreneurs believe that return on investment is a main driver for their Business Angels to invest. “Of course, our Business Angels invest for the financial return. They at least

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Angels indicated that the return on investment was their most important motivation to invest, but al stated that it was very important. A Business Angel for example said that the interaction with the entrepreneurs and the startup is a big motivation for him, but that if he would not be motivated by the return on investment he would not take investing seriously. “You can

compare it to playing football. I like a real football match, but I don’t like a friendly football match. Something needs to be at stake.”. (Traditional BA 1).

2. To have something to do / for pleasure

Five out of six business angels that invested in a Traditional Startup mentioned that they were motivated to invest just because then they would have something to do which gave them pleasure or satisfaction. Most Business Angels have been entrepreneurs themselves and have sold their company which made them financially independent. Selling your company sounds

nice, but for the most entrepreneurs it is a low point in their career. After their exit they might go golfing or sailing for half a year, but after that these entrepreneurs all get very bored. They want to get back in the action. They want to use their experience in a useful way. (Traditional ENTR 2). Traditional BA 2 stated that he became a Business Angel because he

had a bank account that was filled with money and he was sitting at home doing nothing. Further, Traditional BA 1, stated that he invested mostly just because he liked the interaction with entrepreneurs and less for the financial return. According to the founder of LiveTours their Business Angels invested because they liked the entrepreneurs and they liked to be close to innovation. So, next to the return on investment these Business Angels also invested

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3. To learn and to create new business opportunities

As could be seen in the Cross-Case analysis some Business Angels invest to learn from their investment and some invest to find new business opportunities. Since these two motivations are very much related to each other, in this section they are seen as one single motivation. Some invest to learn about a market they are interested in and others want to learn about how other investors would look at their own business. These learnings are often important for them because they are looking for new business opportunities outside the startup they invested in.

“I want to learn from my investments and use that knowledge in my own company. From my investment in Plot Projects I learn a lot because they are active in the same discipline as I am with my own company. I know their problems and vice versa and I can get insights in their company. And now I am involved in the company by my investment I need to deepen my knowledge. Next to that, the startup needs to be open to me about their plans and financials. Other companies that I think are interesting and I can learn from don’t have this obligation.”. (Traditional BA 2). Another Traditional Business Angel said it was very important for his

daily job as CEO of a big corporate to stay connected to new developments and innovation and investing in innovative Startups is his way of doing that. One of the Business Angels owned the radio station Sublime FM and invested in a startup because he thought the startup would fit with something he was doing with Sublime FM at that moment. So, Traditional Business Angels are not only driven for the business opportunity of the startup itself but might sometimes invest because they think the investment can help them to detect or carry out other business opportunities.

Reflections on motives to invest Impact BA

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During this exploration also drivers to invest other than financial personal gain or Impact creation were found. These drivers mostly were personal benefits Business Angels derived from their interaction with the entrepreneurs other than financial. Three main drivers for Business Angels to invest in Impact Startups were found, namely, 1) to create a positive

social or ecological Impact on the world, 2) To generate positive financial returns on their investment, and 3) to feel meaningful / to help entrepreneurs. All quotations on the motives of

Impact Business Angels can be found in appendix 3.

1. To create a positive social or ecological Impact on the world

The motivation that was mentioned by all the Impact Business Angels was that they invested to create a positive social or ecological Impact on the world. All Impact Business Angels clearly stated this as their most important motive to invest. Most of the Impact Business Angels mentioned that also return on investment was still important, but that this was not their main motive to invest, their main drive was the positive Impact they could make via their investments. “Financially seen, it is great if the company grows and my share value grows

with it, so I earn back my investment a few times. But for me it is way more important that we can reach millions of people and help them to deal with the pain they have.” (Impact BA 3).

Most Business Angels mention that they have always been impact driven and that this is just something about who they are. “I have always been Impact-driven, my first startup was a

medical information center which provided online medical information. This startup I think was almost only about Impact.” (Impact BA 1). Another Business Angel that invested in

Impact Startups mentioned that at first, he strived for being financially independent and that once this goal was reached he wanted to create a positive impact on the world. “You could say

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moment, I still wanted to create big things, but now my motivation was more to make a positive Impact. “(Impact BA 3).

2. To generate positive financial returns on their investment.

Even though all Impact Business Angels mentioned that financial return was less important than the positive Impact that was generated, still most of them mentioned that financial return was an important factor as well. Also Impact Entrepreneurs mentioned that for their Business Angels the ecological or social motive was the most important drive to invest, but that still a financial return was expected. “In Lightyear we have Business Angels who are entrepreneurs

that already made a big exit. Those Business Angels want to help the Dutch entrepreneur ecosystem and they invest because they think our mission is very important, the mission is the most important reason for investing, but of course, every investor expects a financial return as well”. (Impact ENTR 1). A minority of the Impact Business Angels did not expect a

financial return. “I know he did not invest in ‘On the Rocks’ for the return on his investment.

His only reason for investing is the positive Impact we make as a company. We never talk with the Business Angel about finances. I tried at the beginning, but he does not care about his return on investment.” (Impact ENTR 2). However, most of the Impact Business Angels

did expect a financial return and some of the Business Angels even stated that they thought that this return on investment was higher for investments in Impact Startups than investments in Traditional Startups. “We only invest in companies that are distinctive and sustainable and

that create positive Impact. What I see is that these startups often bear less risks and grow more stable and faster. Eventually therefore, they create a higher economic firm value and there is a higher return on investment, and of course this return is nice as well”. (Impact BA 1). Another Impact Business Angel thought that investments in Impact Startups often have

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services, they provide there really is a need. It is more than just a luxury, so the potential of having customers buy your product works more natural in this case. Further this Business Angel mentioned that Impact Investments generate a higher return on investment since entrepreneurs of Impact Startups are more passionate about what they are doing and are therefore more flexible and more resilient when there are hardships. On the other hand, one Business Angel indicated that he thought his investment in an Impact Startup had more risk than investments in Traditional Startups. I think the risk for investing in this Impact Startup is

higher. If I would not take my passion for creating a positive impact into account and I would just look at the markets that are growing at the moment, which would of course include sustainability as well, but then there would be investment possibilities that include less risks.

So, to conclude, Business Angels that invested in Impact Startups were all at first driven by the Social or Ecological impact they could create but were almost all also driven by the return on investment. Some of the Business Angels expected a return on investment that would be above market average and others expected it to be lower.

3. To feel meaningful, to help entrepreneurs

After coding and analyzing the incentives of Impact Business Angels to invest, it became clear that the motivations to make a positive Impact on the world and to receive a return on investment were the most important and most mentioned drivers of Business Angels to invest in Impact Startups. However, A third and fourth driver could be added, namely, to feel

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Angels like to help entrepreneurs, since they want to mentor and put their own gained knowledge to use. “Sometimes entrepreneurs don’t dare to ask enough money for their

product or service and then I can help them with this and coach and mentor them. I try to let them grow personally and that makes investing a lot of fun. “. (Impact BA 1). Another

Entrepreneur mentioned that her Business Angel wanted to give help back that was provided to him when he was an entrepreneur. He had a lot of help during his startup and he wants to

give this help back to a new generation of entrepreneurs. So, besides the positive impact and

return on investment, Business Angels are also motivated to invest to feel meaningful and to provide help to the entrepreneurs. So, this drive is less directed toward the outcome of the investment, which could be positive impact or financial return, but is more directed towards the interaction between the Business Angels and the Entrepreneurs. This interaction is what gives them the feeling of being meaningful and this interaction enables them to use their experience and knowledge to help entrepreneurs.

Differences and similarities motives Traditional BAs Impact BAs

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Table 8: Main motives Business Angels to invest Traditional Startup or Impact Startup

Impact Startup Traditional Startup

1. Create positive impact 1. Financial return

2. Financial return 2, For pleasure / have something to do 3.To feel Meaningful / to help 3. To learn and to create new business

opportunities

5.2 How Business Angel and Entrepreneur interact to stimulate value

creation

The Entrepreneur and Business Angel are contractually bound to each other by a transfer of capital from the Business Angel to the startup in return for shares of this startup, but this just their official relationship. The Business Angel and Entrepreneur both legally bound

themselves to each other via the Startup and the Entrepreneur probably wanted this

investment because he or she thought that together they could increase the value creation of the startup. So, the startup is creating a certain value, this can be social, ecological, economic or a combination of those and the Entrepreneur and the Business Angels have a certain interaction that helps the startup to create these values. Entrepreneurs and Business Angels were asked why they thought they needed each other and how they could together increase the value creation of the startup. After coding and analyzing the transcripts three ways of how the relationship between Business Angels and Entrepreneurs contribute to the value creation of the startup were discovered. 1) Knowledge Exchange, 2) Capital Transfer, and 3) Network Sharing.

Frequency Analysis

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were big differences in how Business Angels and entrepreneurs stimulate value creation together in these startups.

Table 9: Frequency Analysis of how BA / ENTR interaction increases value creation

Way of val u e cr eat ion Im p ac t S tar tu p ( C as e 1) Im p ac t S tar tu p ( C as e 2) Im p ac t S tar tu p ( C as e 3) Im p ac t S tar tu p ( C as e 4) Im p ac t S tar tu p ( C as e 5) T rad it ion al S tar tu p (C as e 6) T rad it ion al S tar tu p (C as e 7) T rad it ion al S tar tu p (C as e 8) T rad it ion al S tar tu p (C as e 9) T rad it ion al S tar tu p (C as e 10) T rad it ion al S tar tu p (C as e 11) S cor e Knowledge Exchange X X X X X X X X 8 Capital Transfer X X X X 4 Network Sharing X X X X 4 Cross-Case Analysis

A Cross-Case Analysis was performed for how Business Angels and Entrepreneurs together stimulate the value creation of the Startup. In table 10 a summary of this Cross-Case Analysis can be found. More elaborate quotes and codes on how Business Angels and Entrepreneurs interact to increase the value creation can be found in Appendix 4. Since, as can be seen in the frequency analysis (Table 9), there were no big differences in how Business angels and

Entrepreneurs stimulate value creaton in Impact Startups and Traditional Startups, the Cross-Case Analysis was performed for both groups together.

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Motives to invest ->

Knowledge Exchange Capital Transfer Network Sharing

Impact Startup

(Case 1) “The energy in this startup was very low. I then took a share and helped them to take a new strategy and to bring the energy back.”

“Money is not important, entrepreneurs can get this everywhere. I can do a lot with less money. I have a big network with a lot of people that are very hands on.”

Impact Startup

(Case 2) “I can add value to these companies due to my experience.” Impact Startup

(Case 3)

“I am very much involved with helping to form the ideas and helping with the market fit.” Impact Startup

(Case 4)

“Building a car just costs a lot of money, so the faster we raise the money, the faster we reach our goal. “

“If one angel invests this often results in more angels from his network to invest as well.” Impact Startup

(Case 5)

“He (BA) then tells me he has done these things already 100 times and he then gives advice.” Traditional

Startup (Case 6)

“The startup needed me for my media network. I cannot make business for them, but I can connect them to other people. “ Traditional

“I see what the entrepreneur misses in his organization. I know where he can find good people, when he should expand, and how he should do his marketing.” Traditional

“Most startups make the biggest mistakes in their first three years. I help them not to make these.” Traditional

“One of the BA’s is experienced in sales, on is an accountant and the other is a legal specialist, so they always advise us on these topics.”

“Next week we have our first meeting with people that are going to help us with our marketing. This cost a lot of money.” Traditional

Startup (Case 10)

“I can talk with them about conflicts, relations, legal challenges, or how to deal with growth. So, these were things I could use my Business Angels for.”

“We had calculated that if we would invest a certain amount in sales and marketing we could accelerate the startup. This was the reason we looked for an investor.”

Traditional Startup (Case 11)

“We needed a Business Angel for the capital. We had a plan and wanted to work fulltime on it. Therefore, we needed to stop our job.”

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Reflections on how Business Angels and Entrepreneurs stimulate value creation

three ways of how Business Angels and Entrepreneurs could create right conditions for value creation were discovered. 1) Knowledge Exchange 2) Capital Transfer, and 3) Network Sharing.

1. Knowledge Exchange

The most mentioned way of how Business Angels and Entrepreneurs create value together is that Business Angels provide the entrepreneurs and startups with knowledge. This knowledge often comes from their own entrepreneurial experiences, the market they are active in, or from the profession they are specialized in (e.g. legal, finance, or business development). This knowledge can be used to prevent the startup from making mistakes. “Because I am an

entrepreneur myself I know the pitfalls and the problems that the startup will encounter.” (Traditional BA 2). Next to this, the knowledge and experience of the Business Angel is used

to lay out the strategy for the startup. “I took a minority share in this company and together

with the board developed a growth strategy. The board at that point in time was not very motivated anymore. The energy in this startup was very low. I then took a share and helped them to take a new strategy and to bring the energy back.” (Impact BA 1). Further, the

knowledge and experience of the Business Angels is used by the Business Angels to help the entrepreneurs in their personal development, which in turn can help the startup to grow. I try

to get them out of their comfort zone and help them to think what they can do with their own knowledge and strengths. Often Entrepreneurs don’t dare to dream big from the beginning, but then I try to see how far I can help them to dream bigger. (Impact BA 1). Also, if startups

are facing big decisions the knowledge and experience of the Business Angels can be

important for the entrepreneurs. “I was just called by SustainerHomes, since they are doing an

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attention to certain details.” (Impact BA 3). Some startups have Business Angels in their

startup that have different backgrounds and can therefore be a help in different areas. “We

make sure that everyone who invested in our startup has a role to play. We call our important Business Angels daily. We have a non-executive board with three Business Angels. One of the BA’s is experienced in sales, on is an accountant and the other is a legal specialist, so they always advise us on these topics.” (Traditional ENTR 1).

2. Capital Transfer

Another sort of interaction between Business Angels and entrepreneurs that enhances the value creation of the startup is transfer of Capital from the Business Angel to the Startup. This Capital is used to accelerate the startup. If a startup is not yet making a profit, which is often the case, the startup needs external capital for growth. This capital can be needed to provide the entrepreneurs with a management fee which enables them to work for the startup fulltime.

We needed a Business Angel for the money/capital. We had a plan and wanted to work fulltime on it. Therefore, we needed to stop our job and a management fee therefore was necessary. (Traditional ENTR 3). Some products or services require intensive R&D budgets

and therefore these startups simply need the Business Angels to finance the development of their product. For example, the startup Lightyear, is developing an electric car that charges itself with sunlight. Developing such a car requires a lot of time and capital. Lightyear can of

Business Angels and Entrepreneurs: exploring how Social, Ecological and Economic values are created and why Business Angels invest