Chapter 13: Investment Decision Making by Business Angels
Allan L. Riding, Judith J. Madill and George H. Haines, Jr Introduction It is widely acknowledged that business angel investors (BAs) are important sources of ﬁnancing for early-stage growth-oriented new businesses (see Chapter 12 by Kelly). The focus of this chapter is to review the research literature with respect to the investment decision-making process employed by business angels. This is important for several reasons. First, understanding business angels’ decision-making is important to public policy makers. Governments have recognized the importance of business angels and are seeking ways of encouraging higher levels of business angel investment activity. This goal prompts two debates. One issue is whether governments ought to encourage participation of more business angels; the other issue is how to encourage additional investment by business angels. As to the ﬁrst issue, Gompers and Lerner (2003) argue that encouraging amateur informal investors may be counterproductive from a societal perspective in part because their investment decisions may not be well-founded. As to the second issue, Bygrave and Hunt (2005) advocate a ‘tax break and other [unspeciﬁed] incentives’ for business angels and other informal investors (examples of which are described by Lipper and Sommer, 2002); however, the design of any such incentives should be grounded in a thorough understanding of business angels’ motivations, decision-making processes and criteria. Accordingly, understanding business angels’ decision-making process may be a key to the appropriate design of public policy initiatives that seek to expand the supply of business angel investment without encouraging less-than-competent informal investors. Second, the...
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