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Building an equity story: the impact of effectuation on business angel investments

Sebastian Schmidt (), David Bendig () and Malte Brettel ()
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Sebastian Schmidt: RWTH Aachen University
David Bendig: RWTH Aachen University
Malte Brettel: RWTH Aachen University

Journal of Business Economics, 2018, vol. 88, issue 3, 471-501

Abstract: Abstract This study investigates the effects of the decision-making style of angel investors on their investee businesses’ valuations with a particular focus on the early post-investment phase. Business angels not only provide new ventures with financial resources. By assuming different value-added roles, they also contribute considerable non-financial value to their investee companies during the post-investment phase. They not only act entrepreneurially through their hands-on involvement, but also often have their own distinct entrepreneurial experience. We hence draw on the emerging entrepreneurial decision-making theory of effectuation to explain their investment outcomes in an environment of uncertainty. This study links angels’ decision-making styles to their ventures’ valuations in the period between their initial investment and the first external follow-up investment in an investee business. Based on a sample of 73 angel investments, this study finds that informal investors experience a significant increase in their investments’ valuation if they emphasize the effectual principle of means-orientation in their decision-making.

Keywords: Entrepreneurship; Effectuation; Means-orientation; Venture capital; Business angels; Valuation (search for similar items in EconPapers)
JEL-codes: D81 G24 G31 L26 (search for similar items in EconPapers)
Date: 2018
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