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Study lifts lid on start-ups

Business angels reveal investment secrets

Edinburgh Business School

Edinburgh University Business School: study reveals investor thinking


Business angels are unwilling to back start-ups unless the founders are prepared to invest their own money, according to new research.

In a study revealing the decision making process among more than 100 investors, 87% said they would find it too risky to back an entrepreneur who had not made a significant financial investment in their own venture.

More than two-thirds (70%) thought founders motivated by status were more risky. However, 62% said entrepreneurs looking to become wealthy were a safe bet.

Nearly all of the individual investors believed founders with demonstrable leadership skills (97%) and familiarity with the market (96%) reduced investment risk and 94% said entrepreneurs with the energy to make a sustained effort were also less risky.   

The study by Edinburgh University Business School and the University of Glasgow’s Adam Smith Business School found that 90% felt interviewing founders was important, while 87% considered cash flow to be key.

Significantly, just 52% said detailed product information was vital in deciding whether to finance a venture.

Only one-third (36%) believed having independent due diligence carried out by a third party accounting or consulting firm was important. 

University of Edinburgh Business School chairman in Entrepreneurship and Innovation, Professor Richard Harrison, led the study with Colin Mason, Professor of Entrepreneurship at Adam Smith Business School.

Prof Mason said: “As independent investors, business angels must put their own money – and indeed reputation – on the line each time they invest. So it should come as no surprise they’re prudent when it comes to interviewing entrepreneurs and rigorously examining cash flow.” 

Prof Harrison said: “What’s clear from our study is the vital importance angel investors place in the characteristics of the business founder – their ability to lead and prior experience – as well as a founder’s willingness to invest in the venture.

“The ‘jockey’ (entrepreneur) remains much more important than the ‘horse’ (the business), so potential entrepreneurs need to demonstrate their commitment, both financially and in their capacity for hard work.

“Signalling to business angels that they have the right motivations and entrepreneurial capabilities to make any investment work, should be a priority.”

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One Comment to Business angels reveal investment secrets

  1. Jim Duffy says:

    Really?? While I appreciate the research by both business schools into this area of economic growth and entrepreneurship, the findings have been evident for years.

    Six years ago we were talking about backing the jockey and not the horse.

    This makes me wonder why we have Babson and MIT over here selling in their entrepreneurship and startup models rather than our own Scottish Universities delivering such content.

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