The role of trust in the informal investor’s

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  • The Role of Trust in the Informal Investors Investment Decision: An Exploratory Analysis
  • Objective of Research To explore the relevance of the concept of trust to the analysis of the informal venture capital market Explored as a part of a wider study of information sources, reliance structures networks, and
  • Trust Trust: A means of speeding decision-making and negotiations by reducing transaction costs under conditions of risk Trust plays a major role in analysis of informal venture capital market In the entrepreneurial context, trust has been identified as a major lubricant for cooperation to arise ENVC_GROUP7
  • Situational Domains in the Informal Investment Decision-Making Process DOMAIN DESCRIPTION Screening Decision to pursue initail awareness of opportunity Review of business plan Decision to reject/follow up Assessment Evaluation of merits, Degree of confidence Evaluation Reaction to entreprenuer team,Decision to reject or enter negotiations,Increase in financial return factors Negotiations To invest or not to invest,Issue of deal structure and pricing Involvement Decision to become involved or remain handsoff,Decisions on level of involvement ENVC_GROUP7
  • Swift Trust Emergence of trust relations in situations where the individuals have a limited history of working together & limited prospects of working in future are involved in tasks that are often complex and involve independent work & have deadlines tasks are non-routine and not well understood Exists in temporary group situations Made possible in presence of a contractor ENVC_GROUP7
  • Importance of a Coordinator Coordinator knows the other individuals in group Already formed a trusting relation to each member in group in advance Swift trust to come about as a result of assessment of the trustworthiness of the coordinator Only non-situation specific individuals in the group A rather stronger swift trust ENVC_GROUP7 link between
  • Other Trust Types Calculus Based Trust: Formed on the basis of what one sees to get out of the relationship - difference Knowledge Based Trust: Formed on the basis of shared knowledge of product or market situation - agreement Identification based Trust: Formed on the basis of high degree of identification with the wishes of the other party mutual sharing of values ENVC_GROUP7
  • The Relation: Swift Trust & Other Trust Types ENVC_GROUP7
  • Swift Cooperation Criteria Individuals perception of: 1. 2. 3. 4. 5. Utility: Potential economic value Importance: Potential non-economic value Risk: Potential loss Competence: Professional Ability Coordinator Judgment: Coordinating Partys ability
  • Propositions P1: The greater the perception of utility, the greater the possibility of trusting, cooperative behavior P2: The greater the perception of importance, the greater the possibility of trusting, cooperative behavior P3: The greater the perception of risk, the less the possibility of trusting cooperative behavior P4: The greater the perception of competence, the greater the possibility of trusting, cooperative behavior ENVC_GROUP7
  • A Protocol for Indentifying Trust and Cooperation Data was collected as part of wider study of decision making process of business angels. Focus of study was on the initial screening stage when business angels become aware of investment opportunity. The study methodology used verbal protocol analysis
  • Verbal Protocol Frequency Analysis
  • Trust and Investment Decisions Nine in ten investors rejected the proposal as an investment opportunity. Shows (93% investment proposals received by business angels are rejected) These decisions were based on time spent on reviewing the proposal.(Avg time 11.25 minutes) The result of verbal protocols analysis can be summarized under: Evidence of cooperation Evidence of trust Nature of the statement type
  • Evidence of Trust All references to trust issues by investors in this sample refer to calculus-based trust Calculus based trust as most common form of trust in business relationship. In this stage investors look for reason to reject and opportunity
  • Evidence OF Cooperation Three quarters of the thoughts segments coded in this analysis relate to five dimensions Utility Importance Risk Competence Coordinator judgment Thoughts segments are classified to reflect the specific context of the investor comments.
  • Investors thoughts are dominated by comments about the low perceived competence of entrepreneur team. Risk account for almost 15% of thought segment coded and 20% of the swift cooperation comments in particular. The issue of coordinator judgment is of considerable importance in the initial screening stage Judgment is made on basis of inferences and
  • Nature of Statement Type Informal investors make decision in the situational domain primarily on basis of preconceptions and inferences. Informal investors are not systematically seeking out additional information to assist in coming to a decision in this stage Preconceptions are more likely to be negative than positive at early stage. Investors perception of market related factors may play a particular role in this process.
  • Swift trust and the Role of coordinator The evidence suggest that investor or prospective investees do place as considerable reliance on the coordinator providing them with information of a kind and in a way that enables them to from judgments and indentify cooperation thresholds. The role of the coordinator in the informal investment decision therefore requires the development of trust in two sets of actors: 1. trust in promoters of the investment 2. trust in source of information on this (with realization that the latter will itself influence the former)
  • Implications of further Research The exploratory research discussed in this paper does suggest that it is possible to extend the current conceptualization of swift trust to incorporate three advances. 1. The formal distinction between trust and cooperation as separately identifiable influences on business behavior 2. The identification of swift trust and swift cooperation bases for decision making in time constrained and only indirectly inter personal contexts. 3. Identification of specific roles of coordinator judgment in shaping trust and cooperation thresholds in these investment decision-making domains.
  • Based on the initial exploration of the application of the swift trust concepts to informal investment decision making domains, we can identify a number of key propositions around which to structure further more research. PR1: Calculus based trust will dominate investor investee relationships in all decision making process. PR2: knowledge based trust and identification based trust will become relatively more important in later situational domains of the decision making relationships develop. process as investor entrepreneur
  • PR3: The relative importance of each of the three trust types in investor coordinator relationships will vary according to the type of coordinator: informal referral sources such as family friends and business associates will be relatively more likely to depend on knowledge or identification based trust than formal referral sources such as business angel networks. PR4: Calculus based trust will be relatively less important than knowledge- or identification-based trust in situations where an investment opportunity is considered than where it is rejected. PR5: Even in the situational domain 1, where calculus based swift trust dominates, the decision to proceed with an opportunity to the next domain will be relatively more reliant on knowledge based trust.
  • PR6: Measures of utility (upside potential) will become relatively more important than the measures of risk (downside potential) as the investment opportunity movies from early to later situational domains. PR7: while coordinator judgment is important in early situational domains, its importance will fall once the initial reject/proceed decision has been made by the investor PR8: investor preconception and inferences which dominate in early situational domains will be replaced in a relative importance by questioning an action statement types in later situational domains.
  • Conclusion (The Role of Trust in the Informal investors Investment decision) The building of trust relationship between the entrepreneur and the i