The Role of Trust in the Informal Investor’s Investment Decision:
An Exploratory Analysis
Group 3 Ankita S Bhavika V Mohit S Neethesh G Sahil S Saurav D
Richard T. Harrison, Mark R. Dibben & Colin M. Mason
Overview
Introduction
Informal Investment Decision Making
Swift Trust
Research Methodology
Verbal Protocol Analysis
Findings
Conclusion
Introduction
Venture Capitalist
Angel Capitalist
Informal Venture Capitalist aka
Angel Capitalist
Personal contacts
Networks
Referrals
Information sources
Approaching an Angel Capitalist
Why is trust important in informal investment
decision making process?
Identified as a major lubricant –
essential for cooperation
Experience generated trust is
controlled opportunism
Trust emerges over time
Means of speeding decision making
Means of negotiations by
reducing transaction costs
• Decision to pursue initial awareness of opportunities • Review of business plan or outline • Decision on rejection or follow-up with entrepreneur • Multiple criteria used to reject opportunities • Initial reaction to the opportunity
Screening
• Evaluation of the merits or worth of the information source • Degree of confidence in the referrer of opportunities • Quality of the information is key to reject/proceed decision • Issue of trust in the medium of information dissemination
Assessment
• Reaction to entrepreneur or management team • Decision to reject or enter negotiations • Management team and financial return factors increase • Due diligence (if any) through network of personal contacts
Evaluation
• To make invest/not invest decision • Issues of personal chemistry grow in importance • Issues of deal structure and pricing grow in importance • One major factor likely to lead to rejection by the investor
Negotiation
• Decision to become involved or remain hands-off • Decisions on level of involvement.
Involvement
Situational Domains in the Informal Investment Decision-Making Process
Informal Investment Decision Making
Screening Assessment Evaluation Negotiation Involvement
Initial awareness
Personal chemistry
Initial reaction
Management team
Confidence in
referrer
Level of
involvement
Swift Trust Emergence of Swift Trust
• Limited history of working together • Limited prospects of working together in
the future • Tasks are often complex and involve
independent work • Have a deadline • Have non-routine tasks
‘Swift trust is based on faith in one’s own ability and the expected ability of the other members.’
‘Swift trust is resilient enough to survive the life of the
temporary group’
What determines trust? How trust develops?
How it influences relationships?
Stages of Trust Development
• Effectively understand and appreciate the other’s want
• Effectively act for the other
• Substitute for the other in interpersonal interactions
• Know each other well enough
• Have a history of interaction • Allows each to make
predictions about the other
• Early stage of the relationship
• On-going, market oriented economic calculations
• Determining outcomes
Screening Assessment Evaluation Negotiation Involvement
Research Methodology
•19 business angels
•3 business opportunities
•10 active investors
Study Details
•Four determinants
•Accurate predictions
Swift Cooperation
Criteria •Thought segments
•Statement types
Verbal Protocol
•What each gets out of the relationship •Intimation of difference between individuals •Lack of shared knowledge of the product/market
situation
Calculus Based Trust
•Shared knowledge of the product/market situation •Intimation of agreement between individuals •Leading to perceptions of predictability and the
reduction of uncertainty
Knowledge Based Trust
•High degree of identification with the wishes/intentions of the other party
•Strong agreement between the individuals • Intimations of mutual sharing of values
Identification Based Trust
Swift Trust Criteria (cf. Lewicki & Bunker, 1995)
• P1: The greater the perception of utility,
the greater the possibility of trusting co-operative behavior.
• P2:The greater the perception of importance,
the greater the possibility of trusting co-operative behavior.
• P3: The greater the perception of risk,
the less the possibility of trusting co-operative behavior.
• P4: The greater the perception of competence,
the greater the possibility of trusting co-operative behavior.
Propositions – the expected relationship with trust and cooperation
‘Swift Cooperation’ Criteria
Description
Utility An individual’s perception of the potential economic value of a situation.
Importance An individual’s perception of the potential non economic value of a situation
Risk An individual’s perception of the potential loss from a situation
Competence An individual’s perception of the professional ability of another individual. Fiduciary responisbility.
Coordinator judgment
An individual’s perception of the coordinating party’s ability to select potentially successful opportunities for investment
Other Comments on any other aspects of the business that cannot be coded in any other category
Swift Trust Criteria (cf. Marsh, 1995)
DESCRIPTION: Non-evaluative statement consisting of verbatim or paraphrased quotation of information presented in the plan
RECALL: Non-evaluative information based on the past experience of the respondent
PRECONCEPTION: Judgmental statement based on previous experience/background knowledge
INFERENCE: Statement that involves a judgment on some part of the plan
QUESTION: Statement that seeks further information
ACTION: Statement of intention or action to be performed
COMMENT: Uncodable or irrelevant statement
Classification of Thought Segments in the Protocols
Source: Mason & Rogers, 1996. Modified from Zacharakis & Meyer, 1995.
‘Dealing with swift trust situation in which investors are being asked to express and evaluate opinion and reach a decision on an investment opportunity that
they are seeking for first time’
Verbal Protocol Analysis
Findings
9 out of 10 investors rejected the proposal
1 indicated to meet the entrepreneur to consider
Between 93-97% proposals are rejected by angel capitalist
Time spent reviewing proposals between 30 seconds and 26 minutes. Average time is 11:25minutes.
213 thought units were recorded.
Over 5 investors account for 71% coded thought units.
No single investors recorded more than 16% of coded thoughts.
Description Recall Preconception Inference Question Action Comment Total Number Total %
CBT - - 22 23 1 - 2 48 22.5
KBT - 1 2 1 - - - 4 1.9
IBT - - - - - - - - 0.0
U Low - - 13 6 - - - 19 8.9
U Med - - 5 1 - - - 6 2.8
U High - -- - - - - - - 0.0
I Low - - 3 1 - - 2 6 2.8
I Med - - 1 1 - - - 2 0.9
I High - - - - - - - - 0.0
R Low - - 1 1 - - - 2 0.9
R Med - - 7 2 - - 1 10 4.7
R High - 1 10 6 1 - 1 19 8.9
C Low 1 1 7 25 11 1 5 51 23.9
C Med - - 1 5 - - - 6 2.8
C High - - - - - - --- - 0.0
CJ Low - 2 3 3 7 1 5 21 9.9
CJ Med - - - - - - 1 1 0.5
CJ HIGH - - 2 1 - - 2 5 2.3
Other - - 2 5 1 4 1 13 6.1
Total 1 5 79 81 21 6 20 213
Total % 0.5 2.3 37.1 38 9.9 2.8 9.4
Evidence of trust • Calculus-based trust: 92% of trust references
• 22.5% coded thoughts recorded • Identifies calculus-based trust as the most
common form of trust in business relationships
• Investors look for reasons to reject an opportunity • Dominance of calculus based trust helps
explain this finding • Investors to take a positive decision they
would rely on knowledge based trust and identification based trust
Findings Evidence of cooperation
• Investor thoughts are dominated by
– The low perceived competence of the entrepreneur team
– Characterized by comments about
• Market analysis
• Data availability
• The quality of the proposal
• Ability and expertise are determinants of trust and cooperative behaviour
• The issue of coordinator judgment is of considerable importance in the initial screening situational domain.
– 17% of the swift cooperation
• 15% representation of the thought segments for comments by risk account & 20% of swift cooperation comments
• The utility of the opportunity ranks relatively low
– 12% of thought segments
• The investor perception of the potential non-economic value of the situation, is of almost no importance at this stage of the process.
Nature of the statement type
• Decisions primarily based on the preconception and inference, there is relatively little use made of recall, action or question.
– Consistent with very low levels of knowledge based trust
• Preconceptions arise from the a lack of information in the proposal itself.
• The combination of low competence, high risk, low coordinator judgment, low importance and low utility generate a high cooperation threshold.
– When combined with calculus-based trust only one investor would consider the opportunity
Calculus based trust will dominate investor- investee relationships in all
decision making domain.
Knowledge based trust and identification based trust will become
relatively more important in later situational domains of the decision
making process as investor entrepreneur relationships develop.
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 depend on knowledge or
identification- based trust than formal referral sources such as business angel
networks.
Calculus based trust will be relatively less important than knowledge or
identification – based trust in situations where an investment opportunity is
being considered than where it is rejected.
Even in 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.
Measures of utility (upside potential) will become relatively more important
than ,measures of risk (downside potential) as the investment
opportunity moves from early to later situational domain.
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.
Investor preconceptions and inferences which dominate in early situational domains will be replaced in relative
importance by questioning and action statement types in later situational
domains.
Propositions
Informal investment decision requires development of trust in two sets- 1. Trust in the promoters of the investment 2. Trust in the source of information on that opportunity
• The opportunities provided are of poor quality and the people running the business seeking investment are not screened.
• Staff running the services are perceived of poor quality with little business or investment experience.
• Information provided on opportunities is of poor quality and fragmented.
• Business introduction services act only as forwarding agents for the information, lack of value added to the information.
• Low level of sophistication in matching process, and absence of effective targeting of right investor with the opportunity.
Criticism grouped under five headings
Conclusion
Swift trust framework
• Allows accurate identification of different trust types
• Forms the basis for uncovering interplay between trust and cooperation in the
informal investment decision- making process.
Limitations faced by business angel’s informal investment decision making process-
1. Primary focus is on one situational domain
2. Present study restricted to analysis of trust and cooperation of investment
opportunity
This study only provides for trust based factors that lead an investor to reject an
opportunity, and not on those that lead him/ her to accept and pursue an interest in
the opportunity.