Angel Investors Rely On Gut Feel Over Data

Laura Huang, assistant professor of management and entrepreneurship

New research shows that early-stage angel investors rely on instincts over data when looking for their next home run.

As the first source of external financing for most entrepreneurs, angel investors play an important role in the success of burgeoning startups. But investing in young businesses is always a risk. So what convinces an investor a venture is worth betting on—the product? The market data? The confidence and charm of the entrepreneur?

According to research by Laura Huang, assistant professor of management and entrepreneurship, the answer might be found in an unexpected place: the gut. In her paper “Managing the Unknowable: The Effectiveness of Early-Stage Investor Gut Feel in Entrepreneurial Investment Decisions,” coauthored by Jone L. Pearce, a University of California, Irvine, management professor, Huang examined the ways in which angel investors make decisions. When she was speaking to investors for her research, she says, one theme kept turning up: “They would talk about the size of the market; they would talk about the product. But they kept coming back to: ‘Well, then I rely on my gut feel,’ or, ‘Then I invest based on my gut feel.’”

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Who Is The American Angel?

Angel investors—accredited individuals who collectively support the American startup industry with some $24 billion of capital per year – maintain diversified portfolios that represent roughly 5 percent of total held assets, with median investments of $25,000 per deal. The Angel Capital Association (ACA) and Wharton Entrepreneurship released these and other early insights from the ongoing “The American Angel” survey, which is designed to provide the deepest research to date into the characteristics of angel investors. The survey is open for more angels to participate.

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Ask an Entrepreneur: Angel Investors

In this new series, we’ll pose questions from student entrepreneurs to our entrepreneurial instructors, and let you read their answering chatter. Casual, off-the-cuff, intelligent, informed responses are guaranteed. Want to ask a question? Email and include “Ask an Entrepreneur” in the subject line.  

Nupur Joshi WG’16 asked:

At what stage should I pursue angel investors, and what level of preparedness do I need for initial conversations?

Tyler Patrick Jeffrey
Tyler Wry, Patrick Fitzgerald, and Jeffrey Babin

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Decisions, Decisions: How to Choose Your Investors

Karthik Sridharan W’07/ENG’07, Co-founder and CEO of Kinnek

Properly choosing your investors is one of the most important, but often overlooked, aspects of building a tech company. As an early-stage entrepreneur, you’re constantly dealing with so many major existential questions (“Will our company exist next week?”, “Why can’t we convince a single person to invest any money in us?”), that the matter of deciding between multiple investors seems like a real first-world problem. I had many friends volunteer the advice that “beggars can’t be choosers” in those early-stages; they figured we should just take money wherever we could find it. Boy, am I’m glad I didn’t listen to them!

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