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.’”