(EDITOR’S NOTE: This is the first article in a two-part series spotlighting Shawn Carson’s recent dissertation that examined a critical topic – “Identifying Critical Risk Factors in the Decision-making Process of Angel Investors and Venture Capitalists.”)
By Tom Ballard, Chief Alliance Officer, PYA
“The numbers have to be there, and they also have to like you,” Shawn Carson says in succinctly capturing the results of the research undertaken on investment strategies for his recently completed dissertation at the University of Tennessee (UT).
The long-time player in the Knoxville region’s entrepreneurial ecosystem will share the results of his research at tonight’s “Innov865 Investor Series” forum, then moderate a panel discussion about the topic. The panel will feature Tony Lettich of The Angel Roundtable, John Morris of The Lighthouse Fund, Grady Vanderhoofven of Three Roots Capital, and Ken Woody of Innova Memphis.
Carson is well-known across East Tennessee for his skills as a workshop leader and effective communicator. As such, it was only natural that the soft-spoken Lecturer in UT Knoxville’s Haslam College of Business would decide to pursue his doctorate. And, it should come as no surprise that his previous ties to the now defunct Technology 2020 and current additional role at Three Roots Capital would lead him to a dissertation topic based on the decision-making process used by angel and venture investors.
“I’ve been studying entrepreneurial risk for a while,” Carson told us in an interview ahead of the forum. We wanted to better understand the methodology that he used and the results that he uncovered.
“Entrepreneurs take risks, investors avoid risks,” Carson explained. “I wanted to know if there was a way to quantify risks beyond the ‘Big 4’ – execution, market, technology, and funding.”
The short answer is “yes,” but it took some work. Carson described his challenge as “developing a process that would get people to explain their individual risk factors in a way I could quantify.” To do it, he selected the Delphi Method developed in the 1950’s to achieve consensus while avoiding biases of those surveyed.
“I conducted three surveys,” Carson said. Those surveyed were nine venture capitalists and nine angel investors who were known to be active in the region even though all did not live in Tennessee. Some resided in Georgia and Kentucky and one is based in California.
The first survey asked the individuals to identify critical risk factors considered in their early evaluation work. Carson allowed them to list as many as 25 factors, but the individual responses ranged from a low of four to a high of 20 with an average 11. Overall, after eliminating duplicates, he says the unique factors totaled 82.
“I next asked them to rate all 82 on a scale of one (not important) to five (critically important),” Carson explained. Armed with those responses, the final survey was what he described as the “consensus round.” Respondents were given their previous ranking of each factor and the median ranking of that factor for all 18 respondents.
“You got to compare yourself to your peers and decide if you wanted to change your ranking,” Carson said.
Along the way, he also grouped the 82 into seven common categories like founders and management team, relationship, intellectual property, competitive factors, value proposition, scalability, and exit.
“If 70 percent agreed to a rating of either three, four or five on a factor, that meant there was consensus,” Carson explained. When all the input was tabulated, about one-half of the factors were rated as a four or higher.
“There was 100 percent consensus among the VCs on the top 40 factors, and 100 percent consensus among the angel investors on the top 31,” Carson says.
“There is a whole lot more going on subconsciously than they (the respondents) realized,” he says.
Those attending tonight’s event (click here to register) will hear Carson’s presentation and the panel discussion. For those who cannot attend, tomorrow’s second article in this series will examine those factors in greater detail.