(EDITOR’S NOTE: This is the final 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.” The results of this research were shared at last night’s “Innov865 Investor Series” forum.)
By Tom Ballard, Chief Alliance Officer, PYA
Shawn Carson says the research conducted for his recently completed dissertation on the critical risk factors considered by angel and venture capitalists confirmed some things he expected, but also held a big surprise.
“What I expected was the importance of the ‘Big 4,’ what surprised me were the relationship factors,” the Lecturer in the Haslam College of Business at the University of Tennessee Knoxville and Consultant with Three Roots Capital says.
The ‘Big 4,” as he describes them, are execution – can the management team execute the business plan, market – is there a viable market for the product or service, technology – does it work, and funding – can the start-up secure the necessary capital.
“Those are fairly objective measures that are commonly accepted,” Carson says. Yet, when he asked nine venture capitalists and nine angel investors for their list of all critical factors considered in making investment decisions, they collectively identified 82 unique ones.
Carson lumped those into seven categories like founders and management team, relationship, intellectual property, competitive factors, value proposition, scalability, and exit.
“By far, the number one category of factors was around relationships,” Carson said. “Six of the top 10 were about relationships.”
You might ask, “What are those six?” Survey says, in order, trustworthiness, ethics and honesty, integrity, coachability, character, and passion. Two others were in the top 20 – management ‘skin in the game’ and transparency. (See the PDF at the end of this article for the complete list.)
As he explained to the attendees at last night’s “Innov865 Investor Series” forum, the results are enlightening.
“The fact that the relationship-based factors proved to be more important than objectively-measured factors, coupled with the finding that these two types of factors are in play at the same time, shows the complexity of decision-making in early stage investments,” Carson says. “The relative high degree of consensus within the most important factors may bring confidence to individual investors that their experience is confirmed by their peers and affords them an opportunity to review their biases in light of how they rate against their peers.”
In the case of entrepreneurs seeking funding, Carson says there is no silver bullet or short checklist.
“This study did not result in a concise, five-point checklist or framework they can use to help guarantee an investment,” he explains. “Despite any clarity this study brings to the process, there will still be a fraction of funding resources available to all who are seeking it. Investors will still have to decide to decline far more investment deals than they will close.”
He adds that the study does document how complex the process is, with all the variables that come into play.
“The consensus effect underscored this reality and should provide a more realistic alternative to all the ‘Top Ten Things Investors Look For’ that show-up in ubiquitous blogs on the subject,” Carson says.
The other implication for entrepreneurs is the fact that there are dual/parallel tracks of critical risk factors at play: those related to relationship and those related to more objective, measurable factors.
“Much attention is currently given to constructing financial statements and business models, backed by market research, founder’s experience and technology,” Carson notes. “Relationships take time to build, which helps in part to explain why investment deals take such a long time.”
Carson shared a summary of his research in this PDF document (Carson Dissertation Summary).