How business angel groups work: Rejection criteria in investment evaluation

Abstract

In this article, we study the decision-making criteria that business angels (BAs) adopt when screening business opportunities in the different assessment phases (pre-screening, screening and due diligence). We exploit an original dataset of 1942 ventures that sought angel investment from 2008 to 2014 from the members of Italian Angels for Growth (IAG). Results have shown that the emphasis that BAs place on rejection criteria and contact channels varies along the three considered stages of the investment process. In particular, we found that business proposals brought to the attention of BAs by venture capitalists are more likely to get through the pre-screening stage, suggesting an important quality certification role played by venture capitalists. Moreover, at the screening stage (in comparison with the pre-screening stage), proposals are rejected more often for reasons related to the characteristics of the entrepreneur and management team and less often for the lack of business innovativeness. Finally, business proposals showing lower levels of profitability are more likely to be rejected after the due diligence.

Why business angels reject investment opportunities: Is it personal?

“…In effect, angels put greater value on referrals from people they know as the referral source is risking their own credibility when referring the proposal. Croce et al's (2016) study noted that referrals from venture capital funds were more likely to get through the screening stage; Angels then consider how well the proposal 'fits' their knowledge domain and personal investment criteria (Mason and Rogers, 1997;Mitteness et al, 2012). It is only from this point that the attributes of the opportunity are considered.…”

“…Until recently, much investment activity occurred 'under the radar' and so remained undocumented; however, angels are increasingly organising into managed angel groups Carpentier and Suret, 2015;Croce et al, 2016). This enables investment activity to be documented -for example, by national angel associations.…”

“…A study of UK angel networks noted that only 30% of funding proposals went beyond the initial screening process and overall, fewer than 3% attracted funding . An angel group in Quebec invested in only 2.4% of the proposals received (Carpentier and Suret, 2015) whilst only 4% of potential investments submitted to an Italian angel group were successful at the pre-screening and screening stages (Croce et al, 2016). These high rejection rates have prompted substantial research on the investment criteria of business angelsthe factors that they consider (or not) when evaluating investment opportunities.…”

The transformation of the business angel market: empirical evidence and research implications

“…This paper is the first to explicitly and systematically examine this transformation of the angel market. It builds on previous papers on the overall evolution of the early stage risk capital market (Harrison, Don and Johnston 2010), the evolution of specific business angel groups (Gregson, Carr and Harrison 2013), group investment decision-making (Carpentier and Suret 2015;Croce, Tenca and Ughetto 2016; and the emergence of the angel group gatekeeper as a new actor in the market (Paul and Whittam 2010). Based on a case study of Scotland, where this market evolution has proceeded the furthest, the paper addresses the following key issues.…”

Institutional Seed Financing, Angel Financing, and Crowdfunding of Entrepreneurial Ventures: A Literature Review

“…In terms of determinants for business angel investments, Croce et al (2016b) find that ventures proposed by institutional investors are more likely to successfully navigate the business angel's pre-screening process. Moreover, business angels appear to take significant interest in the entrepreneur and the management team during the subsequent screening stage as these elements are often the reason for rejection.…”