In Search of Efficient Investment Decisions by Business Angels

Abstract

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Business angels (BAs) play a crucial role in entrepreneurial financing by providing the necessary funding that contributes to the success and viability of their projects. This chapter proposes a theoretical model that explains investment decisions on the basis of a combination of factors related to the BAs, the entrepreneur, and the project. The model, grounded in signaling theory, applies crisp-set qualitative comparative analysis (csQCA) and process tracing to a sample of 88 responses collected from BAs within the Spanish ecosystem between August 13 and October 3, 2023. The results allow for the identification of factor combinations that influence investment decisions, as well as an understanding of the individual characteristics of BAs, who are informal and heterogeneous investors. Thus, trust is identified as a necessary condition present in all three solutions alongside the entrepreneur’s experience and other factors linked to the project and the entrepreneur’s experience. Conversely, the decision not to invest is explained by three combinations of conditions, without a common condition across all. Additionally, causal mechanisms have been identified that explain both the decision to invest and the decision not to invest. These findings enable us to understand how experienced BAs make decisions more efficiently, using heuristics supported by specific characteristics of the analyzed project. This research contributes to the literature on entrepreneurial financing by advancing the application of csQCA in investment studies, offering practical value to entrepreneurs and business angel networks. It also supports BAs by offering less experienced investors an opportunity to understand critical investment factors, while organized networks can leverage these findings for further growth and development.