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NOTE: Since 2009 the title of the International Journal of Entrepreneurship Education (IJEE) has been changed to the title above.  ISSN numbers: IJEE 1649-2269 and IRE 2009-2822

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Backing the Horse or the Jockey? Due Diligence, Agency Costs, Information and the Evaluation of Risk by Business Angel Investors

IRE Vol 15: Issue 3, 2017 (3 of 6 papers, publishing 30th September)

Author(s): Richard T. Harrison (Centre for Entrepreneurship Research and Centre for Strategic Leadership, University of Edinburgh Business School, Scotland, UK) and Colin M. Mason (Adam Smith Business School, University of Glasgow, Scotland, UK)

This paper explores the argument that business angel investors are more concerned with managing and minimising agency risk than market risk. Based on data on the due diligence process from a survey of business angels in the UK, the paper concludes that business angels do view entrepreneur characteristics and experience as having the greatest impact on the perceived riskiness of an investment opportunity. Further, they emphasise personal and informal over formal sources of information in the due diligence process, and seek information on both the entrepreneur and the venture in determining valuation. Indeed, the reliance of business angels on short-term and subjective information to value investment opportunities leads to the conclusion that their approach to valuation is not a function of the conventional protocols of financial analysis, but of personal relations and assessment.

Keywords: risk, investment decision-making, due diligence, business angel, agency costs