An Exploratory Investigation into the Decision-making Processes of Angel and Venture Capital Investors in New Zealand

Abstract

Angels and venture capitalists are key private investors that operate in New Zealand. There is a particular prevalence of these investors in the biotechnology, information technology and software industries. Understanding their respective decision-making processes is vitally important. Previous research has analysed this process either through establishing the individual steps the different investors go through, or focussing on the investment criteria that they feel are important. Researchers have called for future studies to combine these two types of investigation and also to look at investment rejection reasoning. The relative importance of investment criteria is an area that is also lacking in the literature and cannot readily be studied unless the complete investment process and criteria are researched concurrently; thus this research aimed to understand these aspects. A critical realist framework was utilised with a qualitative based interview approach. Participants were interviewed to identify the investment process; investment criteria; and reasons for rejection in one concurrent session. Semi-structured interviews overcame previous limitations in this field of research as they allowed true themes to emerge from participants. These interviews were transcribed and analysed for common themes, and were analysed alongside secondary data to ensure validity. Findings showed commonalities and differences with previous literature. It emerged that angels are becoming more like venture capitalists by undertaking due diligence in their process; something which had not been comprehensively shown in the literature previously. Venture capitalists identified investment committees as a vital aspect of their process; which the literature had consistently failed to identify as a key step. This research found that angels and venture capitalists weight the entrepreneur far more at the earlier stages of the process compared with other important criteria such as market factors. However as the process enters due diligence these previously less important factors begin to outweigh the importance of the entrepreneur. These findings have potential value to the investors themselves as well as entrepreneurs looking to seek investment. This research paves the way for future studies to further analyse the relative importance of investment criteria with respect to the stage of the investment process.