The Role of Trust in the Informal

Investors Investment Decision:

An Exploratory Analysis
Richard T. Harrison, Mark R. Dibben &
Colin M. Mason

Group 3
Ankita S
Bhavika V
Mohit S
Neethesh G
Sahil S
Saurav D

Overview
Introduction
Informal Investment Decision Making
Swift Trust

Research Methodology
Verbal Protocol Analysis

Findings
Conclusion

Informal Venture Capitalist

aka
Angel Capitalist
Venture
Capitalist

Introduction

Angel
Capitalist
Personal
contacts

Networks

Approaching an
Angel Capitalist
Referrals

Why is trust important

in informal investment
decision making
process?

Identified as a
major lubricant
essential for
cooperation

Means of
negotiations by
reducing
transaction costs

Information
sources

Experience
generated trust is
controlled
opportunism

Means of speeding Trust emerges over

decision making
time

Situational Domains in the Informal Investment Decision-Making Process

Screening

Decision to pursue initial awareness of opportunities

Review of business plan or outline
Decision on rejection or follow-up with entrepreneur
Multiple criteria used to reject opportunities
Initial reaction to the opportunity

Assessment

Evaluation of the merits or worth of the information source

Degree of confidence in the referrer of opportunities
Quality of the information is key to reject/proceed decision
Issue of trust in the medium of information dissemination

Evaluation

Reaction to entrepreneur or management team

Decision to reject or enter negotiations
Management team and financial return factors increase
Due diligence (if any) through network of personal contacts

Negotiation

To make invest/not invest decision

Issues of personal chemistry grow in importance
Issues of deal structure and pricing grow in importance
One major factor likely to lead to rejection by the investor

Involvement

Decision to become involved or remain hands-off

Decisions on level of involvement.

Swift Trust
Initial
awareness

Confidence
in
referrer

Management
team

Level
of
involvement

Screening

Personal
chemistry

Initial
reaction

Emergence of Swift Trust

Limited history of working together
Limited prospects of working together in
the future
Tasks are often complex and involve
independent work
Have a deadline
Have non-routine tasks

Swift trust is based on faith in ones own ability and

the expected ability of the other members.

Swift trust is resilient enough to survive the life of the

temporary group

Assessment

Evaluation

Negotiation

Informal Investment Decision Making

Involvement

What determines trust?

How trust develops?
How it influences relationships?

Stages of Trust Development

Screening

Assessment

Evaluation

Effectively understand and

appreciate the others
want
Effectively act for the
other
Substitute for the other in
interpersonal interactions

Know each other well

enough
Have a history of interaction
Allows each to make
predictions about the other
Early stage of the
relationship
On-going, market oriented
economic calculations
Determining outcomes

Negotiation

Involvement

Research Methodology

19 business
angels
3 business
opportunities
10 active
investors

Study Details

Swift
Cooperation
Criteria
Four
determinants
Accurate
predictions

Thought
segments
Statement
types

Verbal Protocol

Swift Trust Criteria (cf. Lewicki & Bunker, 1995)

Calculus
Based Trust

What each gets out of the relationship

Intimation of difference between individuals
Lack of shared knowledge of the product/market
situation

Knowledge
Based Trust

Shared knowledge of the product/market situation

Intimation of agreement between individuals
Leading to perceptions of predictability and the
reduction of uncertainty

Identification
Based Trust

High degree of identification with the

wishes/intentions of the other party
Strong agreement between the individuals
Intimations of mutual sharing of values

Propositions the expected relationship with trust and cooperation

P1: The greater the perception of utility,

the greater the possibility of trusting co-operative behavior.
P2:The greater the perception of importance,
the greater the possibility of trusting co-operative behavior.
P3: The greater the perception of risk,
the less the possibility of trusting co-operative behavior.
P4: The greater the perception of competence,
the greater the possibility of trusting co-operative behavior.

Swift Trust Criteria (cf. Marsh, 1995)

Swift
Cooperation
Criteria

Description

Utility

An individuals perception of the potential economic value of a

situation.

Importance

An individuals perception of the potential non economic value

of a situation

Risk

An individuals perception of the potential loss from a situation

Competence

An individuals perception of the professional ability of another

individual. Fiduciary responisbility.

Coordinator
judgment

An individuals perception of the coordinating partys ability to

select potentially successful opportunities for investment

Other

Comments on any other aspects of the business that cannot be

coded in any other category

Classification of Thought Segments in the Protocols

DESCRIPTION: Non-evaluative statement consisting of verbatim or
paraphrased quotation of information presented in the plan
RECALL: Non-evaluative information based on the past experience of the
respondent
PRECONCEPTION: Judgmental statement based on previous
experience/background knowledge
INFERENCE: Statement that involves a judgment on some part of the plan

QUESTION: Statement that seeks further information

ACTION: Statement of intention or action to be performed

COMMENT: Uncodable or irrelevant statement
Source: Mason & Rogers, 1996. Modified from Zacharakis & Meyer, 1995.

Verbal Protocol Analysis

Dealing with swift trust situation in which investors are being asked to express
and evaluate opinion and reach a decision on an investment opportunity that
they are seeking for first time
Findings
9 out of 10 investors rejected the proposal
1 indicated to meet the entrepreneur to consider
Between 93-97% proposals are rejected by angel capitalist
Time spent reviewing proposals between 30 seconds and 26
minutes. Average time is 11:25minutes.
213 thought units were recorded.
Over 5 investors account for 71% coded thought units.
No single investors recorded more than 16% of coded
thoughts.

Description

Recall

Preconception

Inference

Question

Action

Comment

Total Number

Total %

CBT

22

23

48

22.5

KBT

1.9

IBT

0.0

U Low

13

19

8.9

U Med

2.8

U High

--

0.0

I Low

2.8

I Med

0.9

I High

0.0

R Low

0.9

R Med

10

4.7

R High

10

19

8.9

C Low

25

11

51

23.9

C Med

2.8

C High

---

0.0

CJ Low

21

9.9

CJ Med

0.5

CJ HIGH

2.3

Other

13

6.1

Total

79

81

21

20

213

Total %

0.5

2.3

37.1

38

9.9

2.8

9.4

Evidence of trust
Calculus-based trust: 92% of trust references
22.5% coded thoughts recorded
Identifies calculus-based trust as the most
common form of trust in business
relationships
Investors look for reasons to reject an
opportunity
Dominance of calculus based trust helps
explain this finding
Investors to take a positive decision they
would rely on knowledge based trust and
identification based trust
Nature of the statement type
Decisions primarily based on the preconception
and inference, there is relatively little use made
of recall, action or question.
Consistent with very low levels of
knowledge based trust
Preconceptions arise from the a lack of
information in the proposal itself.
The combination of low competence, high risk,
low coordinator judgment, low importance and
low utility generate a high cooperation
threshold.
When combined with calculus-based trust
only one investor would consider the
opportunity

Findings

Evidence of cooperation
Investor thoughts are dominated by
The low perceived competence of the
entrepreneur team
Characterized by comments about
Market analysis
Data availability
The quality of the proposal
Ability and expertise are determinants of trust and
cooperative behaviour
The issue of coordinator judgment is of considerable
importance in the initial screening situational domain.
17% of the swift cooperation
15% representation of the thought segments for
comments by risk account & 20% of swift
cooperation comments
The utility of the opportunity ranks relatively low
12% of thought segments
The investor perception of the potential noneconomic value of the situation, is of almost no
importance at this stage of the process.

Propositions
Calculus based trust will dominate
investor- investee relationships in all
decision making domain.

The relative importance of each of the

three trust types in investor coordinator
Knowledge based trust and
relationships will vary according to the
type of coordinator informal referral
identification based trust will become
sources, such as family, friends and
relatively more important in later
situational domains of the decision
business associates, will be relatively
making process as investor entrepreneur
more likely depend on knowledge or
identification- based trust than formal
relationships develop.
referral sources such as business angel
networks.

Calculus based trust will be relatively

Even in situational domain 1 where
less important than knowledge or
calculus based swift trust dominates the
identification based trust in situations
decision to proceed with an opportunity
where an investment opportunity is
to the next domain will be relatively
being considered than where it is
more reliant on knowledge based trust.
rejected.

While coordinator judgment is

important in early situational domains,
its importance will fall once the initial
reject/ proceed decision has been made
by the investor.

Measures of utility (upside potential)

will become relatively more important
than ,measures of risk (downside
potential) as the investment
opportunity moves from early to later
situational domain.

Investor preconceptions and inferences

which dominate in early situational
domains will be replaced in relative
importance by questioning and action
statement types in later situational
domains.

Criticism grouped under five headings

The opportunities provided are of poor quality and the people
running the business seeking investment are not screened.
Staff running the services are perceived of poor quality with
little business or investment experience.
Information provided on opportunities is of poor quality and
fragmented.
Business introduction services act only as forwarding agents
for the information, lack of value added to the information.
Low level of sophistication in matching process, and absence
of effective targeting of right investor with the opportunity.

Informal investment decision requires development of trust in two sets1.

Trust in the promoters of the investment
2.
Trust in the source of information on that opportunity

Conclusion
Swift trust framework
Allows accurate identification of different trust types
Forms the basis for uncovering interplay between trust and cooperation in the
informal investment decision- making process.

Limitations faced by business angels informal investment decision making process1. Primary focus is on one situational domain
2. Present study restricted to analysis of trust and cooperation of investment
opportunity
This study only provides for trust based factors that lead an investor to reject an
opportunity, and not on those that lead him/ her to accept and pursue an interest in
the opportunity.

Thank You