Investment Motivations and UK Business Angels’ Appetite for Risk Taking: The Moderating Role of Experience
| Author | Elisa Ughetto,Annalisa Croce,Marc Cowling |
| Published date | 01 October 2020 |
| Date | 01 October 2020 |
| DOI | http://doi.org/10.1111/1467-8551.12380 |
British Journal of Management, Vol. 31, 728–751 (2020)
DOI: 10.1111/1467-8551.12380
Investment Motivations and UK Business
Angels’ Appetite for Risk Taking: The
Moderating Role of Experience
Annalisa Croce, Elisa Ughetto 1,2 and Marc Cowling3
Politecnico di Milano, DIG, Piazza Leonardo da Vinci 32, 20133 Milan, Italy, 1Politecnico di Torino,
Department of Management and Production Engineering, 10129 Torino, Italy, 2Bureau of Research on
Innovation, Complexity and Knowledge(BRICK), Collegio Carlo Alberto, 10122 Torino, Italy, and 3University
of Derby, College of Business, Law and Social Sciences, Kedleston Road, Derby, DE22 1GB, UK
Corresponding author emails: annalisa.croce@polimi.it, elisa.ughetto@polito.it and m.cowling@derby.ac.uk
In this paper we use a large UK survey of business angels (BAs)investing in two dierent
publicly supported schemes to directly question the role that investment motivationsplay
in shaping investors’ appetite forrisk. We dive deeper into the relationship between invest-
ment reasons and risk taking, by exploring the potential for a moderating eect derived
from BAs’ past experience (i.e. financial and entrepreneurial experience). Our analysis
revealsthat both investment reasons (for return and for passion) have substantial explana-
tory power in shaping angels’ risk attitude, but their eect is moderated by the investors’
prior experience. This keyfinding represents important empirical support for what has so
far been anecdotal evidence concerning BAs’ appetite for risk when investing.
Introduction
How investors and managers deal with risk has
been at the heart of a substantial body of re-
search in finance and management for many
years (Palmer and Wiseman, 1999; Van de Venter,
Michayluka and Davey, 2012). The concept of
risk implies polysemic meanings, depending on the
specific context to which it applies (Janney and
Dess, 2006). In standard financial theory, risk is
seen as variance in outcomes. However, in typi-
cal managerial decision-making contexts,other di-
mensions of risk are likely to emerge beyond sim-
ply the variability of returns. Research has shown
that most managers and investors interpret risk as
the likelihood of venture failure or loss of invested
capital (March and Shapira, 1987). The multiple
meanings associated with the concept of risk have
found their ground in distinct theoretical frame-
works (Palmer and Wiseman, 1999), ranging from
expected utility theory (Starmer, 2000) to more
behaviourally driven approaches, such as prospect
theory (Kahneman and Tversky, 1979).
A large amount of research in economics, fi-
nance and management has been devoted to the
assessment of individuals’ attitude towards risk
(i.e. managers, households, investors), bymeans of
self-reported answers to survey questions, choice
experiments or experiments using risk-involving
tasks (Metzger and Fehr, 2018). Overall, there ap-
pears to be significant agreement among schol-
ars that risk attitude is a subjective attribute with
a strong genetic predisposition (Cesarini et al.,
2009), which is largely associated with a range of
demographic, socio-economic and psychological
factors (Van de Venter, Michayluka and Davey,
2012).
In this paper we add to the knowledge about
the general concept of risk appetite by studying
the attitude towards risk of a specific type of eq-
uity investors – business angels (BAs) – who play
a key role in the provision of equity capital to
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Investment Motivations and Risk Taking 729
financially constrained small firms.An exploration
of how willing BAs are to take on risk by investing
their personal wealth in what is widely accepted as
a very uncertain segment of the capital market,and
what drives their approach to risk, is a worthy en-
deavour in the context of entrepreneurial finance
and management research.
BAs dier substantially in their motivations
for investing, in their approaches to investment
and portfolio management, as well as in their
post-investment involvement (Drover et al., 2017;
Wallmeroth, Wirtz and Groh, 2018). Despite the
ever-expanding body of work around BAs and
the underlying dynamics of their investments (see
Tenca, Croce and Ughetto, 2018 for a recent re-
view), very few studies have explicitly addressed
how angels’ heterogeneity impacts on their de-
cision process (Freear, Sohl and Wetzel, 1994;
Sørheim and Landstr¨
om, 2001; White and Dumay,
2017). In particular, we are not aware of any re-
search that has recognized the inherent dierences
across angels in their appetite, or willingness, to
assume risk. Fiet (1995) compared risk-avoidance
strategies employed by BAs and venture capital
(VC) firm investorsby explicitly asking them about
their views on the dangers of market and agency
risk. In his study, however, angels are clustered to-
gether as if they were a homogeneous category. In
other works, BAs’ attitude to risk has been mostly
implied from observed investments (Lahti, 2011)
or investment/exit strategies and decision making,
using protocol analysis techniques and interviews
(Harrison, Botelho and Mason, 2016; Maxwell,
Jerey and L´
evesque, 2011; S¨
oderblom, Samuels-
son and M˚
artensson, 2016). Other studies have
measured risk on a broader level, using elements
of Hofestede’s cultural dimensions indices (Ding,
Au and Chiang, 2015) or from a comparative in-
stitutions perspective (De Clercq, Meuleman and
Wright, 2012). Thus, despite the central role that
angels’ risk profile plays in their investment de-
cisions, empirical research has so far fallen short
of establishing a coherent research base on the
issue.
In this study, we build on, and integrate, these
disparate strands of literature to directly address
the question of angels’ ‘appetite for risk when in-
vesting’. We adhere to a conceptualization of risk
that incorporates the likelihood of capital losses
and business failure. Using a large UK survey of
BAs investing in two dierent publicly supported
schemes (i.e. the Enterprise Investment Scheme
(EIS) and the Venture Capital Trusts (VCTs)), we
build on the current evidence base around BAs’
investment process (Croce, Tenca and Ughetto,
2017; Ding, Au and Chiang, 2015; Harrison,
Mason and Robson, 2010; Mason and Harrison,
1996; Mitteness, Sudek and Cardon, 2012) by
looking at the relationship between risk attitudes
and investment reasons and testing forany role ex-
erted by past experience (i.e. entrepreneurial and
financial) in moderating these relationships.
We aim to contribute to the literature in three
ways. First, this study extends our knowledge of
angels’ willingness to ‘play the investment game’
(Collewaert and Manigart, 2016) in new directions,
by casting new light on the factors aecting BAs’
appetite for risk. While conventional wisdom has
long asserted that BAs are risk takers, limited em-
pirical evidence has so far supported this notion.
We argue that BAs are not a homogeneous group
with regard to their risk attitudes, and that their
willingness to take risks will vary acrosskey dimen-
sions, including personal demographics and their
pool of experience in entrepreneurship per se, in-
vestment and finance. Second, the paper adds to
our understanding of the relationship between the
reasons why BAs invest and how this shapes their
appetite for risk. To our knowledge,ours is the first
empirical study to specifically examinethe role that
investment motivations play in shaping investors’
appetite for risk. In particular, we look at two op-
posing investment reasons: investing for financial
return and investing for passion, referencing them
against a standard portfolio diversification risk-
mitigation approach. To our knowledge, we lack
(somewhat surprisingly)systematic evidence about
the role that both passion and return expectations
play in driving BAs’ appetitefor risk taking. Third,
we dive deeper into the relationship between in-
vestment reasons and risk taking, by exploring the
potential for mediation of a BA’s past experience
as an entrepreneur and as a professional work-
ing in the finance field. We feel that both these
forms of experience have relevance in shaping a
BA’s approach to investing. To date, we know lit-
tle about how personal experience works in con-
cert with BAs’ motivations to invest, and specifi-
cally in influencing their appetite for risk taking.
Our analysis reveals that both investment reasons
(for return and for passion) have substantial ex-
planatory power in shaping angels’ risk attitude,
but their eect is moderated by the investors’ prior
experience. This key finding represents important
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