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Group-3

Anil Kumar

Chandana

Pradeep

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Introduction The research has been characterized in 3 parts:

Need to "put boundaries on our ignorance

Understanding the market and identify mechanisms bywhich it could be made to work more efficiently andeffectively

Third, and partly as a consequence of these two trends,research on informal venture capital has not beencharacterized to date by a high level of theoreticalsophistication, although recent research has considered theapplicability of the pecking order hypothesis decision theory,the economic analysis of altruism, and agency theory

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Characteristics Of The Investment Decision Situation

Decision to pursue initial awareness of opportunities Review of business plan or outline

Decision on rejection or follow-up with entrepreneur Initial reaction to the opportunityScreening

Evaluation of the merits of the info resource Degree of confidence in the referrer or enter negotiations Quality of the info is key to reject/proceed decision Issue of trust in the medium of information dissemination

Assessment

Reaction to Entrepreneur team Decision to reject or enter negotiation Management team and financial return factors increase Due diligence through network of personal contacts

Evaluation

To make investment decision

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

Negotiation

Decision to become involved or remain hands-off Decision on level of involvement.Involvement

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Swift TrustIt is a concept relating to temporary teams whose

existence is formed around a clear purpose and common

task with a finite life span

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Swift Trust elements

Willingness to suspend doubt about whether others who are"strangers" can be counted on in order to get to work on the group'stask

Positive expectation that the group activity will be beneficial

It is built and maintained by a high level of activity and responsiveness

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Trust that exists between individuals in the earlystage of relationship

Trust which exist between individuals who knoweach other well enough that allows each to makepredictions about the other

Trust that exists because the parties effectivelyunderstand and appreciate the others wants

Calculus-Based Trust

Knowledge-Based Trust

Identification-Based Trust

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Swift Cooperation Criteria DescriptionUtility An individuals perception of the potential economic

value of a situation. Eg. Expected return on an

investment

Importance An individuals perception of the potential noneconomic value of a situation

Risk An individuals perception of the potential loss froma situation

Competence An individuals perception of the professional abilityof another individual. Characterized by commentsregarding market analysis, data availability, quality,etc.

Coordinator judgment An individuals perception of the coordinatingpartys ability to select potentially successfulopportunities for investment

Other Comments on any other aspects of the business thatcannot be coded in any other category

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Protocol for Trust & Cooperation

Identification It covers both the trust criteria and cooperation

criteria

Trust criteria includes calculus based-trust, knowledge

based-trust and identification based-trust Which are consistent with the factors utility,

importance, risk, competence, coordinator, judgment

Verbal protocol analysis- involves asking respondents tothink out loud while they perform a particular task and isbased on vocalization of thoughts which has the form ofinner speech

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Classification of thought segments

in the protocols: statement type 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 therespondent

PRECONCEPTION:Judgmental statement based on the previousexperience/background knowledge

INFERENCE: Statement that involves a judgment on some part of the plan

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QUESTION: Statement that seeks further information

ACTION: Statement of intention or action to be performed

(E.g. to search for the source of information)

COMMENT: Un codable or irrelevant statement

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TRUST AND INVESTMENT DECISION

Study on proposal of investment opportunity of domain 1

Out of 10 investors, 9 are rejected the proposal

5 investors account for 71% of coded thoughts

The frequency matrix gives an indication of the informationtypes frequently used in the investors decision of domain 1

The result of this verbal protocol analysis can be summarize in 3headings:

Evidence of trust

Evidence of cooperation

Nature of the statement type

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Verbal PROTOCOL FREQUENCY ANALYSISdescription Recall Preconcp

tionInference Question Action Commen

tTotal no

CBT - - 22 23 1 - 2 48 22.5

KBT - 1 2 1 - - - 4 1.9

IBT - - - - - - - - 0.0U Low - - 13 6 - - - 19 8.9

U Med - - 5 1 - - - 6 2.8

U High - -- - - - - - - 0.0

I Low - - 3 1 - - 2 6 2.8

I Med - - 1 1 - - - 2 0.9

I High - - - - - - - - 0.0

R Low - - 1 1 - - - 2 0.9

R Med - - 7 2 - - 1 10 4.7

R High - 1 10 6 1 - 1 19 8.9

C Low 1 1 7 25 11 1 5 51 23.9

C Med - - 1 5 - - - 6 2.8

C High - - - - - - --- - 0.0

CJ Low - 2 3 3 7 1 5 21 9.9

CJ Med - - - - - - 1 1 0.5

CJ HIGH - - 2 1 - - 2 5 2.3

Other - - 2 5 1 4 1 13 6.1

Total 1 5 79 81 21 6 20 213

% 0.5 2.3 37.1 38 9.9 2.8 9.4

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Evidence of Trust

Calculus-based trust: 92% of trust references

Dealing with swift trust situation in which investors are being asked to expressan evaluate opinion and reach a decision on an investment opportunity thatthey are seeking for first time

Which identifies calculus-based trust as the most common form of trust inbusiness relationships

Limitation of research: lack of investors who make a positive decision toexplore the opportunity. If the investors take positive decision then they rely onknowledge based trust or identification-based trust

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Evidence of cooperation Conclusions drawn from the table:

1. Investor thoughts are dominated by comments about the low perceivedcompetence of the entrepreneur team

2. Comments about risk account. The importance of an investors perception ofthe potential loss from a situation is consistent with the view that the initialscreening stage investors are looking more for reasons to reject anopportunity without investing significant time and effort

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Contd

3. The issue of coordinator judgment is of considerable importance in the

initial screening situational domain. Suggesting that there may be a complexinterpretation of situational domains1 & 2

4. The utility of the opportunity, in terms of the investors perception of theeconomic value of the situation ranks relatively low

The investor perception of the potential non-economic value of thesituation, is of almost no importance at this stage of the process

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Nature of the Statement Type Informal investors make decisions in this domain based on the preconception

and inference, there is relatively little use made of recall, action or question

Preconception are more likely to be negative than positive at this stage becausepreconceptions arise from the a lack of information in the proposal itself

This can be rectified by the entrepreneur, most reflect strongly held investorpreconceptions that have been formed before the proposal has been read

Entrepreneurs are capable of modification of the proposal

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Contd

The combination of low competence, high risk, low coordinator judgment, low

importance and low utility generate a high cooperation threshold

When we combine with calculus-based trust, it is unsurprising that only oneinvestor in the sample would consider the opportunity further

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Swift Trust and the Role of the

Coordinator Study to illustrate the trust issues with the coordinator judgment in the

domain 2(contains 19 business angels)- which illustrates the potentialapplicability of the swift trust/swift cooperation framework to the analysis of

informal investment decision making

2/3rd of these business angels derive information on investmentopportunities form personal networks with friends and associates

Other are more interested in the key players than the referral (perceptionthat referral made no difference)

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Contd Opinion of the actual activities of business introduction services, some are

positive and others are negative view and 2 of them had insufficient knowledge

The criticisms of negative views are grouped into 5 headings:

i. Opportunities provided are of poor quality and people not screened

ii. The staff poor- low experience

iii. The information provided on opportunities

iv. Business introduction services often act only as forwarding agents for theinformation

v. There is low of sophistication in the matching process

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Majority have a low opinion of the quality of opportunities provided bybusiness introduction services

Some investors are suspicious that if a business has to seek an investorthrough a business introduction service rather than finding one through theentrepreneurs own contacts

The degree of trust in and willingness to cooperate with a coordinator bodyor organization has in turn influence on how the merits and attractiveness ofthe investment opportunity itself is perceived.

The role of the coordinator in the informal investment decision thereforerequires the development of trust in two sets of actors:

Trust in the promoters of the investment

Trust in the source of information on the opportunity