The good and the bad of trust in angel investor-entrepreneur relationships

Angel investors play an important role in providing seed capital for start-up businesses. Just as important to the success of these enterprises is the level of mutual trust that exists between investor and entrepreneur. A close partnership where both parties respect one another’s professionalism, competence and moral character supposedly provides the best foundation for business success.

A Maastricht University / Vlerick Business School study explores how perceptions of trust between angel investors and entrepreneurs affect the angel’s perceived venture performance through data collected from surveys of the lead entrepreneur and angel investor in 54 Belgian ventures.

This study is one of few to recognize that the perceptions and expectations of angel investors and entrepreneurs may be radically different. The degree of trust they have in each other reflects their personal interpretations of the quality of their relationship. More importantly, by examining individual trust perceptions this study shows how trust perceptions may have diverging implications for both partners.

The results show that angel investors evaluate portfolio company performance more positively as both investors and entrepreneurs see a higher level of mutual trust. These effects can be partially explained by the improved quality of information exchanges between both parties as a consequence of their higher trust perceptions. Even after controlling for this effect though, the study finds that angels’ trust perceptions still positively affect perceived venture performance. The authors claim this may be due to angels having a more positive attitude towards the entrepreneur.

The most surprising finding of the study, however, is that entrepreneurs perceiving more trust between themselves and their angel leads to more negative evaluations of their venture’s performance by the angel. The authors argue that when entrepreneurs have a greater perception of being in a strong trusting relationship, they may have more incentives to protect their trusting bond with their investors. As such, they may become locked into patterns of expected behaviours and become more rigid in their decision-making in order to protect their trusting relationship with their investors.

Together, these findings point to the benefits as well as threats that come with the presence of strong trust in entrepreneur-angel investor relationships.

Source: “Trust between entrepreneurs and angel investors: exploring positive and negative implications for venture performance assessments(Journal of Management). By professor Veroniek Collewaert (Vlerick Business School) and professor Yannick Bammens (Maastricht University).

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