The Qi3 Accelerator investment evaluation process is (in)famously rigorous. We follow a defined series of steps in order to evaluate businesses against a series of criteria. My head tells me that’s all good and rational, a business-like approach. But experience tells me that many angels rely much more heavily on ‘gut feel’ to reach investment decisions. So what happens when the head and heart feel differently, and which should you follow?
It is true that the argument of using your head is strong and logical, and we should make our business decisions based on research and evidence. NESTA states that every investment should have three critical factors in place: 1) a great business idea 2) a great management team 3) great mentors. If any one of those is missing, then business angels would be better off encouraging the start-up entrepreneur to seek to improve their idea, management team or mentors before parting with cash.
But emotion will always be part of investing especially when facing convincing applicants. Recent statistics from SEI (http://www.seic.com/enUS/about/4895.htm) showed that more than two-thirds (68%) of high-net-worth individuals surveyed have let their emotions get in the way of making the best investment decisions. Additionally, Dr. Gerd Gigerenzer, social psychologist and the director of the Max Planck Institute of Human Development in Berlin, writes (http://paultrout.com/leadership/trusting-your-gut-feelings/), “… gut feelings are based on simple rules of thumb, what we psychologists term ‘heuristics.’ These advantage of certain capacities of the brain that have come down to us through time, experience and evolution, when people use their instincts, they are heeding these cues and ignoring other unnecessary information.” In other words, he argues that gut feelings help us to sense when something is afoot without having actual proof that it is.
Perhaps Dr. Gigerenzer has a point here. Looking at the statistics (http://f3fundit.com/blog/what-makes-a-good-business-angel-investment/) , approximately 80% of angel-invested businesses fail. However, if one observes angel investor activity from individuals who have been actively investing in the industry, then the failure rate drops to about 60%.
So head or heart? And before you ask – yes it’s a live case for me.