Selection and Return in Angel Investments

2002

Saras Sarasvathy Rob Wiltbank

In this paper, we argue that the decision processes used by angels and VCs differ in their cognitive content and overall logic, and that this difference impacts their returns differentially. More precisely, while VCs tend to use a causal approach based on predictive rationality, angels are more effectual and make their choices based on the logic of non-predictive control. This suggests a primary hypothesis for differentials in returns to the two types of investors – i.e., the theory of effectuation predicts that while angels may or may not obtain a higher overall rate of return than VCs, they will obtain a higher hit rate (proportion of investments that survive and succeed). The paper also provides a substantial review of extant theories of private equity financing.

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