Gut feeling plays an important role in early-stage investors’ decisions

Early-stage investors make decisions to provide seed money to a startup based on the slimmest of information about the business. Even when they conduct in-depth due diligence, they receive very little tangible data on the product or service (because there is often not yet even a prototype) and they do not formally assess the market growth possibilities (because the markets may not yet be known). Early stage investors often cannot rely upon the models and analytic tools taught in finance courses, and yet this type of investment is an increasingly important contributor to economic growth. These investors say they rely on their “gut feel” for a business, and others have said it is based on “the chemistry” between funders and the entrepreneur seeking their money. But what is gut feel, exactly, and how accurate are these angel investors at predicting the investments that will yield the supernormal returns (ten times investment or more) they say they are seeking?We conducted a series of studies to better understand what exactly earliest stage investors are assessing in deciding to allocate money, and how accurate they are in predicting what the investors in our studies called “home runs.” We conducted three studies focused on experienced angel investors, specifically examining those who look for ventures asking between US $250,000 and US $2 million, with individual angels investing US10, 000 and US $20,000 on a per angel, per investment basis.