With the plethora of investment opportunities currently available to angel investors, how can entrepreneurs of start-up companies make themselves stand out from the pack? And, for that matter, how can entrepreneurs heading up small and medium-sized enterprises (SMEs) in new emerging markets hope to compete, considering they often live and work far distances from the majority of angel investors?
Some recent research on the role of perceived entrepreneurial passion may shed some light on these questions. Angel investors take a broad range of rational, quantitative factors into account when evaluating an entrepreneur. However, there is always an amount of intuition involved in making a final decision, which takes into account the passion an entrepreneur shows for her work.
source: Charlotte Spencer at www.flickr.com
To understand this influence, Richard Sudek, current president of the Orange County Tech Coast Angels network and chairman-elect of Tech Coast Angels (TCA), is co-authoring a study with Melissa Cardon and Cheryl Mitteness on the effect of perceived entrepreneur passion on angel investing. In the study, they look at the relationship between the passion that an entrepreneur displays, the passion the angels perceive, and the impact of the evaluation and funding decision for angels. The initial results of their research show that display of passion is a factor in an investment decision.
Sudek and the two co-authors of the study surveyed 150 angels in organized angel groups across the United States, asking them how important passion is and how an entrepreneur demonstrates it. The researchers coded the responses into an instrument of approximately 30 entrepreneurial behaviors that were perceived by angels to indicate evidence of entrepreneurial passion.
“When you think about passion off the cuff,” Sudek says, “you might say it is when someone is excited, displays enthusiasm, or talks loudly. It is inflection in tone and body language, but when we think about it, we have all seen passionate entrepreneurs who are not loud or extraverted. Entrepreneurs can show passion by their commitment—the money they put in or the blood, sweat, and tears. Entrepreneurship can also signal passion based on preparedness. All these are components.”1
Does this research have any relevance for SME entrepreneurs in new emerging markets? Granted, the study was conducted in a developed market (the United States), where the angel investors presumably are investing mostly (if not exclusively) in American entrepreneurs. What happens when the angel investor and the entrepreneur are NOT from the same country, and the opportunities for face-to-face contact are limited? Can the entrepreneur’s passion still play a role in the investment decision? And is it possible to show passion on-line?
Even when you can’t meet face-to-face, there are an increasing number of means to show passion in a “virtual” setting. Youtube.com is one such mechanism. According to an April 2009 survey by the Pew Research Center's Internet & American Life Project, the share of online adults who watch videos on video-sharing sites has nearly doubled since 2006. Fully 62% of adult internet users have watched video on these sites, up from just 33% who reported this in December 2006. Entrepreneurs can potentially tap into this medium to pitch their companies to potential investors. Photos are also a way to share information between people separated by physical distances.
Media such as video and photos may help transcend physical and even cultural distances, which may help entrepreneurs in new emerging markets trying to catch the eye of investors. Dr. David Matsumoto, San Francisco State University Professor of Psychology has shown that the way faces show emotion is determined by our genes (i.e.; it is hardwired and not learned) and that some major aspects of nonverbal behaviour are stable across cultures. His work is backed up by researchers like Paul Ekman, who has produced solid evidence for the universality of basic facial expressions.
However, Matsumoto also finds that the levels of control exerted over different emotions differ across cultures. Moreover, there are also cultural differences in the way expressions are interpreted. In the intensity of emotions, for example, it has been found that Asians tend to judge displayed emotions as less intense than non-Asians. So, showing and interpreting passion across countries remains a hurdle for SMEs located far from angel investors.
Sudek’s research gives some clues that there are ways to deal with these hurdles, which is hopeful news for entrepreneurs in far-flung parts of the globe. According to Sudek, entrepreneurs show passion not only via face-to-face, verbal cues, but also in their commitment and preparedness, which are both elements that entrepreneurs can express via a thoroughly worked out and well-presented business plan or business concept. This is borne out by BiD Network, a Netherlands-based foundation that sources and selects business plans of SMEs in emerging markets, and which has experience with matching the best of the crop with interested angel investors.
While a handful of BiD Network’s entrepreneurs are selected each year to travel to the Netherlands to meet face-to-face with investors during an annual marketplace, the vast majority are limited to the network’s website to showcase their plans. The investors in BiD Network take entrepreneurs more seriously if they can provide at least 10-20% of total requested financing from their own sources. BiD Network measures entrepreneurs’ passion for their business by the number of hours they dedicate to their start-ups, their determination to understand the markets they operate in, and their attention to detail, e.g., in their ability to explain what their product costing and pricing is based on. All of these are non-visual ways that SMEs can demonstrate their passion for their companies.
Another way to express seriousness of commitment in a cross-border context is to be able to communicate in a timely way. Investors need to be updated on operational and financial position on a timely basis in order to make decisions quickly should things go wrong in an investment. There is often a lack of clear information available on the operational and financial performance of SMEs in developing countries, along with a need to improve corporate governance. Most investors will seek to improve these factors early on in an investment, so that they have solid and updated information on which to base their decisions. According to Erik Peterson Regional Managing Partner from Aureos Latin America, most funds dealing with SMEs spend a considerable amount of time in the early stages of an investment getting the entrepreneur’s books in order. By providing monthly updates on the financial performance of their companies, SMEs can show that they are passionate about communicating their results, even when these may not always present their companies in a positive light.
It could be that the closer an entrepreneur is to the investor, the less 'prepared' she has to be. In order to bridge the physical and cultural distances, highly motivated entrepreneurs in emerging markets are increasingly willing to take the extra step to prove their passion for their businesses.
At the end of the day, cross-cultural differences in expressing and perceiving passion will always make this a difficult element in evaluating a cross-border investment in an SME. And, historically, 94% of angel investors like to invest close to home. Still, BiD Network is proving that it is possible for the best entrepreneurs to bridge these differences and attain financing, and no doubt, a large part of this is due to their passion for their companies. (August 3, 2009)
1 New Research: Effect of Entrepreneur's Perceived Passion on Angels' Investment Decisions (July 31, 2009) www.angelcapitaleducation.org/dir_resources/news_detail.aspx?id=203
Susan Randall-Country Research Coordinator-BiD Network
