Dear Professor Breuer, dear Professor Pinkwart,
Thank you very much for giving us the opportunity to revise and resubmit our manuscript entitled “Building an equity story: The impact of effectuation on business angel investments”. Building an equity story: Effectuation explaining the increase in valuation of early stage angel investments.” We are grateful for the time and effort you and the reviewers spent evaluating our paper. The comments were thought-provoking and very helpful in improving our manuscript, and we have made significant changes accordingly.
The major changes include:
Revision of contribution to literature and practice
We have completely revised our contribution to literature and practice. We have better linked our findings to current research streams and outlined how our research adds to the existing fields. Furthermore, we have also completely revised our recommendations for practice and now provide more detail and instructions on how both angel investors and entrepreneurs can benefit from the results of our study.
Linking our work to the Journal of Business Economics
Where While our original submission was broadly aligned on with several research streams established in a multitude of business administration and entrepreneurship journals, the specific link to extant research published in the Journal of Business Economics has beenwas too weak. We now have included several publications articles published in from the Journal of Business Economics from over over the past decade to outline that our work fits well into the fields that this journal has coversed.
Addressing potential data limitations
We have now described our approach and reasoning for our dependent variable of valuation increase and as well as the data collection process in greater more detail to mitigate a potentially limited impact of our results. Nevertheless, we highlight in our limitations section that self-reported data maymight involve entail a self-selection bias as we have gathered used data gathered from angel investors.
The following pages provide our thoughts on each comment and show how we responded to each one in the revised manuscript. We hope that we have addressed your criticisms and suggestions to your satisfaction and look forward to a continuation ofing this process.
Sincerely,
The authors
Response to Reviewer #1:
Comment 1: [Suggestion] one is related to page 11 where the sign for the negative effect has to be also typed negative and not positive.
Response 1: Thank you very much for your attentive indication. Of course, the negative sign in the text had the wrong direction and has been corrected. We apologize for this inaccuracy.
Comment 2: The second suggestion is referred to the selected literature. Due to the fact that the study is focused on BA from German speaking countries a very early contribution which was published in ZfB/JBE by one of the most famous practitioners could be added (Oetker, R. (2003): Erfahrungen mit innovativen Start-Ups aus Sicht eines Business Angels). He gives in his article deep insides in the action radius and means of BA for start-ups.
Response 2: Indeed, Oetker’s (2003) publication is one of the important seminal works related relating specifically to the German business angel scene. We have added tThe publication has been added to the article’s literature and considered consider it in the article’s argumentationour rationale, especially with regards to the overview of business angels’ value-added activities on page 54. Furthermore, we have conducted a repeated literature review of entrepreneurship research in the Journal of Business Economics to ensure that we do not missinclude all further relevant works. The revised manuscript now includes presents several references regarding on research publications from shed in the Journal of Business Economics from over the past decade. With this, we intend to to warrant a correct positioning position our study correctly into extant business administration and entrepreneurship literature.
Response to Reviewer #2:
Comment 1: I recommend you to moderate or lessen your argumentation that the post-investment phase is under researched as your analysis also considers the decision making phase which is part of the selection and investment phase.
Response 1: Thank you very much for pointing this out. On the one hand, it is certainly true that business angels’ decision-making preferences for effectual (or causal) patterns also affect their pre-investment decisions. On the other hand, this paper examines an outcome of their decision-making patterns, which is specifically related to their early post-investment phase. The post-investment phase of angel investments is in many aspects still a black box (Collewaert & and Sapienza 2014); moreover, and especially an appropriate success measure for angel investments is missing for that this phase is missing. Venture valuation represents an important aspect of early -stage investments, but has so far largely been neglected in academic research on business angels (Collewaert & and Manigart 2016). Hence, we set placea strong focus on the post-investment valuation performance, which is affected by angels’ decision -making styles. Nevertheless, you are right in your remark, that their decision-making style does also affect also other phases aside the post-investment phase. Hence, to reduce potential misconceptions, we have adapted our argumentation in the wayas follows: that we have screened our paper for lines of argumentation which emphasizesing post-investment angel behavior and, have reduced the exposure of such argumentation. and iInstead, we now emphasize the aspect of performance in the early post-investment phase, which is affected by angels’ decision-making. In response to your comment, we have revised the structure and the wording in our abstract, introduction, theoretical foundation, and hypotheses sections. In particular, we have rewritten our introduction section to remove ambiguities in our argumentation early- on.
Comment 2: In chapter 2.2, 5th paragraph, your write “first revenues or even market entry have yet to occur”. If I understand you correctly, you mean that first revenues and market entry have not occurred so far.
Response 2: Yes, you are correct and to avoid potential misconceptions, we have clarified this paragraph in the following way on page 4: “[…] in which the venture may not have realized first revenues or may not even have entered the market where the venture may not have realized first revenues or may not even have entered the market yet.”
Comment 3: In chapter 3, 1st paragraph, you cite Politis (2008) and different value creation measures. I recommend you to look for further frameworks beyond Politis (2008) as there are some value creation measures missing, e.g. how about operative support. Maybe you can have a look at the venture capital literature.
Response 3: Indeed, operative support is a very important non-financial post-investment contribution of angel investors, which is not explicitly mentioned in Politis’ (2008) framework. We considered your suggestion by integrating the following added-value frameworks in our argumentation on page 5:
- Prowse (1998): Arranging Arrange additional financing;, hire top management, ; recruit board members, ; provide operational support, ; evaluation ofe capital expenditures, ; development of long-term strategy
- Brettel (2003): Engage in cCoaching, networking, know-how transfer, strategy development, capital acquisition, personnel development
- Oetker (2003): Engage in cCoaching and, networking towards with customers, partners and investors;, providing market and industry information and know-how; provide, operational support in functional areas
Comment 4: In chapter 3.4, you argue that BAs invest rather driven by their gut feeling. At this point I would add the fact that the team or entrepreneur (human capital) is probably the most important criteria BAs consider in their investment decision.
Response 4: Thank you for highlighting this. To support this line of argumentation, we follow your suggestion and have added several sources that list identified investment criteria, including the team/founder as an important criterion. The new wording in this argumentation on page 7 is as follows:
“As most of business angels’ identified investment criteria appear to have a rather soft and subjective character (Brush et al. 2012), such as entrepreneur/team (Brettel 2003; Maxwell and Lévesque 2014) or customer/market attractiveness (Brettel 2003; Maxwell et al. 2011), surprises in the post-investment phase are likely to occur, both on a micro- (investor-entrepreneur) and on a macro-level (firm-market).”
Comment 5: In chapter 4.1, table 1, I would like to the mean, median and standard deviation of your descriptive statistics. I assume that especially the standard deviation might be high.
Response 5: We have added mean, median, and standard deviation to our sample description and have adapted table 1 accordingly.
Comment 6: In chapter 4.1, you describe in the 3rd paragraph, the problem of the self-selection bias. From my perspective, your sample has a bias in terms the selection of ventures. If we consider the meta study of Zacharakis and Meyer (2000), 35 to 55% of VC investments fail, which is higher significantly than you sample. This is also supported increase in valuation which appears to be relatively high for Germany. The studies you cited have another geographical focus. Especially the US has much higher valuations than European countries like Germany. Hence, another approach would have been that the BA has to fill out the questionnaire for one of this best and one of his worst investments to avoid this type of bias. As this aspect is a major issue of this paper from my perspective, we have to be careful regarding your results and the implications you made from it.
Response 6: We appreciate your comment. Selection biases represent a threat risk for any kind of research that relies draws on self-reported data; and interpretations of such results should always be treated with caution. Although this paper also relies on self-reported data, we have taken several steps to minimize potential threats. You are right that the literature on venture capital investments, and especially your reference, reports higher failure rates. The mentioned literature is, however, not necessarily directly comparable to this sample. The sample in the study by of Zacharakis and Meyer (2000) consists only of investments by institutionalized venture capital firms (VCF), which differ in some respects substantially from private angel investors. One of these aspects is that private angel investors experience a much less skewed return distribution compared tothan VCF, meaning fewer losses, but also fewer high-return investments (Mason and Harrison 2002). This is mainly due to VCFs’s funds character, which forces them to run a portfolio investment approach and, that must to deliver a certain return after a determined time periodtimewhere only one or very few investments have to be a major success and compensate the much larger share of unsuccessful investments. Our sample delivers yields quite a similar picture to the one reported by Mason and Harrison (2002). The here reported portfolio returns in our sample indicate that overall, only a small proportion of investors has have experienced a very high share of losses, and only a small proportion of investors has have experienced a very high share of successful exits. The individual deals, which are at the center of analysis in the paper, cannot be compared to overall portfolio performance. This is, due to the specific criteria based on which the investors had to select the investee business on which they had to report the data.
The precise instructions on selecting the venture to be examined also left respondents only limited room for a subjective selection of a better or worse performing investment. The questionnaire instructed respondents to provide data only on their the last of their investments, that has received subsequent external follow-up financing in a subsequent financing round. Furthermore, respondents first had to provide general company data unrelated to firm performance; only then, they were asked, before having been asked to provide performance data. This approach should aimed to increase objectiveness and comparability amongst the reported venture performances.
In our opinion, gGiving the investors the choice to between selecting both one of their better and one of their worst performing investments in our opinion may provide a useful approach for future research. Yet, researchers using such an approach need to keep in mind that examining a higher n increased number of investors’ past investments can could reduce the response rate. It is very time- consuming for an individual to recapitulate the necessary data for additional several projects. Hence, despite the trade-off in regarding bias -reduction, we selected the chosen approach to increase the chances to successfully run the survey and collect a set of entirely new data on investment valuation between two financing rounds. Where our original submission has been lackinged detail in the description ofn our considerations regarding the approach on to collecting valuation-related data, we have now added these this information in the respective section on the dependent variable on page 9.
Nevertheless, you are of course right that the study, despite of all precautions, still contains a threat risk of self-selection bias, one of them also being the our study’s focus on business angels from the DACH countries. We therefore now emphasize this even stronger in the paper’s limitations section:
“As outlined earlier, there is a certain risk of certain biases, a non-response bias and a self-selection bias in particular. Although several measures have been taken to reduce the risk of common method and self-selection biases, the results of this study should be interpreted taking into account its limitations. It relies on self-reported data originating from angel investors in the DACH area. Hence, the conclusions drawn from this study—especially with regard to the reported valuations (e.g., compared to valuations in the Anglo-Saxon world, which are typically higher)—must be treated carefully, always bearing in mind its setting and context.“
· [example 1]
· [example 2)
Comment 7a: In chapter 4.2, you describe your dependent variable. Overall, I think the variable is well chosen. However, you might think about the idea of multiple success criteria, e.g. sales or employee growth. The venture capital or private equity has already shown that different value creation measures also impact different success measures. This might increase the depth of your analysis and offers further facets of your results.
Response 7a: Thank you very much for the overall appreciation of our success measure. The Integrating idea to integrate further success measures in addition to increase in valuation, in our opinion, would not does represent a gooddoes represent a good way approach to increasinge the depth of our analysis, however comes with some critical restraints in our case. As the focus of the study is the valuation aspect, we aspired to makeaimed to en sure that the response rate on that item is as high as possible. Extensive pre-tests and discussions with business angels prior to the actual , which were conducted before we started our survey, revealed that most angels could not very well recall other venture-specific performance indicators (such as sales or number of employees) for multiple points in time very well. FurthermoreHence, including multiple performance indicators for venture success performance indicators in the questionnaire would increase the risk raised the threat of incomplete responses, especially in the critical valuation section.