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Chair « Finance for Innovation » NL #4 - Publications

01 juin 2020
Gilles Certhoux publishes an academic article in « Technovation »

In this article titled “Sustaining Trust to cross the Valley of Death: a longitudinal study of BAs trust evolution and outcomes”*, Vincent Lefebvre, Gilles Certhoux and Miruna Radu-Lefebvre seek to explain how, why and with what consequences Business Angels (BAs) trust in the entrepreneur affects their decisions to invest, reinvest or withdraw funding in the “Valley of Death” (VoD).

Drawing on BA literature, they define them as providers of early-stage capital, thus taking on the major economic mission of filling the funding gap between initial start-up financing and financing by venture capital. They do this by investing their own money along with non-monetary resources such as knowledge, experience, mentoring and contacts in unquoted companies with which they have no family connections 
However, the funding gap between the demand and supply of early-stage capital is still present. This funding gap is referred to as the “Valley of Death”, a label metaphorically describing the most probable outcome of start-ups unable to attract funding during the “nebulous phase” or “corridor” between research & development and the commercialization of new products and services  
Recent research acknowledges the role of finance providers such as BAs in enabling start-ups to cross the Valley of Death through continuous support, such as reinvestment or recommendation to other investors 
This study addresses two questions: 

  • How and why does the BAs trust in the entrepreneur evolve over time, from investment to post-investment and then exit?
  • How does evolution of BA trust affect their decisions to invest, reinvest or withdraw funding during the VoD?

Based on an inductive theory building process, they retrospectively studied the investment and reinvestment process of two French start-ups operating in the IT sector (contrasting cases of failure for startup A and for success for startup B), over a period of two and nine years, respectively. They selected the two case studies within a business angel network of the West of France, comprising 46 members. This choice is justified by the fact that one of the authors has acted as a BA for almost 20 years in the region and was a member of this network since its creation, in 2007.
Overall, their perceptions and evaluations regarding the entrepreneur of Start-up A indicate that he was able to build BAs trust during the initial formal meetings by showing competence and receptivity to feedback, but that he rapidly and repeatedly damaged BAs trust by showing a lack of managerial ability and an unwillingness to delegate, and he finally destroyed BAs trust by lying to them, which led to the BAs decision to withdraw funding and exit. 
On the other hand, the BAs perceptions and evaluations regarding the entrepreneur of Start-up B indicate that he was not only able to build BAs trust during the initial formal meetings by showing relevant experience and expertise, but also that he was committed to sustain BAs trust by showing consistency, receptivity and a constant openness to be “coached”, which finally led to BAs reinvestment decisions at two occasions, then to the decision to recommend the entrepreneur to VCs.

This study has practical implications for BAs and entrepreneurs.T
This research may enhance the BAs ability to understand and manage the factors involved in their investment and post-investment decisions, and thus improve their capacity to identify and evaluate the potential mechanisms and consequences of their decisions. For entrepreneurs, the main implication of this study is that it helps them understand how important it is to build BAs’ trust not only at the beginning of their relationship, but also throughout its duration. Trust is not a stable resource, but rather a subjective perception that must be constantly built by demonstrating competence, by showing management capacity, by performing at the expected level, and by being open and receptive to BAs’ feedback and recommendations.
This study also raises entrepreneurs’ awareness about the BAs’ trust threshold: a critical moment when entrepreneurs repeatedly damaged BAs’ trust or even destroyed it, so that they are at risk of losing investor support. It is at this moment that entrepreneurs must be particularly vigilant to strategically implement trust-repair behaviours aimed at (re)building BAs’ trust. By doing this, they may both access further financial resources from BAs and gain BAs’ support and recommendation to gather additional financial resources from new investors, such as VCs.


* LEFEBVRE, V., CERTHOUX, G., RADU LEFEBVRE, M. (2020) . Sustaining Trust to Cross the Valley of Death: A Retrospective Study of Business Angels' Investment and Reinvestment Decisions, Technovation

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