Decision-making style in entrepreneurial finance and growth

Abstract

Comparing one hyper-growth venture with one moderate growth venture, we show that growth paths critically depend on the founders’ capability to leverage BAs’ and VCs’ financial and cognitive resources in an ongoing process of interaction. Dynamically matching specific entrepreneurs’ and investors’ decision-making styles is critical for shaping heterogeneous growth paths, as investors and entrepreneurs interact. Specifically, sharing a predictive decision-making style among VCs, BAs and entrepreneurs facilitate mutual communication and shared understanding in the joint pursuit of ambitious growth targets. To the contrary, matching non-predictive and purely control-oriented entrepreneurs with BAs featuring an identical decision-making style locks the venture into a moderate growth trajectory. This has practical implications for entrepreneurs searching for the adequate funding strategy, and for equity investors in their assessment of entrepreneurs’ cognitive profiles.

Plain English Summary

Decision-making style in entrepreneurial finance and growth: how matching predictive entrepreneurs with predictive VCs and business angels boosts venture growth. Predictive decision-making boosts strong venture growth when shared by entrepreneurs, business angels (BAs), and venture capitalists (VCs) alike. Purely control-oriented entrepreneurs get locked into moderate growth when teaming up with control-oriented BAs, unless they dynamically adapt their decision-making style as a result of their interaction. Matching of decision-making styles appears hence to be crucial to sustain growth. Decision-making styles are not necessarily static, and the various actors may adapt their approach to changed circumstances. Certain BAs may play a prominent role in the process of change. Dynamic matching is a relevant avenue for future research. Our findings have also practical implications for the various actors in the field of entrepreneurial finance. Investors targeting especially strong growth should team up with highly predictive entrepreneurs only.

Appendices

Appendix 1. Summary of source content analysis and examples

Main concepts	Investment process		Exemplary
	Quadro	Primo1D
Decision-making style
Control oriented	35	11	“VCs are used to managing funds. They wanted to apply to Quadro the same methodology, traditional, stupid and heavy that the funds use when they invest. And their goal is short-term profitability. I think the main difference is that BAs favour the long-term. 7 years to 10 years. The BAs are not in a hurry on the contrary, they want to accompany over time. While VCs, their goal is profitability. And every year, they have to show the results of their participation” (Quadro - BA representative, 2014) “The question for us at that point, because we couldn’t do it with them [the VCs], was “how can we run this project with what we have?” So, we changed our strategy and modified our initial fundraising project. We positioned ourselves on the Medtech project [the instrument] at €750” (Quadro - CEO/Co-founder, 2014)
Predictive	11	32	“I’m used to doing budgets and keeping an eye on spending. It’s an element of visibility that we need to give our shareholders” (Primo1D - CEO/Co-founder, 2015) “For the VCs, there is a double challenge: at first there is the technological challenge, then the commercial challenge and then the question arises: can this company value itself enough to make investors win multiples? Because we [VCs] are judged on our TRI and if we do a weak TRI, the financial model will not work. See, if it takes ten years, twelve years to liquidate our stakes in a rather long model, it’s a financial failure. Quadro still has a lot to prove to interest VCs” (Quadro – VC CEO of Sofimac Partners, 2015) “I don’t make any differences between the VCs and us [BAs]. In the study or due diligence phase, we all seek to identify and rationalize risks. We are all in an investment perspective, bets on the future (Primo1D - BA representative, 2015). “The particularity of this project, -and what made it interesting for certain BAs and, which led to some form of adherence-, is that BAs may have a significant place. Given the stakes and the amounts involved, it was out of the question for us to be just followers […] We took advice from iSource which invested pari passu at our side and adopted for this deal their operating modes in terms of investment methodology which, it seems to me, is closer to VCs than BAs” (Primo1D - BA representative, 2015)
Perceived growth and growth path
Growth potential and growth path	17	33	“I would say that both the strength of the team, its experience on the one hand, the clarity of the growth prospects and the intention of strong growth of the team on the other hand, seemed to us to be very interesting and so we decided to select this project” (Primo1D - VC RAC, 2015) “We perceived the high growth potential, and we wanted to help the company to grow and go international” (Primo1D - VC CEO of Sofimac Partners, 2015). “The investors are also anticipating a third fundraiser within 18 months to support the expected growth and extend more broadly on a global scale” (Primo1D - La Tribune, 15 mars 2019). “2016 was a pivotal year in terms of growth, I think the company is in the most difficult part of its existence, even after 7 years” (Quadro – BA representative, 2017) “What is Quadro’s growth potential? What is the CEO aiming for: 10 machines? This cannot interest a VC” (Quadro – VC-CEO of Sofimac Partners, 2015)
Interrelations
Interactions Entrepreneur/BAs/VCs As a result of matching or mis-matching decision-making styles	27	78	“We were looking for €2-3 million. We presented our case to the VCs at the end of 2010, but we quickly realized that they weren’t ready. They were contacted too early in the company ' s maturity” (Quadro - CEO/Co-founder, 2014) “The founder changed strategy […] If you present that to an institutional investor, he’ll say, “but hang on … the first two- or three-year cycle was unsuccessful, and he’s putting money in to restart a new R & D cycle using the [same] technology but on another product!” It was problematic because of that” (Quadro - VC-CEO of Sofimac Partners, 2015) “The approach is to talk with a lot of people, to talk with other start-ups, investment funds, angels to make them tell their stories” (Primo1D - CEO/Co-founder, 2015) “The arrival of iSource, which allowed the BAs to structure an interesting team to conduct due diligence and challenge the entrepreneur; the VCs that were mobilized to raise the necessary funds. All of these elements, the conduct of the investment process and the interactions between us, convinced us all. We have been able to bring value, in tracking, in the network, at commercial ports of entry. And because the objectives are roughly kept and the growth prospects still strong that brings to the society of the value also in the follow-up of the future investments” (Primo1D- VC CEO Sofimac Partners, 2017) “It is part of the interesting discussions we have with our investors because, if it’s continuity, it’s in the order of €5 M. If we start to dream a little more… but the strategy, we will define it together, I need advice and we will do it together” (Primo1D - CEO/Co-founder, 2017). “When we consider that there is potential, we will continue to help them. In the case of Primo1D the company is developing very well, it needs to invest, to go international and there we will help it to develop. And so we decided that we had to integrate investors with this capacity in the second round to be able to support this company in the long term. That’s why we’re doing a syndication” (Primo1D- VC CEO of Sofimac Partners, 2017)

Appendix 2. Main figures of the two companies

	PRIMO1D			QUADRO
Balance sheet (Eur)	31/12/2018	31/12/2017	31/12/2016	31/12/2018	31/12/2017	31/12/2016
Fixed assets	3,424,933	3,014,992	1,781,888	1,836,695	1,493,330	1,072,967
Current assets	5,572,603	1,964,672	2,600,838	3,757,939	3,691,054	3,274,014
Total assets	8,997,536	4,979,665	4,382,726	5,594,634	5,184,385	4,346,980
Capital	5,001,816	677,549	577,720	1,561,975	1,413,161	1,609,307
Long-term debt	2,080,166	2,207,661	2,416,066	2,641,496	2,575,672	1,966,369
Current liabilities	1,915,551	1,936,455	1,388,939	1,352,185	1,142,103	771,304
Total liabilities	8,997,536	4,979,665	4,382,726	5,594,634	5,184,385	4,346,980
Working capital and cash
Working capital	3,655,291	26,304	1,206,429	2,422,660	2,515,741	2,615,672
Working capital requirement	−513,356	−1,003,291	−367,947	1,681,095	1,313,288	1,530,524
Net cash	4,168,647	1,029,595	1,574,376	741,565	1,202,453	1,085,148

1. Source: DIANE Database