aspect of the psychology of angel investing. Specifically, I want to
address what I consider a very ripe area of research: fundamental
attribution error in angel investing.
I observe that when angel investors follow lead investors (see the
previous blog) there are many opportunities for them to make
fundamental attribution errors. By that I mean they attribute useful,
positive personality traits to others because they observe some
apparent external condition (wealth or success).
The easiest false logic is "He is rich, so he must know how to make
money."
More subtle are assumptions like …
He is articulate …
He is skeptical…
He is cynical …
He is passionate …
He is intelligent…
… so he must make good investment decisions."
He could be a member of what we call 'the lucky sperm club' (i.e.
inherited wealth). Many times the truth is more subtle. Barry
Switzer observed, "Some people are born on third base and go through
life thinking they hit a triple." Maybe he was born on second and
barely made it to third.
My point about fundamental attribution error is that other angels
assume that the lead angel has to be capable of 'hitting a triple' or
even a home run! The reality could be the lead angel is a very
middling talent who at some point in his life was just plain lucky.
Alternatively, he may be very intelligent and very successful in his
business but not have the experience, skill, or time to do a good job
as a lead angel.
There is another source of uncertainty that exists when a syndicate is
coming together. Guys (who may be viewed as keystone investors) can
express genuine interest in investing during the early stage but elect to take a pass when the final call goes out for checks. So you thought you were in a deal with one group of people and you may find that you are in a deal with a slightly different set of investors. That small changes may significantly affect your comfort level. It may also effect the start-up's probability of survival.
Even if you are comfortable with the group that you invest with. How
superficial is the basis of that comfort? I think it is accurate to
say that relationships between most angels can be better characterized
as business associates rather than as close friends. (a ripe area of
research).
Many if not most of the interactions between angel investors can also
be characterized as infrequent and occurring in public venues (another
ripe area of research).
As a result of these two situations, most angels have very sketchy
information on the careers and capabilities of other angels. In
point of fact, the actual information they have may be significantly
less than is presented by any prospective employee on their resume.
So just exactly how much halo effect is attributed to a fellow angel
(to twist Mark Twain's words)… "just because he is a member of a club
to which I belong"?
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