The document explores the concept of trust in informal venture capital investment decisions. It finds that business angels primarily rely on calculus-based trust when initially screening opportunities, assessing factors like risk, utility, and entrepreneur competence. While the coordinator plays a role in enabling swift trust, further research is needed on how knowledge-based and identification-based trust become more important later in the investment process as relationships develop. The framework of swift trust appears useful for understanding the interplay between trust and cooperation in informal investment decisions.

1. The Role of Trust in the
Informal Investor’s Investment
Decision: An Exploratory
Analysis

2. Objective of Research
• To explore the relevance of the concept of
trust to the analysis of the informal
venture capital market
• Explored as a part of a wider study of
information
sources,
reliance structures
networks,
and

3. Trust
• Trust: A means of speeding decision-making and
negotiations by reducing transaction costs
under conditions of risk
• Trust plays a major role in analysis of informal
venture capital market
• In the entrepreneurial context, trust has been
identified as a major lubricant for cooperation
to arise
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4. Situational Domains in the Informal
Investment Decision-Making Process
DOMAIN
DESCRIPTION
Screening
Decision to pursue initail awareness of opportunity
Review of business plan
Decision to reject/follow up
Assessment
Evaluation of merits, Degree of confidence
Evaluation
Reaction to entreprenuer team,Decision to reject or
enter negotiations,Increase in financial return factors
Negotiations
To invest or not to invest,Issue of deal structure and
pricing
Involvement
Decision to become involved or remain handsoff,Decisions on level of involvement
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5. Swift Trust
• Emergence of trust relations in situations
where
– the individuals have a limited history of working
together & limited prospects of working in future
– are involved in tasks that are often complex and
involve independent work & have deadlines
– tasks are non-routine and not well understood
• Exists in temporary group situations
• Made possible in presence of a contractor
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6. Importance of a Coordinator
• Coordinator knows the other individuals in group
• Already formed a trusting relation to each member in
group in advance
• Swift trust to come about as a result of assessment
of the trustworthiness of the coordinator
– Only
non-situation
specific
individuals in the group
– A rather ‘stronger’ swift trust
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link
between

7. Other Trust Types
• Calculus Based Trust:
– Formed on the basis of what one sees to get out of the
relationship - difference
• Knowledge Based Trust:
– Formed on the basis of shared knowledge of product or
market situation - agreement
• Identification based Trust:
– Formed on the basis of high degree of identification with the
wishes of the other party – mutual sharing of values
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8. The Relation: Swift Trust &
Other Trust Types
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9. Swift Cooperation Criteria
Individual’s perception of:
1.
2.
3.
4.
5.
Utility: Potential economic value
Importance: Potential non-economic value
Risk: Potential loss
Competence: Professional Ability
Coordinator Judgment: Coordinating
Party’s ability

10. Propositions
• P1: The greater the perception of utility, the greater the
possibility of trusting, cooperative behavior
• P2: The greater the perception of importance, the greater
the possibility of trusting, cooperative behavior
• P3: The greater the perception of risk, the less the
possibility of trusting cooperative behavior
• P4: The greater the perception of competence, the
greater the possibility of trusting, cooperative behavior
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11. A Protocol for Indentifying Trust
and Cooperation
• Data was collected as part of wider study of
decision making process of business angels.
• Focus of study was on the initial screening
stage when business angels become aware of
investment opportunity.
• The
study
methodology
used
verbal
protocol
analysis

12. Verbal Protocol Frequency
Analysis

13. Trust and Investment
Decisions
• Nine in ten investors rejected the proposal as an
investment opportunity.
• Shows (93% investment proposals received by business
angels are rejected)
• These decisions were based on time spent on reviewing the
proposal.(Avg time – 11.25 minutes)
• The result of verbal protocols analysis can be summarized
under:
 Evidence of cooperation
 Evidence of trust
 Nature of the statement type

14. Evidence of Trust
• All references to trust issues by
investors in this sample refer to
calculus-based trust
• Calculus based trust as most common
form of trust in business relationship.
• In this stage investors look for reason
to reject and opportunity

15. Evidence OF Cooperation
• Three quarters of the thoughts segments coded in this
analysis relate to five dimensions
 Utility
 Importance
 Risk
 Competence
 Coordinator judgment
• Thoughts segments are classified to reflect the specific
context of the investor comments.

16. • Investors
thoughts
are
dominated
by
comments about the low perceived competence
of entrepreneur team.
• Risk account for almost 15% of thought
segment
coded
and
20%
of
the
swift
cooperation comments in particular.
• The issue of coordinator judgment is of
considerable importance in the initial screening
stage
• Judgment is made on basis of inferences and

17. Nature of Statement Type
• Informal investors make decision in the situational domain
primarily on basis of preconceptions and inferences.
• Informal investors are not systematically seeking out
additional information to assist in coming to a decision in
this stage
• Preconceptions are more likely to be negative than positive
at early stage.
• Investors perception of market related factors may play a
particular role in this process.

18. Swift trust and the Role of
coordinator
• The evidence suggest that investor or prospective investees do
place as considerable reliance on the coordinator providing them
with information of a kind and in a way that enables them to
from judgments and indentify cooperation thresholds.
• The role of the coordinator in the informal investment decision
therefore requires the development of trust in two sets of
actors:
1. trust in promoters of the investment
2. trust in source of information on this
(with realization that the latter will itself influence the former)

19. Implications of further
Research
The exploratory research discussed in this paper does suggest that
it is possible to extend the current conceptualization of swift
trust to incorporate three advances.
1.
The formal distinction between trust and cooperation as
separately identifiable influences on business behavior
2. The identification of swift trust and swift cooperation bases
for decision making in time constrained and only indirectly inter
personal contexts.
3. Identification of specific roles of coordinator judgment in
shaping trust and cooperation thresholds in these investment
decision-making domains.

20. Based on the initial exploration of the application of the swift
trust concepts to informal investment decision making domains,
we can identify a number of key propositions around which to
structure further more research.
• PR1: Calculus based trust will dominate investor investee
relationships in all decision making process.
• PR2: knowledge based trust and identification based trust will
become relatively more important in later situational domains of
the
decision
making
relationships develop.
process
as
investor
entrepreneur

21. • PR3: The relative importance of each of the three trust types in
investor coordinator relationships will vary according to the type
of coordinator: informal referral sources such as family friends
and business associates will be relatively more likely to depend
on knowledge or identification based trust than formal referral
sources such as business angel networks.
• PR4: Calculus based trust will be relatively less important than
knowledge- or identification-based trust in situations where an
investment opportunity is considered than where it is rejected.
• PR5: Even in the situational domain 1, where calculus based swift
trust dominates, the decision to proceed with an opportunity to
the next domain will be relatively more reliant on knowledge
based trust.

22. • PR6: Measures of utility (upside potential) will become relatively
more important than the measures of risk (downside potential)
as the investment opportunity movies from early to later
situational domains.
• PR7: while coordinator judgment is important in early situational
domains, its importance will fall once the initial reject/proceed
decision has been made by the investor
• PR8: investor preconception and inferences which dominate in
early situational domains will be replaced in a relative
importance by questioning an action statement types in later
situational domains.

23. Conclusion
(The Role of Trust in the Informal investor’s Investment decision)
• The building of trust relationship between the entrepreneur and
the informal investor appears to be essential for successful
capital investments.
• Business angels trust in the entrepreneur is determined in the
first instance by an assessment of the proposal.
(be it any of
the 3 trust types)
• Numerous factors are taken into account by Business Angels
when assessing investment opportunities are
1. Risk 2. utility 3. importance of opportunity 4. perceived
competence of entrepreneurs
• Swift trust may or may not develop in a context mediated by a

24. • Overall therefore, the swift trust
framework proposed here appears to
allow accurate Identification of
different trust types and appears to
provide the basis for uncovering the
interplay between cooperation and trust
in the informal investment decision
making process.