Working papers

New venture investment decisions reflect misvaluations as many deserving proposals are rejected, while most invested proposals fail to provide the required financial returns. This suggests that investors overvalue and undervalue investment proposals. We have used the arguments of dual process theory and salience theory to explain the cause of misvaluations. An experimental setup is used where the treated group is given time constraints to make the investment. Results show that investors under time constraints overvalue investment proposals, while reference-based comparison of salient information signals results in undervaluation. Results further show a significant impact of time constraints on the reference for comparison of proposals. Investors under time constraints consider only the last proposal as a reference to compare salient information signals, in contrast, they consider information from multiple previous proposals in the absence of time constraints. This study provides the specific source of misvaluations as per the context of overvaluation and undervaluation of new venture investment proposals.

Keywords: New ventures, Investments, Misvaluation, Salience theory, Dual process theory

New venture investment decisions have gained much attention from researchers in recent times as these investments play a critical role in determining the performance of new ventures. Researchers have explored a comprehensive list of information signals significantly affecting these decisions. However, there is a lacuna of research exploring the role of information signals in the decision process, which has limited the understanding of new venture investment decisions. This article explores the role of information signals in new venture investment decisions using Herzberg's two-factor motivation theory lens. We categorize information signals as the source of satisfaction and dissatisfaction. To test our hypothesis, we utilized a mixed-method approach and conducted two studies. First is a qualitative study that analysis the interview transcripts of 23 angel investors. The second study uses a quantitative approach with an experimental setup where 336 business graduates appraise investment proposals. Both studies show that information signals related to risk coverage are associated with dissatisfaction. Whereas information signals related to return potential are associated with satisfaction. We provide quantitative evidence of loss aversion among new venture investors as the absence of risk coverage creates dissatisfaction while perceived return potential motivates investment.

Keywords: New venture, Investment decisions, Information signals, Signaling theory, Hertzberg two factor theory

Researchers have suggested that new venture investors rely on heuristics as investors conclude their decisions quickly. However, there is a paucity of empirical work concluding the usage of heuristics and its subsequent effect in the context of new venture investment decisions. We are exploring the presence and the effect of heuristics on new venture investment decisions using an experimental setup. A balanced setup is used, where the treated group is given time pressure to make the decision. Results show that quick decisions lead to the usage of heuristics as only a subset of the available information signals is processed to perceive the probable prospects as well as to make investment decisions. The high-risk context of new venture financing reduces the significance of probable risk-exposure, and in quick decisions, investors focus only on probable return-potential. This dominance of probable return-potential motivates investors; thus, investors making quick decisions overinvest in proposals.

Keyword: Heuristics, New Ventures, Investment, Decisions, Dual process theory (DPT)