The Perception of Risks and Uncertainty in Innovation Finance

Arthur-Annobil, Kweku (2022). The Perception of Risks and Uncertainty in Innovation Finance. PhD thesis The Open University.



This thesis investigates how the perceptions of uncertainty by investors in early-stage ventures affect their investment decisions. Uncertainty is fundamental to entrepreneurship and innovation projects. It is the ability of entrepreneurs and investors to understand and respond to uncertainty in the business environment that brings forth innovative projects. However, very little has been done to understand the role of uncertainty in the decision-making of early-stage investors. The thesis thus addresses this gap in a two-part sequential mixed-methods study.

The first part is a qualitative study that seeks to understand how business angels think about uncertainty. Findings from the qualitative study suggest that in general, investors do not think about uncertainty in terms of probability of events occurring as pertains in the ambiguity aversion literature. Investors think about uncertainty in terms of missing or incomplete information. The second part employs a policy capturing experiment that addresses how investor characteristics affect perceptions of uncertainty and how these perceptions affect investor decisions. The design of the experiment is partly based on findings from the qualitative study. The findings from the second part suggest that while investing experience has a negative moderating effect on investor perceptions of uncertainty , entrepreneurial background and familiarity with venture industry have no effects. Additionally, investor perceptions of uncertainty mediate the relationship between business information cues and investor decisions. The thesis makes empirical, theoretical, and methodological contributions that have implications for practice. For example, inexperienced business angels can work closely with their more experienced counterparts to learn how they deal with uncertainty. Business angel networks can facilitate this through angel education programmes, networking events, and mentorship programmes. Also, entrepreneurs may need to use a targeted approach in finding the right investors for funding.

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