D81 - Criteria for Decision-Making under Risk and UncertaintyReturn

Does an early-stage startup have future potential or not? This is a question that many investors or start-up appraisers ask themselves. A qualified answer to this question can be obtained by learning how and why experienced business angel investors, who are those who invest substantial sums in early-stage start-ups, make empirical decisions. In this article, we identify the key signals that are decisive for Mr. Jiří Hlavenka, a experienced Czech angel investor in IT sector with a history of more than 50 invested start-ups and several thousand analyzed investment opportunities. The results show that the angel investor’s decision is primarily a “bet on people” – his decision to invest in an early-stage start-up is most influenced by the specific set of skills and abilities of the founder(s), namely: (i) the ability to execute a business, (ii) being a good leader, (iii) being a good merchant, (iv) ability to build a team, (v) all-round versatility, (vi) carrying a strong vision. The findings of this article may be of interest, among other things, to appraisers, investors who estimate the future potential of new start-ups, or start-up founders who use the investments themselves in the early stages of their business.

The presented paper aims to point at the broader context of valuation using the methods of risk-adjusted discount rates (RADR) and certainty equivalents (CE), respectively, when dealing with negative risk cash flows. The article discusses different concepts of risk and uncertainty, presents an overview of the research (literature) on risk adjustment and discounting methods applicable on future uncertain cash flows published over the past 50+ years, and also addresses how the methods of certainty equivalents and risk-adjusted discount rates interlink and relate to the concept of utility function. The article concludes with a call for caution and critical view when the universally adopted RADR method is applied in valuation of negative risk cash flows (expenditures).