ATTRACTED BY FIRE: THE ROLE OF PASSION IN ANGEL INVESTING

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1 Frontiers of Entrepreneurship Research Volume 35 Issue 5 CHAPTER V. ENTREPRENEURIAL MOTIVATIONS Article ATTRACTED BY FIRE: THE ROLE OF PASSION IN ANGEL INVESTING Charles Y. Murnieks Oregon State University, USA, charles.murnieks@oregonstate.edu Melissa S. Cardon Pace University, USA Richard Sudek University of California, Irvine, USA T. Daniel White University of Tennessee, USA Wade T. Brooks Willamette University, USA Recommended Citation Murnieks, Charles Y.; Cardon, Melissa S.; Sudek, Richard; White, T. Daniel; and Brooks, Wade T. (2015) "ATTRACTED BY FIRE: THE ROLE OF PASSION IN ANGEL INVESTING," Frontiers of Entrepreneurship Research: Vol. 35: Iss. 5, Article 3. Available at: This Paper is brought to you for free and open access by the Entrepreneurship at Babson at Digital Knowledge at Babson. It has been accepted for inclusion in Frontiers of Entrepreneurship Research by an authorized administrator of Digital Knowledge at Babson. For more information, please contact digitalknowledge@babson.edu.

2 Murnieks et al.: ATTRACTED BY FIRE 130 FRONTIERS OF ENTREPRENEURSHIP RESEARCH 2015 ATTRACTED BY FIRE: THE ROLE OF PASSION IN ANGEL INVESTING Charles Y. Murnieks, Oregon State University, USA Melissa S. Cardon, Pace University, USA Richard Sudek, University of California, Irvine, USA T. Daniel White, University of Tennessee, USA Wade T. Brooks, Willamette University, USA Introduction Research is emerging that looks at both the construction of entrepreneurial passion (Cardon et al., 2009) as well as its influence in the entrepreneurial process (Chen et al., 2009, Breugst et al., 2012, Ho & Pollack, 2014). We argue it is time to extend this work into the new venture investing context to examine the assumption that investors search for passionate entrepreneurs. More specifically, we seek to investigate three primary research questions herein: 1) why is an entrepreneur s passion important to angel investors, 2) how do angel investors value tenacity versus passion among entrepreneurs, and 3) how do angel investors value obsessive versus harmonious passion? To do so, we have developed a qualitative study that examines question one above, and two conjoint studies that examine questions two and three. We focus on angel investors (wealthy individuals who invest their own personal funds into new ventures) because previous research shows that passion generally matters more to these investors than to venture capitalists (Hsu et al., 2014). Hypotheses Development Passion is defined as a strong inclination towards an activity that people like and find important (Vallerand et al. 2003). Building on the growing body of research in the domain of passion (e.g. Cardon et al., 2009; Vallerand et al. 2003), scholars are beginning to examine the role passion plays in new venture investing. Hsu et al. (2014) and Sudek (2006) both find that angel investors consider an entrepreneur s passion an important criterion during investment evaluation. This is reinforced by Mitteness, Sudek and Cardon (2012) who show that greater perceived passion results in significantly increased evaluations of funding potential by investors. All of these authors surmise that passion is important because it indicates commitment and tenacity which are necessary to make a new venture successful. Even though extant work agrees that passion should be important in the investing context, it has yet to examine why this might be so empirically. Following the theories offered by Cardon et al. (2009), scholars appear to assume passion is important because it manifests commitment to a course of action and this commitment could be crucial for persistence through adversity (Cardon & Kirk, 2015). We do not disagree with the idea that passion might be important because it could lead to tenacity. However, we are mindful of the fact that passion and tenacity are not equivalent constructs. Whereas passion is a strong inclination towards an activity (Vallerand et al., 2003), tenacity is sustained action or the tendency to persist in the face of adversity (Baum & Locke, 2004; Eisenberger, 1992; Markman, Baron & Balkin, 2005). As a construct, passion does not explicitly involve persistence despite adversity, which is a key component of tenacity. In addition, although passion can lead to tenacious behavior, the former is not always an antecedent to the latter. Individuals can exhibit passion or tenacity separately, without necessarily invoking both. For example, some people display tenacity by persisting with a certain activity even though they do not feel an identity connection or great enjoyment (i.e., passion) for it. Given the distinct nature of these constructs, we seek to extend the theory around passion to Frontiers of Entrepreneurship Research

3 Frontiers of Entrepreneurship Research, Vol. 35 [2015], Iss. 5, Art. 3 ENTREPRENEURIAL MOTIVATIONS 131 determine how tenacity and passion might work separately to influence opportunity evaluation and investment decision-making. To do so, we begin with a qualitative pilot study to inform our theorizing. Qualitative Pilot Study (Examination of Passion) This pilot study was developed to help us understand, empirically, the rationale underlying angel investors search for passionate entrepreneurs. Our sample included individuals from the largest angel investing group in the U.S. Since its inception in 1997, this group has invested over $164 million in over 270 new ventures. We asked members of this group to answer one question: Why is or isn t passion important when evaluating an entrepreneur? We received responses from 79 individuals. First, we organized their responses into relevant units of analysis (Jennings et al., 2015) by bracketing phrases that linked passion to direct reasons of importance. To develop a coding scheme in an objective manner, we distributed the data to two members (one author and a research assistant) who had not been involved in the original data collection and followed a procedure termed open coding (cf. Strauss & Corbin, 1998). We read through all the responses and developed a categorical scheme whereby definitional labels were provided for each distinct type of construct alluded to in the data. An initial list of 7 codes was developed. Although our categorization of this data followed an emergent, iterative, inductive process, our analysis was guided by the outcome of interest specified in our research questions. Namely, was passion important, and if so, why? Thus, in coding, we looked specifically for answers to this question. Our summary of these codes and their frequencies of occurrence is provided below in Table 1. Some responses indicated that passion was important, but did not offer a reason why. A few responses indicated that passion was not an important criterion. In many cases, investors cited more than one reason that passion was important. As such, the total number of coded phrases sums to more than the number of individuals who responded to this question. From this table, we discern that the primary reasons angel investors cite for the importance of passion are that it 1) leads to tenacity (44% of sample state this) and that it 2) inspires and motivates others to support the venture (16%). We used these results to help develop hypotheses for our main study. Tenacity & Passion The results from our pilot study indicate that tenacity is a significant reason passion is valued by investors. This finding corroborates extant entrepreneurship literature. For example, Cardon et al. s (2009) theory of entrepreneurial passion argues that passion matters because it drives persistence in venture activities. Cardon et al. (2013) confirm that passion for founding and for developing ventures each correlate with greater persistence. This research simultaneously reinforces the idea that passion is separate from tenacity and that passion is important because it can lead to tenacious persistence. Baum, Locke and Smith (2001) find that passion and tenacity work together to increase development of competencies (skills and abilities) and enhance motivation. Baum & Locke (2004) find that passion and tenacity both lead to visions oriented towards greater growth, setting higher goals, and greater development of new resource skills. Taken as a whole, the empirical work surrounding entrepreneurial passion reinforces our finding that tenacity is important in the entrepreneurial context. As such, we hypothesize: H1: Entrepreneurs tenacity increases the favorability of investors evaluations of entrepreneurial opportunities. Even though we argue passion and tenacity are not the same construct, we still contend that passion will be important to investors. A litany of research we cited above details various studies that show angel investors value passion (e.g. Hsu et al., 2014; Mitteness et al. 2012; Sudek, 2006). As such, we hypothesize that in accordance with the findings of other scholars, angel investors will value passionate entrepreneurs more highly than non-passionate ones. More importantly, we contend that it is the Posted at Digital Knowledge at Babson 2

4 Murnieks et al.: ATTRACTED BY FIRE 132 FRONTIERS OF ENTREPRENEURSHIP RESEARCH 2015 interaction of passion and tenacity that may be of greater interest. Entrepreneurs who demonstrate both passion and tenacity are likely to be evaluated more favorably than those who show only one or the other. Formally, we hypothesize: H2: Entrepreneurs passion increases the favorability of investors evaluations of entrepreneurial opportunities. H3: Passion positively moderates the relationship between tenacity and entrepreneurial opportunities such that entrepreneurs who show evidence of both passion and tenacity will be evaluated more favorably. Obsessive Versus Harmonious Passion Just as we are mindful of the fact that passion and tenacity are separate constructs, we are also cognizant of the fact that there are different types of passion. We posit that angel investors will evaluate these differently. The dualistic theory of passion contends that there are at least two distinct types of passion: harmonious and obsessive (Vallerand et al., 2003, 2007). They are characterized by their different internalization processes. Harmonious passions are internalized autonomously, meaning the individual engages those activities willingly, without contingencies. In contrast, obsessive passions are internalized in a controlled manner, meaning the individual feels compelled to engage because feelings of social acceptance or self-esteem are tied to the activity. Harmonious passions occupy a significant but not all-encompassing space in an individual s life, which means these passions work in harmony with other activities. Meanwhile, obsessive passions generate uncontrollable urges for engagement and manifest as rigid persistence. As Vallerand and Verner-Filion (2013) put it, an obsessive passion controls the person. One key element consistent across a large body of work on the dualistic theory of passion is that obsessive passion is linked to rigid persistence at an activity (Vallerand & Verner- Filion, 2013). Whereas rigid persistence may create havoc in the daily lives of average individuals, angel investors may view this trait positively in entrepreneurs because it indicates commitment to developing the new venture. Obsessive passion has also been linked to increased aggression (Donahue et al., 2009; Philippe et al. 2010) and goal-shielding (Belanger et al. 2013) which involves suppressing alternative goals in order to concentrate on one s primary goal. Given that aggression and focus can be beneficial traits in entrepreneurial environments, these may be viewed positively by angels. Although obsessive passion has been linked to increased persistence and performance, a number of studies also highlight that it can have detrimental effects as well. Whereas harmonious passion has been tied to increased positive affect, psychological well-being and vitality (Vallerand et al., 2003; Forest et al., 2011, 2012), obsessive passion has been linked to increased negative affect, pathological behavior and burnout (Lafreniere et al., 2009; Vallerand et al., 2010). We estimate that although the rigid persistence that emanates from obsessive passion will be viewed positively in general, the more experience angels have, the more likely they are to have seen and understand how these types of passions can exert a toll on entrepreneurs over time. As such, they will know that entrepreneurs who have an obsessive passion for their venture cannot sustain their level of commitment, and will burn out or become ineffective. Experienced angels are also more likely to understand the strain obsessive passions may put on relationships and other aspects of entrepreneurs lives (Ho & Pollack, 2014; Jowett et al., 2013). Being more sensitive to these deleterious effects of obsessive passion, experienced angel investors should put less weight on obsessive passion as a key variable in their investment evaluations. H4: Obsessive vs harmonious passion increases the favorability of investors evaluations of entrepreneurial opportunities. H5: Investing experience negatively moderates the relationship between entrepreneurs obsessive passion and opportunity evaluation. Frontiers of Entrepreneurship Research

5 Frontiers of Entrepreneurship Research, Vol. 35 [2015], Iss. 5, Art. 3 ENTREPRENEURIAL MOTIVATIONS 133 Method & Results Overview To investigate our hypotheses, we employed conjoint analyses in two studies: an initial pilot study followed by a main study. The initial pilot study was designed to evaluate the relative importance of obsessive versus harmonious passion in the eyes of angel investors (H4). The main study was designed to evaluate the relative importance of passion and tenacity as well as their interaction when considered by angel investors (H1, H2, H3 & H5). We employed Hierarchical Linear Modeling (HLM) to decompose the decision policies of angel investors across both studies because of the nested nature of data from repeated measures obtained in conjoint experiments. Conjoint Pilot Study For this study, we developed a conjoint decision-making experiment that asked a sample of 43 angel investors to evaluate a series of hypothetical investment opportunities and indicate the probability that they would invest in each one. Each opportunity profile conveyed information about the personality of the lead entrepreneur, including their type of passion: harmonious or obsessive. The angel investors belonged to two prominent angel investing organizations located in Colorado and Oregon. 81% (35 of 43) of the angels were male and the mean age range was years old. On average, participants had 12.7 years of experience investing in ventures and 74% (32 of 43) reported formal education at the master s-degree level or higher. The opportunity profiles in this pilot study were constructed using unique combinations of three attributes (passion, psychological ownership, and humility) represented at two levels each. For passion, the two levels were harmonious versus obsessive passion. We included psychological ownership and humility as control attributes in this pilot study because of their demonstrated influence on entrepreneurial behavior (Hsu, 2013; Sieger et al. 2013) and potential to bias how entrepreneurs are viewed as effective leaders (Owens & Hekman, 2012; Owens, Johnson & Mitchell, 2013). That said, these variables were only included as control attributes and were not of primary interest. Our research design included a full factorial conjoint (3 attributes at 2 levels equals 8 profiles) with 6 profiles replicated for a total of 14 profiles per respondent. We developed the profiles using extant literature to create vivid descriptions of different personality characteristics (i.e. harmoniously or obsessively passionate feelings) among the hypothetical entrepreneurs. We assessed the face validity of our conjoint experiment by conducting qualitative interviews with a sample of 10 different angel investors prior to the pilot study. We also validated our instrument with a sample of 61 undergraduate students. Both groups attested to the realism of our hypothetical profiles. The dependent variable in this pilot study was a two-item measure designed to capture the likelihood the angel would evaluate the opportunity profile positively and invest in the deal and how successful they thought the opportunity would be overall (Muzyka et al., 1996; Shepherd et al., 2000). Respondents indicated their likelihood of investing on a seven-point Likert scale. This scale demonstrated satisfactory reliability (Cronbach s alpha = 0.93) and high inter-item correlation (0.88). In all, 77% of the individual decision models for the angels were significant (p<0.05) with a mean adjusted-r 2 of Further, the mean test-retest correlation for the dependent variable was 0.7 (p<0.05) indicating consistency in decision-making. This pilot study provided 602 total observations (14 observations per participants for 43 participants). Table 2 below contains the results of our analyses. As can be seen in Table 2, the main effect of obsessive passion is significant, providing preliminary support to H4. In this pilot study, angel investors preferred to invest in entrepreneurs demonstrating obsessive passion versus harmonious passion. The results for the control variables indicate that angels also preferred entrepreneurs demonstrating high levels of psychological ownership and humility. Posted at Digital Knowledge at Babson 4

6 Murnieks et al.: ATTRACTED BY FIRE 134 FRONTIERS OF ENTREPRENEURSHIP RESEARCH 2015 While these results are interesting, they are beyond the scope of the current paper. The pseudo R 2 for this model is 0.53, and the ICC is Conjoint Main Study For our main study, we developed a conjoint experiment similar in design to the conjoint pilot study (3 attributes at 2 levels each, high versus low). To select the attributes, we relied on the results from our qualitative study, as well as our conjoint pilot study. From the qualitative study, we selected the top two characteristics cited by angels as reasons why passion is important: tenacity and inspirational leadership. From the conjoint pilot, we used obsessive passion and did not test harmonious passion since the pilot study already confirmed that angels prefer the former when evaluating entrepreneurs. The sample for this study was 57 angel investors selected from the same investing group used in the qualitative study, but the data collection for the qualitative study terminated in 2011, and this data was collected in As such, we believe the possibility that results would be biased from using the same organization twice is relatively small due to the large temporal separation. In this sample, 82% of respondents (47 of 57) were male and one person declined to indicate their gender. The mean age range was years old, participants had an average of 12.2 years of experience investing in ventures and 67% (38 of 57) reported formal education at the master s-degree level or higher. The dependent variable was the same used in the conjoint pilot, except we added a third question concerning the amount of money the angel was willing to invest (Elitzur & Gavious, 2003). This scale demonstrated satisfactory reliability (Cronbach s alpha = 0.95) and high inter-item correlations ranging from.83 to.88. In all, 77% of the individual decision models for the angels were significant (p<0.05) with a mean adjusted-r 2 of Further, mean test-retest correlation for the dependent variable was 0.8 (p<0.01) indicating consistency in decision-making. In addition to the main effects, we controlled for gender, education, and self-efficacy. Our main study provides 798 total observations (14 observations per participant for 57 participants). Table 3 below contains the results of our analyses. As can be seen in the table 2, the main effect of tenacity is significant whereas the main effects of obsessive passion and inspirational leadership are not. It is interesting that investors were more concerned about the tenacity of entrepreneurs than their passion or their ability to inspire followers. This provides support for H1, but not for H2. Moreover, this casts some doubt on H4. Although obsessive passion seemed preferable to harmonious passion in the conjoint pilot study, in this study, the main effect of obsessive passion is not significant when controlling for tenacity and inspirational leadership. That said, obsessive passion is still an important factor overall, as it positively moderates the relationship between tenacity and the investors evaluation of different opportunities. This supports H3. We also note a three-way interaction, as the investing experience of the angel mitigates the positive interaction between obsessive passion and tenacity, which provides support for H5. The pseudo R 2 for this model is 0.74, and the ICC is Discussion & Implications Through our three studies in this paper, we seek to extend the knowledge surrounding passion in new venture investing. We find that angel investors look for tenacious entrepreneurs, and prefer individuals who are both tenacious and passionate. It also appears that tenacity is valued more highly than passion, or perhaps passion is desired because it is assumed to link to tenacity. This provides an avenue for interesting future research. When given a choice between obsessive and harmonious passion, the former appears more desirable to angels than the latter. This is interesting because a compendium of passion literature in psychology generally concludes that harmonious passion leads to more functional outcomes than obsessive passion. We provide some indication that context matters in determining the functionality of passion (Amiot et al. 2006). We hope that our research initiates greater conversation into how angel investors use characteristics like passion and tenacity together to evaluate entrepreneurial opportunities. Frontiers of Entrepreneurship Research

7 Frontiers of Entrepreneurship Research, Vol. 35 [2015], Iss. 5, Art. 3 ENTREPRENEURIAL MOTIVATIONS 135 CONTACT: Charles Y. Murnieks; charles.murnieks@oregonstate.edu; (T) ; College of Business, 478 Austin Hall, Corvallis, Oregon Table 1: Summary of Qualitative Data Reasons Provided for Why Passion is Important Times Cited 1. It leads to tenacity / persistence through obstacles It inspires/motivates others to support venture It motivates/energizes focal entrepreneur 7 4. It provides confidence in focal entrepreneur 2 5. It conveys knowledge about venture 1 6. It conveys the venture is valuable 1 7. It conveys entrepreneur will do the extraordinary 1 8. Passion is not important 3 9. Passion is important, but no reason provided why No response provided to question 16 N = 79 angel investors Table 2. Hierarchical Linear Modelling of Angel Investor Evaluations of Opportunities Variables Coefficient Standard Error t-ratio Intercept ** Obsessive Passion (H4) ** Psychological Ownership * Humility ** Notes: * p<0.05; ** p<0.01; N = 602 decisions nested within 43 Angel investors Table 3. Hierarchical Linear Modelling of Angel Investor Evaluations of Opportunities Variables Coefficient Standard t-ratio Error Intercept ** Main effect of Tenacity (H1) * Main effect of Obsessive Passion (H2) Main effect of Inspirational Leadership Interaction of Obsessive Passion x Tenacity (H3) * Interaction of Obsessive Passion x Inspirational Leadership Lvl 2 Interaction: Investing Experience x Obsessive Passion x Tenacity (H5) * Notes: * p<0.05; ** p<0.01; N = 798 decisions nested within 57 Angel investors Posted at Digital Knowledge at Babson 6