Scandinavian Working Papers in Economics

Working Paper Series,
Royal Institute of Technology, Department of Real Estate and Construction Management & Centre for Banking and Finance (cefin)

No 14/7: Mentoring the CEO or monitoring the ROI? The business angel's interrole conflict in the venture relationship.

Andreas Fili ()
Additional contact information
Andreas Fili: Centre for Banking and Finance, Postal: Royal Institute of Technology, Brinellvägen 1, 100 44 Stockholm, Sweden

Abstract: n its normal context, a mentor is a trusted senior person who provides guidance and support to the protégé by keeping the best interest of the pro tégé in mind at all times. Earlier research has indicated that business angels are perceived as men tors by venture members, especially CEOs. An argument put forward in this paper is that an in vestor does not always have the protégé’s best interests in mind and, at times, prioritizes the re turn on investment instead. In some situations, this role conflict might become severe. If the busi ness angel continues in the mentor role, the protégé might take the venture on a very costly and risky course of action, whereas if the business angel switches to the investor role and simply veto es the idea of the CEO through the authority of being a major owner, the venture might be saved from the same costly adventures, but the protégé can be severely dismayed. Presumably, switc hing from the role of mentor to that of investor in this fashion would destroy the trust he ld by the protégé that the business angel really had the protégé’s best interests in mind, and would have repercussions on the relationship for a long time afterwards. This role conflict between being both an investor a nd a mentor is explored in the paper. Based on information gathered from semi-structured face-t o-face interviews with 9 business angels, an image emerges wherein the business angel remains in the mentoring role for as long as possible, given the perceived costs. The paper suggests that in order to understand what perceived costs mean for an investor, the concept of affordable los s (Sarasvathy, 2001) is of great use.One of the implications of affordable loss for an entrepreneur is envisioning the worst-case scenario and the money lost in that case (Dew, Sarasvathy, Read, & W iltbank, 2009). For a business angel, affordable loss could mean the same: the business a ngel could picture the cost of the worst-case scenario by studying the current course of action a nd decide whether it is affordable or not. As long as the worst-case cost associated with a certa in course of action is lower than the affordable loss, the business angel will continue to fulfill t he role of mentor in support of the venture chief executive officer (CEO). However, if the cost excee ds the affordable loss limit, the business angel will switch to the monitoring role, thereby prohibi ting this course of action.

Keywords: mentoring; business angels; role conflict; relationship; affordable loss

JEL-codes: A14

34 pages, October 6, 2014

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