Maxwell, A. L., Jeffrey, S. A., & Lévesque, M. (2011). Business angel early stage decision making. Journal of Business Venturing, 26(2), 212–225. https://doi.org/10.1016/j.jbusvent.2009.09.002
Summary
Early-stage funding is crucial for startups, and business angels (BAs)—individuals who invest their own money into new ventures—are a dominant source of that capital, especially in the seed stage. But how exactly do they decide whether to invest or not?
Maxwell et al. (2011) challenge the traditional belief that BAs make decisions by scoring a long list of attributes (e.g., market size, team, product quality) and weighing them in a logical, compensatory fashion. Instead, they find that BAs use a non-compensatory, fast and frugal heuristic called Elimination by Aspects (EBA). This means BAs look for one or more fatal flaws and quickly reject ventures that display them—no matter how strong other features may be.
This insight came from a rare empirical analysis of 150 real-world pitch interactions drawn from the Canadian TV show Dragons’ Den, allowing researchers to observe the actual decision process in action, not just rely on post-hoc interviews. They identified eight critical factors used by BAs in the first stage (selection) and discovered that if any one of these factors scored poorly, the venture was immediately rejected. Only those passing this filter were then considered in more depth—using different criteria and a more nuanced evaluation.
The Selection Stage – How Angels Eliminate Ventures Quickly
In the high-pressure world of early-stage investing, business angels (BAs) are faced with an overwhelming number of funding requests and limited time to evaluate them. To manage this complexity, they adopt what psychologists call a non-compensatory decision-making approach—in other words, instead of weighing the pros and cons of every aspect of a pitch, they look for disqualifying factors early in the process that justify rejection. This is not a flaw; it’s an efficient cognitive strategy known as “Elimination by Aspects” (EBA).
Maxwell et al. reveal that during this initial phase—often within the first few minutes of a pitch—angel investors aren’t carefully balancing strengths and weaknesses. They are instead scanning the opportunity for any single “fatal flaw” that makes the investment too risky, too vague, or too difficult to execute. If such a flaw is identified, the evaluation stops. The investor disengages mentally or physically and moves on, regardless of how impressive the other components of the business might be.
This selection logic is fundamentally different from what many entrepreneurs expect. Founders often assume that a strong team can offset a weak market, or that a great product can make up for an early-stage go-to-market gap. But angel investors don’t think this way. They are using a binary filter: either the deal clears all major red flags, or it doesn’t. In that sense, this first phase is more about risk elimination than opportunity evaluation.
Through their research—including an innovative observational study using footage from Canada’s Dragons’ Den—the authors identify eight specific criteria that business angels routinely use in this first filter. These are:
- Ease of Adoption – Investors look for products or services that are easy to understand and require minimal customer education. If the offering is too complex or unfamiliar, it raises doubts about market traction.
- Product Status – Angels prefer products that are already developed or near-market. An idea or concept that is still in the design phase without a working prototype or customer validation is often seen as too speculative.
- Protectability – Intellectual property matters. If the product can be easily copied and there is no meaningful protection through patents, trade secrets, or market barriers, angels see a high risk of competition eroding value.
- Customer Engagement – Startups that can point to actual customers, pilot users, or letters of intent gain immediate credibility. The absence of such validation is often a fatal flaw.
- Route to Market – A product, no matter how great, is useless without a clear strategy for getting it to customers. Angels want to see a viable sales and distribution plan, not vague ideas about going “viral.”
- Market Potential – The size and growth rate of the target market must justify the risk. If the market is too small or too niche, the potential return is unlikely to be worth the effort.
- Relevant Experience – Founders need to have industry knowledge or a proven track record. A lack of relevant experience signals that the team may not be equipped to navigate execution challenges.
- Financial Model – Angels expect a business model that makes economic sense, with reasonable projections and a clear path to profitability. Poorly constructed or overly optimistic financials often trigger immediate rejection.
Each of these dimensions is evaluated individually and non-compensatorily. That means if a venture fails on even one of these points—say, the founders have no domain expertise—it doesn’t matter how strong the product or market potential might be. The decision is likely to be “no.”
From a practical perspective, this stage serves as a high-speed risk filter. Given the time constraints under which most BAs operate, and the number of pitches they evaluate annually, this method helps them manage cognitive load and avoid wasting time on ventures unlikely to succeed.
The Post-Selection Stage – When Investors Start Thinking in Trade-offs
If a startup passes the first filter—meaning it shows no fatal flaws across the eight elimination criteria—it enters a very different phase of investor evaluation. This second stage, referred to by the authors as the post-selection stage, involves more deliberate, compensatory thinking. Here, angels shift from asking “Should I eliminate this?” to “How good is this opportunity relative to others?”
In this phase, the tone of the conversation changes. The investor is no longer trying to protect themselves from risk—they are now exploring upside potential. They begin to weigh trade-offs: a smaller market might be acceptable if the margins are high; an inexperienced team might be tolerable if strong advisors or co-founders can be added; a niche product might be investable if customer traction is already evident.
The evaluation criteria in this stage are more subjective and strategic. Angels assess fit with their personal interests, how much time or effort they would need to dedicate, their ability to add value to the venture, and how well they “click” with the founders. These are the kinds of nuanced, relationship-based judgments that only happen after the startup has cleared the initial viability hurdle.
It is also in this phase that deal structure and valuation come into play. Investors may start to negotiate equity stakes, milestones, or convertible notes. But it’s important to emphasize: this stage is only accessible if the first filter has been passed. No matter how impressive the startup seems in conversation, if the pitch doesn’t satisfy the selection criteria, it won’t get to this point.
Another critical insight is that entrepreneurs often confuse these two stages. Many founders, particularly first-time ones, prepare their pitch to impress in-depth rather than to pass the filter. They spend too much time on growth strategies or valuation rationale—topics that are only relevant after an investor is convinced the opportunity is fundamentally viable.
Thus, the post-selection stage represents a reward for getting the basics right. It’s a deeper dive, more flexible and conversational, but it hinges entirely on a founder’s ability to remove all doubt in the opening pitch. Entrepreneurs who understand this sequence—and prepare accordingly—dramatically increase their chances of progressing to investment discussions.
10 Practical Insights for Business Owners and Managers
- Avoid Fatal Flaws at All Costs
You don’t need a perfect pitch—but you can’t afford a serious weakness in any one of the eight core areas. One major issue will likely end the conversation. - Structure Your Pitch to Address All Eight Critical Factors Upfront
Lead with clarity on product readiness, market size, customer interest, protectability, and team experience. These are the “deal breakers.” - Know That BAs Don’t Evaluate You Like Venture Capitalists
VCs often do due diligence after term sheets. Angels are more hands-on early and make faster, personal decisions. Don’t expect deep analysis—expect gut reactions. - Strong Features Won’t Save a Flawed Venture
Unlike in compensatory models, you can’t balance a weak market with a great team or a strong product with weak distribution plans. One “C” can kill the deal. - Think Like a Time-Constrained Investor
Angels often evaluate dozens of pitches. Your job is to be “easy to say yes to” by being clear, credible, and thorough—without being long-winded. - Prepare for Two Distinct Conversations
One pitch gets you past the selection stage (objective, factual, concise). Another closes the deal (subjective, relationship-driven, strategic). - Understand the Psychology of Risk Avoidance
BAs aren’t just seeking high returns—they’re avoiding bad bets. Your job is to eliminate doubt, especially around market size, product viability, and founder credibility. - You Can Train for This
In follow-up studies, entrepreneurs who received guidance on these eight factors doubled their chances of getting past the selection stage and tripled total funds raised. - Fatal Flaws Are Often Fixable—If You Identify Them Early
Before pitching, stress-test your venture on all eight dimensions. Fix the weakest links or develop credible mitigation plans. - Use Feedback to Improve, Not Defend
If you’re rejected, find out which fatal flaw killed your pitch. Treat rejection as market intelligence, not personal failure.
Closing Thought
This research delivers a practical reality check to anyone seeking early-stage investment. Business angels don’t operate like spreadsheets—they operate like people. They’re busy, biased toward caution, and searching for red flags. Their decision-making is fast and intuitive, especially at the start. That’s why your pitch must pass a fatal flaw test in the first 3–5 minutes. If it does, then—and only then—do the deeper conversations about potential, partnership, and vision begin.
Entrepreneurs who understand this two-stage process will stop wasting time perfecting the wrong things and start crafting pitches that survive the first filter—and go on to secure the funding they need.