Investors’ Decision Under Limited Information: Passion of the Entrepreneur as a Signal of Commitment

Based in 720 investor evaluations of real video-recorded pitches, this paper examines whether and how the passion that the entrepreneurs displays during the investment pitch is considered a commitment signal by investors, and how the perception of commitment influences investors willingness to conduct due diligence. Drawing on signaling theory, we compare displayed passion with other signals of commitment and empirically prove that passion should be considered a lower ranked commitment signal, that will be used by investors only when other signals with more informational value such as “founder, friends, and family” money invested and pitch preparedness are not available. In the second part of our model, we investigate whether and how investors’ perception of entrepreneurs’ commitment influences their willingness to conduct due diligence. Our results show that commitment is generally important for investors’ decision to move on in the investment process, but less so for investors who are experts in the industry the new venture is operating in.