The Value of Human Capital Signals for Investment Decision Making under Uncertainty: An analysis of cross-border venture capital investments in Europe and sub-Saharan Africa

In this paper, we analyze the interaction between human capital signals of entrepreneurial founding teams with the contextual experience of potential investors, aiming to explain investment decision making. We use the case of
cross-border venture capital (VC) investments in volatile and uncertain environments as our empirical setting. A large body of research from behavioral economics illustrates that when faced with uncertain and complex decision problems, investors tend to rely on simple heuristics and rules-of thumb, derived by easily accessible and assessable signals. Yet, with increasing experience, investors improve their heuristics and develop more sophisticated and contextual decision making procedures. Previous research in the context of VC investments particularly points at human capital signals of the founding team as an important criteria considered by venture capitalists. Among those signals, a high-class university education is considered as the easiest to access, yet evidence suggests a very loose association between educational achievements and entrepreneurial success. We address the question if more experienced investors cope with uncertainty by relying on different signals than their less experienced peers. We do so by contrasting cross-border VC investments by the same investors in a selection of sub-Saharan African countries with their investments in European economies. Using a propensity score matching procedure, we match every observed investor-company investment pair
with a similar pair that did lead to an investment. Based on Crunchbase investment data, we gather via LinkedIn and further sources detailed information on the founders professional and education background. We find human capital
signals from the entrepreneurs to be of higher importance for investors when investing in uncertain environments. The effect is stronger for specific than for generic human capital. We further find this effect to be moderated by the investors’ country-specific previous experience.