The foremost question that one needs to understand is “What is Gut”. Most angel investors take decisions spontaneously, without getting into detailed financial or business models. Are they just following their instinct or are they driven by a set of honed skills that have been developed with prior experience and expertise.
What actually matters are the circumstances under which the decision has to be made.

For instance, in Shark Tank, all the decisions are made on the spot, there are no financial models that are evaluated. Based on the objective and quantifiable information such as financial statements and market data, almost all of these entrepreneurial ventures would be considered risky investments that should be avoided. Yet, investors often enter into them, relying on their “gut feel” to do so.

Understanding an Investor’s Gut Feel

Where most us believe that the Gut is an intuitive process, The Harvard Business Review explains that the Gut feeling is detail. What needs to be understood is that the gut feel

• Is not a separate piece of information but it draws on both objective and subjective information that is already available.
• Is not quick, impulsive, and emotional — it’s actually something much more cultivated and nuanced and based on experience.
• That investors commit to continually cultivating their gut feel, by paying attention to exemplars, prototypes, patterns, and models in their field and linking what they learn to future decisions

When does the Gut come into Play?

Investors on a daily basis have to take decisions that go beyond routine, where calculations of probabilities and risks are not only unrealistic, they are infeasible.
For example when the world wide web, synonymus to the internet, first became public 29 years back in 1991, the use case for internet was first invented for military purposes, and then expanded to the purpose of communication among scientists.

However, today the use case for the internet has expanded drasticallty. If an investor had to evaluate investing in the internet, the probability for a great return must have for sure not looked very favourable.
The truth is that the economics of investing in startups just don’t make sense mathematically but still we have seen investors become billionaires exiting valuations at as high as 100x.
In 2016 Mark Zuckenburg and Chan Zuckerberg,  as a part of the Priscilla initiative, had invested in a Bangalore based Ed tech company Byjus. Recently, with Tiger Global putting in $200m, they made a 7x on their initial investment of 22.8 cr, as per a report by Entrackr.

I would like to conclude by saying that an Investor’s gut is a blend of experience and instinct that helps him to make decisions when numbers and financial models don’t actually make sense. 

If you have a startup with a unique business model and want veteran guidance and experience, apply to our incubator program Jcurve now.