Study: First impression affects whether investor ‘sharks’ bite

Investors hear a lot of pitches, but they only fund some startups. What criteria do they use?

First impressions, apparently.

Good looks matter, but not as much an entrepreneur’s perceived competence and confidence, a recent study indicates. In fact, if you’re only attractive and likeable, you’re likely to get a lower offer than someone who exudes confidence.

WashU Olin’s Xing Huang, assistant professor of finance, summed it up this way: “Nice people finish last.”

She teamed up with three researchers from Michigan State University to examine investors’ decision-making, and they came up with a novel idea for a laboratory: ABC’s reality TV show “Shark Tank.” The show features a panel of “shark” investors who hear business pitches from entrepreneur contestants. Then the sharks comment, ask questions and say if they’re interested in making a deal.

The researchers set out to explore the relation between two things: first impressions of “Shark Tank” contestants and the investors’ decisions. Toward that end, they manually collected data on 322 pitches during the first five seasons of the show, and they measured first impressions of contestants by asking a nationally representative 680 respondents about them.

Using the crowdsourcing marketplace Amazon Mechanical Turk, the respondents viewed photos of contestants and rated them along six dimensions considered important to entrepreneurs’ success: capability, confidence, trustworthiness, the ability to work under pressure, physical attractiveness and likeability.

The research team then swept those ratings into two principal components: competence/confidence and appearance/likability.

“The likelihood of receiving a shark’s offer is associated positively with both components,” Huang said. But it’s a different story when it comes to sharks’ putting their money where their mouths are. While sharks offered more cash and valuation to entrepreneurs who rated highly in competence and confidence, they actually offered less to entrepreneurs who rated more attractive and likable, according to the working paper “Swimming with the sharks: Entrepreneurial investing decisions and first impression.”

Maybe the investors think people who are likable will not be tough negotiators going forward, Huang said, so they make a lower offer.

“Business decisions are driven by both hard and soft information,” she said. Videos of the five seasons of “Shark Tank” offered the researchers an abundant set of variables including the likelihood of an investor making an offer, investors’ valuation of projects, and the funding structure. Unlike documents about entrepreneurs and ventures, the videos offered a spectrum of information on verbal and nonverbal cues, such as appearance and body language.

“Such rich information enables an investigation of the role of soft information in shaping investors’ decisions,” Huang said.

Increasingly startups are an engine of employment and the economy; young companies have created an average of 1.5 million jobs yearly over the past three years. Huang, whose research interests include behavioral finance and investor behavior, said she hopes the research will be helpful for entrepreneurs. “Understanding the decision-making process of the venture capitalist can help entrepreneurs better think about how they can get better funded,” she said.

Huang conducted the study with Michigan State University’s Zoran Ivković, MSU Federal Credit Union Endowed Chair in Financial Institutions/Investments and finance professor, and John (Xuefeng) Jiang and Isabel Yanyan Wang, both associate professors in accounting.