What criteria do investors use when deciding whether to invest in entrepreneurial ventures?
You would imagine they use strictly rational criteria to judge likely returns on their investments. Perhaps unexpectedly though, management researchers have found that investors are also swayed by the emotions demonstrated by entrepreneurs.
Factors that should not matter - such as emotional displays - can and do make a material difference
Analysing 1,460 pitch videos, a team led by Lin Jiang at the University of South Florida found that the display of positive emotions (for example, joy) by entrepreneurs during their funding pitches was statistically linked to the amount of financial support they were able to obtain. Entrepreneurs who demonstrated higher levels of joy during the beginnings and ending phases of their pitches generally gained more financial support than those who were more reserved.
Entrepreneurs as well as investors often talk about the need for passion in business. Perhaps the amount of joy that entrepreneurs display is one way of measuring passion.
However, more displayed joy was not always better. The data showed that displayed joy had an inverted U-shaped relationship with funding performance. In other words, moderate amounts of displayed joy led to stronger funding performance than low amounts of displayed joy; however, high levels of displayed joy led to poorer funding performance again.
The broader implication of the research is that audiences such as investors are not persuaded only by strictly rational criteria. Factors that should not matter – such as emotional displays – can and do make a material difference.