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Perils of Investing in Our Own Image

September 19th 2014

The established view is that what you do with the startup idea is more important than the idea itself. And execution is in the hands of the CEO entrepreneur and his or her team – that’s why investors and analysts always want to meet them.  But why?  It’s because you want to see how they work, delve the parts the investment note hasn’t reached and figure out what makes them tick. 

The problem is that you’re then into selecting people.  And we’re not very good at doing that.  Statistically you are most likely to choose partners who look a lot like you. They'll share your tastes and values. However much you may believe you are dispassionately analytic, each of us represents a pattern that some other people quite closely approximate, and these are the people we tend to connect with. 

The reason for this is that familiar information is prioritised by our brains. Known information doesn't need to be considered or scrutinised so it reaches our consciousness more quickly. We deal with the easy stuff first.  What that means is that when you encounter someone very like yourself, that person gets priority too.

This is bad news for deciding whether to invest.  It is particularly bad if the startup is led by a woman.  Women make up just 4 percent of senior partners at US VC firms, according to data from Fortune, which attempted to measure the figure in February of this year.  This is a big reason why men -- particularly good-looking men, according to one study -- are more likely to get funding for their ventures than women. Female-founded companies net as little as 7 percent of VC funds, research shows.  Basically this means that investors are less likely to bet that a woman will be the next Mark Zuckerberg because she doesn't look like Mark Zuckerberg.

Yet, in the U.S. the fraction of startups led by women is slightly higher than one in five - and this is a 45% jump in the overall ratio during the last 18 months.  In Europe the fraction is a bit lower but also growing and tech is the lead sector. 

So investors could be losing out if they end up choosing the person rather than the investment.

Warren Buffet once famously put the profile of the CEO entrepreneur into perspective: "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will."

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