That VCs’ startup screening and selection decisions are biased by the attractiveness of the entrepreneur is well-established. Recent research found VCs’ subsequent capital allocation decisions also to be affected by the halo-effect. A new study, available as open access article in Frontiers in Psychology, now turns the spotlight to the attractiveness of the VC himself. The study’s results, which are based on data from 341 startup investments involving male entrepreneurs and male VCs, suggest that VCs of below-average attractiveness are more sensitive to entrepreneurs’ physical attractiveness when compared to VCs of average attractiveness. Also, the nature of this effect changes from positive in the first investment round, to negative in the second investment round. Risk-taking therefore seems to be partly driven by one’s own physical attractiveness.

How venture capital funding works

Once selected, the startup entrepreneur and venture capitalist enter into a collaborative effort aimed at ensuring the success of the startup. This phase presents the VC with a myriad of uncertainties inherent to the startup ecosystem: questions concerning the startup’s ability to fulfill its potential, the entrepreneur’s competence and reliability, and the unpredictable trajectory of the market, among others. Consequently, capital allocation follows a staged approach, gradually disbursing funds as the startup progresses. This approach allows the VC to mitigate risks by retaining the flexibility to withdraw investment and minimize potential losses. Research suggests that the manner in which capital is disbursed reflects the level of trust and confidence the VC has in the startup. Higher levels of confidence translate to larger funding disbursements with longer intervals between investments, whereas doubts prompt tighter control measures, manifested in smaller funding amounts and shorter intervals between rounds. While traditionally assumed to be grounded in rational decision-making, balancing staging costs with monitoring expenses, VCs’ funding approaches may not be entirely devoid of biases.

How does physical attractiveness affect men’s financial risk-taking behavior?

Human behavior, shaped by evolutionary pressures, revolves around the fundamental goal of reproductive success facilitated through sexual selection mechanisms. This process encompasses both intersexual selection, where individuals choose mates, and intrasexual competition, involving rivalry among members of the same sex for access to opposite-sex mates. In this context, men exhibit traits and behaviors signaling mate quality, including physical attributes like facial hair and body shape, alongside behaviors like conspicuous consumption. Conversely, women prioritize physical attractiveness in potential mates, considering it a cue for underlying qualities such as masculinity and health, while also assessing signs of commitment and economic status. Moreover, women evaluate potential partners based on economic indicators, with men’s reproductive success being linked to their economic position. Men, cognizant of these preferences, may compensate for perceived deficiencies in attractiveness by enhancing their desirability through financial success, particularly when motivated by a need to increase their attractiveness to women. This is supported by research showing that men tend to take greater financial risks when exposed to attractive male stimuli. The signaling of economic status through conspicuous consumption further underscores the importance of mate value characteristics like attractiveness and ambition in male-male interactions. Thus, these evolutionary dynamics influence not only mate selection but also financial decision-making, as individuals navigate the complex interplay between attractiveness, status, and reproductive success.

How does VCs own physical attractiveness matter to their risk-taking?

The study investigated the impact of VC physical attractiveness on financial risk-taking, hypothesizing two main effects. Firstly, it was anticipated that VCs with above-average attractiveness will exhibit greater tolerance for investment risks compared to their less attractive counterparts. This expectation is supported by prior research linking attractiveness to positive risk attitudes and higher self-esteem, which in turn correlates with increased trust, financial risk tolerance, and propensity for investment. Conversely, VCs with below-average attractiveness are expected to be more risk-averse due to lower self-esteem and a propensity to react negatively to ambiguous information. Secondly, VCs’ responses to entrepreneurs’ attractiveness are predicted to vary based on the VC’s own attractiveness level, with less attractive VCs showing heightened sensitivity to the attractiveness of the startup entrepreneur. This phenomenon is attributed to a perceived disparity in attractiveness, leading less attractive VCs to engage in compensatory behavior by taking greater financial risks and potentially experiencing threats to self-esteem. Overall, it was expected that while physically attractive VCs tend to take more risks in early-stage funding, they are less influenced by the attractiveness of entrepreneurs compared to their less attractive counterparts.

The study found that VCs, especially those with average or below-average attractiveness, tended to be positively swayed by the attractiveness of male entrepreneurs as evidenced by the first round of funding (see Figure 1). This confirms earlier research on how people assess risk in financial situations. However, this effect wasn’t seen in VCs of above-average attractiveness.

Additionally, the study looked at how this same-sex attractiveness dynamic played out over time by considering the second round of funding. Interestingly, as the funding process went on, VCs of below-average attractiveness seemed to become more cautious about attractive entrepreneurs (see Figure 2). This suggests a shift from initially positive impressions to later doubts, possibly due to what researchers call a “beauty penalty” effect. This beauty penalty idea suggests that highly attractive entrepreneurs might face extra scrutiny if they don’t meet the high expectations set by their looks.

What can we learn from this research?

Fundamentally speaking, this research’s findings suggest that VC risk-taking can be understood by using evolutionary explanations of human behavior. In more practical terms, the study’s findings may assist VCs in their risk-taking considerations. Particularly, this research may help VCs to understand the origins of their risk estimations and preferences.