When looking for funding, entrepreneurs present investors with a vast array of (textual) information typically in the form of slide decks or fully-fledged business plans. Investors analyze such information and assess whether any given investment opportunity is worth pursuing further. What it typically goes overlooked is the (nonverbal) information the entrepreneur conveys. This would be especially worrisome if such information was indeed predictive of start-up success.
In a recent article, Martí Guasch (Esade) and Antonio Dávila (HEC Lausanne) study whether body movement, one type of qualitative nonverbal information, is associated with entrepreneurs’ favorable reporting in start-up forecasts and valuation information and with firm performance (survival and funding success).
The link between body movement and firm reporting and performance is rooted in the social psychology literature, which connects more expansive physical displays with certain personal characteristics like dominance, passion, or attractiveness. These individual characteristics have been associated, among others, with qualities like self-confidence, assertiveness, feelings of power and overconfidence, which may well affect start-up reporting and performance outcomes.
Qualities associated with more dominant, passionate, and attractive individuals can affect firm survival and funding success
The first research question examines whether entrepreneurs’ physical expansiveness is associated with higher deviations between firm (revenue and earnings) forecasts and actual results, and with overly high valuations (as proposed by the entrepreneur) compared to similar firms.
Beyond that, their second research question explores whether physical expansiveness associates with startup-up survival and actual investor funding decisions. Altogether, they argue that the qualities associated with more dominant, passionate, and attractive individuals—e.g., a higher propensity to acquire resources and greater tolerance for risk—can affect firm survival and funding success.
To obtain the measure of entrepreneurs’ physical expansiveness, they use a computer vision software that extracts two-dimensional skeletal information (physical joints coordinates) of 154 entrepreneurs pitching their projects to an audience of early-stage investors (Figure 1). The final physical expansiveness measure averages the distances run by each physical joint through the entire pitch (Figure 2). They also obtain startup valuations and financial forecasts made available to investors at the pitch, and ultimately observe firm survival and funding success.
Findings reveal that body expansiveness is positively associated with revenues and earnings forecast errors and with overly high proposed firm valuations. Ultimately, entrepreneurs with more individual self-confidence, assertiveness, overconfident decision making, and tolerance to risk derive higher business expectations and therefore forecasts and valuations.
Results also show a negative association between body expansiveness and survival, which is explained by higher confidence and risk tolerance driving expansive entrepreneurs to take more risk, therefore explaining lower survival rates. Yet, investors are more likely to fund this type of entrepreneur.
We propose a behavioral explanation consistent with individuals (e.g., investors) attaching a set of positive qualities to passionate, dominant, and attractive people (who display more expansively), even when these qualities do not necessarily translate into better performance (e.g., survival). We rule out alternative (rational) explanations claiming that investors prefer highly expansive entrepreneurs in seek of high returns (i.e., more expansive individuals conveying higher expected growth), even at the expense of lower survival rates and higher entry valuations.
Overall, the study sheds light on an overlooked source of information—nonverbal behavior—and relate it to firm forecasting, valuation, survival, and financing success, which are important factors in the assessment of investment opportunities, deal structure, and monitoring. More generally, the paper informs various research lines.
First, it highlights the relevance of non-verbal communication, and body language in particular, to a growing literature of aesthetic attributes that has primarily explored facial and voice characteristics (Devine et al., 2021). Second, the paper informs the literature on financial reporting and real firm outcomes by documenting associations between body language and important firm (reporting and performance) outcomes. The emergence of video communication suggests this area to be fruitful for further research.
Third, the study is relevant to the entrepreneurial community by showcasing the information content of body communication to the relationship between entrepreneurs and investors. Platforms such as Kickstarter, Crowdcube and AngelList or accelerators like Y Combinator include or advice/require the use of video as part of their communication package. Going forward, the incremental information of video content promises to be an important avenue for research.
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