VC investors prefer personal connection with entrepreneurs

Alex PentlandGallup Management Journal recently interviewed Alex Pentland, professor of media, arts, and sciences at MIT and the author of Honest Signals: How They Shape Our World. One of the issues discussed was why VCs rather invest in business where they have a personal connection and which they can regularly visit. Here is an expert of the interview….

GMJ: In your book, you wrote that venture capitalists “normally only invest in companies they can regularly visit.” Why is that?

Dr. Pentland: There are two reasons. The first is that if you can’t actually see the managers and the team in a normal situation, you don’t get a sense of the unconscious interactions between them. All you see are memos and business plans and things like that. Even listening to people talk, the words and the arguments and the things they say don’t give you a very good sense of what’s going on. [But] if you watch people’s immediate reactions, what they nod their heads at, their honest signaling, you’ll see what arouses them. That gives you a much better sense of how they feel personally about what they’re doing.

You can tell how a group feels when you put something out on the table. If they feel it’s good for them personally, they get excited, and there’s this little mimicry that they do, nodding their head, going “hmm, yeah, hmm.” What that’s telling you is that those people feel like this would be good for them — and you had better pay attention to that. If everybody’s telling you that, you should listen. Those are the initiatives that get the most traction. Otherwise you’ve got an uphill battle. You’ve got to educate people, you’ve got to change the way they think, you’ve got to change the incentives, and you still probably won’t win.

GMJ: You also wrote that venture capital investments made without a personal connection are likelier to fail. Why?

Dr. Pentland: This honest signaling, this unconscious communication, actually changes people. For example, if I sit down with you, and we have a conversation, and I say, “Yes,” and you say, “Yes,” and you nod your head, and I nod my head, we both get a little fired up, because these things are a bit contagious. That unconscious communication actually changes our perception of risk, reward, and trust, which are the core of any sort of business decision. So, although we like to think of ourselves as rational and logical and so forth, engaging in this honest signaling back and forth literally changes our perception of each other.

If you look at some of the older business cultures, such as [those] in the Middle East and Asia, where the legal systems aren’t quite as crisp and clean and responsive as they are in the United States, what do they have to rely on? Personal characteristics and social networks. They have to rely on circuits of trust between people who circle back and fix you within the social fabric. And the wisdom of that is that those things build trust between you and [your] business partners, and it makes them more likely to behave honestly. A lot of talking doesn’t just give you a sense of the person; it literally changes their attitude towards you.

 

 

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About Christoff Oosthuysen

As business improver and entrepreneurial coach Christoff inspires his clients to do more of what they are great at and enjoy doing. He serves on the consultant/mentor panels of institutions like the Industrial Development Corporation. He has been supporting entrepreneurs since the mid 90s, when he launched (and 10 years later sold) the largest publication for business owners in Africa.

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