As many entrepreneurs well know, there are plenty of ways to scare off investors when you're pitching your company. One not-so-obvious way to raise red flags, however, has nothing to do with your idea or how well you sell it.
According to the Wall Street Journal, a new study, "How Images and Color in Business Plans Influence Venture Investment Screening Decisions," indicates that investors are less likely to take a stake in a company that has logos or products containing the color red.
The study's authors, who examined results from a business-plan competition and two survey-based experiments, say that their research indicates that people tend to rely heavily on mental shortcuts drawn from our past experiences--also known as heuristics--when making split-second decisions.
“Humans are not as rational as a lot of people tend to believe that we are,” H. Dennis Park, an assistant professor at Drexel University’s LeBow College of Business and one of the study's authors, told the Journal. The color red is often associated with error or poor performance, especially in the U.S--think about all of your grade school papers marked up with red ink. A pitch or a logo containing this color may subtly remind an investor of mistakes and thus raise literal red flags about your startup's potential.
But here's the good news: once people are made aware of the fact that they are making decisions based on stereotypes, they tend to act more objectively, according to Park. Some venture capitalists, like Madrid-based Luis Martín Cabiedes, make a conscious effort to rebel against traditions in the startup world that promote unconscious bias. Cabiedes told the Journal that he does not watch PowerPoint presentations, read business plans, or attend demo days to make investment decisions. Instead, he relies on in-person interviews with company founders.
"It’s very important to not be affected by the impression that the entrepreneur or the business plan is giving you," Cabiedes said.