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If Investors Really Listened To Data, They’d Be Investing In Women

Investors like to extol their data-driven approach. But then how come they won’t invest in women-led companies, despite the clear evidence that they perform better?

If Investors Really Listened To Data, They’d Be Investing In Women
[Photo: Michal Lomza/Unsplash]

Put your intuition to the test for a moment: Would you say there are more words in the English language that start with K or that have a K as its third letter? Think about it for a moment.

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When researchers asked a lot of smart people this question, they got a lot of wrong answers. More than two-thirds of respondents said that K more often appears as the first letter than the third. The truth is that a typical English text contains twice the number of words with K in the third position.

Because an analytical approach to solving this problem requires a dictionary and unreasonable amount of time, we must rely on intuition to answer it. Why, then, is most people’s intuition on this question so wrong?

This is an excerpt from Unsafe Thinking: How To Be Nimble and Bold When You Need It Most by Jonah Sachs.

What often feels like intuition, a sense of knowing from within, is often just bias. In this case, we fall victim to what’s known as “availability bias.” This thinking flaw causes people to consistently overweigh the importance or likelihood of things that are easy to recall. It’s easier to think of words like kite, kitten, and kick though there are far more words like lake, like, and dike. Judging how often K appears in English words is a low-stakes task, but what happens when it guides higher stakes decisions? A 2014 survey of more than 1,000 executives found that business leaders relied most often on gut instinct, beating out data and the advice of others. The results are often disastrous, predictable, and persistent as data coming out of angel and venture investment firms now attests.

To figure out how investment decisions are being made, Wharton’s Laura Huang planted her research team for two years inside five investment firms and watched, blow by blow, how they made decisions. She discovered that investors consciously grouped their areas of attention into two categories. The first was data. This was the stuff they gleaned from the financials and strategies presented by the entrepreneur, a broader understanding of market conditions and any other numbers they were able to crunch in spreadsheets. The second area they focused on was their perception of the entrepreneur him or herself. Did they trust this person? Did the investment feel right? Here, investors unabashedly relied on emotion and intuition.

So what happened when the analysis of data conflicted with gut instinct? “Intuition trumped any business data they had,” Huang concluded. These investors, who rely on their golden guts are paid handsomely for their magical-seeming intuitive talents. But is it working? Or are they falling into the same traps the rest of us do when considering the letter K?

At the industry level, the data looks bleak. Between 2011 and 2013, companies with a female CEO received $1.5 billion in venture capital investment while companies led by men received 34 times that amount. Yet, research indicates that women tend to be more successful, not less, when they lead ventures. A recent study of 22,000 publicly traded companies found that an increase in leadership positions in a company for women from 0% to 30% is associated with an increase of 15% in profitability. Female tech entrepreneurs, on average, generate a 35% higher return on investment than their male counterparts.

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Babson’s Candida Brush, who compiled much of this data, said she thought exposing a pattern of missed opportunities and basic unfairness would change everything. “We got a billion media hits when we released this report,” Brush says. “One venture firm called and said they wanted to do something about it. One.”

Maybe this is part of the reason that, since 1997, less cash has been returned to investors than has been poured into venture capital investments. For the past decade, VC returns haven’t beaten public markets.

So why is intuition leading investors so badly astray? Imagine a female entrepreneur stepping in front of an intuitive male investor.  (Since 9 out of 10 partners in venture firms are male, this is by far the most likely scenario.) The investor is looking for an “it feels right” experience with this entrepreneur, but he’s not sure what that means. He just knows it when he sees it. Behind the scenes, his brain searches for easy-to-recall experiences that he can match to this woman. But she doesn’t, on the surface, look like, act like, or speak like the previous male entrepreneurs he’s invested in. Like those words with K in the middle, it’s much harder to recall a match for her. Availability bias kicks in and the likelihood of her succeeding seems diminished. Perhaps at this point his rational analytic mind tells him, “you know we really should be giving a second look to women,” but his intuitive brain just “knows” this opportunity isn’t right. So he passes. But while he thinks his gut is recognizing a pattern, it’s over-relying on trivial or limited information.

Overcoming these biases doesn’t mean abandoning intuition. But it does require male gut-driven investors to make a conscious effort to educate their gut instincts, a process that intuition researcher Robin Hogarth says is possible when we consciously expose ourselves to more and better data. And that means breaking old patterns of thought and behavior. Investors should intentionally seek out and spend time with successful female entrepreneurs, making these role models more instantly available to their intuitive processes. Rather than ignore the data that exposes the flaws of their industry, and looks like a threat to their unquestioned genius, they should see it as a treasure map to uncovered opportunity. And, perhaps most importantly, they should bring far more female partners onto their decision-making teams. None of this will feel particularly safe, but sticking with the status quo is, as the data proves, far more dangerous.

Excerpted from Unsafe Thinking: How To Be Nimble and Bold When You Need It Most by Jonah Sachs. Copyright ©2018. Available from Da Capo Lifelong Books, an imprint of Perseus Books, LLC, a subsidiary of Hachette Book Group, Inc.

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About the author

Jonah Sachs is a digital marketing pioneer who created some of the internet’s first viral social change campaigns. He writes about storytelling, creativity and the work of groundbreaking innovators.

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