Does the attractiveness of the founder Chief Executive influence the validation of the company? This was the question that Massimo Colombo and his co-authors set out to discover in their paper “The CEO beauty premium: Founder CEO attractiveness and firm valuation in initial coin offerings”.
The literature includes a number of studies that have shown that attractive candidates, particularly male, are more often and sooner contacted for job interviews and are more likely to gain employment and receive higher ratings. But although the existence of beauty premium is established there is little consensus about its causes and few consider the role of attractiveness within the context of entrepreneurship.
Colombo and his colleagues took the context of Initial Coin Offerings (ICOs), a novel mechanism used by entrepreneurial ventures to raise growth capital, and looked at the relationship between valuations and the attractiveness of the CEO.
ICOs are characterized by an exceptionally large amount of uncertainty: the firm has no track record and the business model is often highly innovative and visionary. In this context it is the CEO, who generally is one of the firm’s founders, that is often the most salient indicator of firm quality and serves as the primary reference point for investors in ICOs.
In an ICO the firm raises funds by selling tokens online to a crowd of investors; it uses blockchain technology to enable a direct and immediate transaction between the investor and the firm and so does not involve intermediaries.
The firms that use this channel are typically in technologically demanding projects and the sums involved are considerable. The mean funding per ICO ranges from $10-20M. However the information available to the investors is minimal and comes directly from the ICO firm.
The findings support the beauty premium concept
Massimo Colombo comments on the findings: “In this study, we investigate the effect of founder CEO attractiveness on firm valuation in the context of ICOs.
“Our empirical results provide strong support for the existence of a founder CEO beauty premium: a 1-SD increase in founder CEO attractiveness is associated with a 13.2% increase in firm valuation ($1.58 m for the mean ICO firm with a valuation of $11.99 m).
“Founder CEO attractiveness, therefore, constitutes an important determinant of ICO success.
“Furthermore, we did not find evidence that the effect of founder CEO attractiveness is substantially mediated by investors’ stereotype-based evaluations related to perceived trustworthiness, likeability, intelligence, or competence.”
Interestingly, the attractiveness of the CEO was found to have greatest impact when other information was scarce.
“Our results suggest that founder CEO attractiveness serves as a reference point for investment decision-making in the presence of highly asymmetric information,” explains Colombo. “It plays a weaker role in information-richer contexts.”
Colombo continues: “Our empirical results associate increased founder CEO attractiveness with higher ICO valuations and post-ICO performance. These findings have important implications for investors and entrepreneurs.
“For startups seeking external finance in a context characterised by extreme uncertainty and strong information asymmetry such as ICOs. If startups can appoint attractive leaders, they may have better access to growth capital.”
Read the full paper
The CEO beauty premium: Founder CEO attractiveness and firm valuation in initial coin offerings – Massimo G. Colombo, Christian Fisch, Paul P. Momtaz and Silvio Vismara, published in the Strategic Entrepreneurship Journal 2021.