And the similar shall lead: the role of the affinity bias in the Italian Venture Capital investment decisions

Abstract: This paper analyses the role of the affinity bias in the Italian Venture Capital (VC) ecosystem. The background idea is that, when seeking for investment opportunities, VC funds' partners may be subject to psychological biases and unintentionally prioritise founders who share with them cultural and genetic features. To this purpose, two different samples were collected: Sample 1 includes 593 initial investments made by 19 Italian Asset Management Companies (AMCs) from January 2000 to December 2021, while Sample 2 is made up of 95 investments closed by 7 Italian Corporate Venture Capital arms (CVCs) over the same period. For each transaction, a percentage similarity score was built to capture the degree of proximity between the startup's founding team and the partners of the fund that participated in the deal. The results obtained confirm that unconscious mental processes are a non-negligible component of human actions, even for highly professional individuals. The affinity bias seems to affect all the VC funds covered in the analysis, with average similarity scores well above 50%. In Sample 1, the heterogeneity in the bias strength among the AMCs is partially explained by the different degree of partners' experience: those with more transactions performed tend to favour more diversity in investments. Also, partners' teams with a more balanced gender structure tend to be less affected by the affinity bias. This suggests that increasing the proportion of females in Italian AMCs may have a positive impact of investment selection. Moreover, the affinity bias seems to have a certain influence on funds' performance, with the best performing funds displaying the lowest similarity scores. This suggests that those AMCs that suffer the most from irrational-induced decisions reach poorer financial results. Interestingly, the highest correlation is obtained when giving a higher weight to the least rational variables of the score (gender and nationality). When it comes to CVCs, the small sample size does not allow to formulate the same strong observations made for Sample 1. Nevertheless, data suggest the influence of the affinity bias also for this type of investors and, under the right assumptions, its intuitive link to fund performance.