In 2019, there were over 4,700 seed-stage investments globally, along with significant recent interest in how resources are mobilized during the earliest stages of the entrepreneurial journey.

Seed-stage startups work towards finalizing their product or services in addition to gathering market data. This also includes finding enough funding to develop an idea, product, or concept. As such, investing in a seed company is risky, as they have a higher chance of failure.

So, when it comes to investing is these types of companies, is there any way to explain seed stage-investment patterns? Another important question is what factors affect investors’ decisions to fund highly uncertain startups?

The entrepreneurship literature has a long history of studying investment patterns, which broadly maps two clear views. The first looks into the common attributes of startups that are of interest to potential investors. The second view focuses on the behavioural patterns of investors, such as social and cognitive influences that may shape their investment decisions.

However, the issue here is that these past studies had access to information about startups and investors. This is not that case at the seed stage, as information is scarce and uncertainty is intense.

Studies in behavioural economics and social psychology have both shown that mood and decision making are interconnected. Interestingly, another finding revealed that factors unrelated to a given task can affect mood and sway decisions. Affect-as-information theory fully develops this insight, arguing that contextual factors (e.g., changes in physical environment) can influence specific decisions.

Within this line of thought, a study by Gary Dushnitsky and Sayan Sarkar aimed to identify the factors that systematically affect seed-stage investment patterns, while also adopting a broader set of possible factors. They put forward the idea that seed-stage investment patterns could benefit from better understanding incidental contextual factors; in this instance, daily sunshine.

It is widely known that sunshine exposure is often associated with a better mood. Using this knowledge in the context of investment, the researchers suggested that investing in an entrepreneurial pitch is more likely to take place on a sunnier day.

To test their predictions, they used archival data and an experimental study. “We propose that, in the presence of substantial uncertainty, investment decisions are affected by incidental contextual factors, e.g., a daily change in sunshine”, they said.

A systematic pattern was revealed after analysing the fundraising of 1,335 startups that had graduated from European accelerators during 171 Demo Days, in which startups pitch to investors. Their analysis found that the likelihood of raising seed-stage funding is sensitive to contextual factors, such as a change in sunshine levels on Demo Days. “We further find the ‘sunnier’ Demo Day effect is exacerbated with the level of uncertainty; it is stronger for nascent startups and those where founders exhibit limited human capital” the researchers add.

Their experimental study, which allowed prospective investors to evaluate a Demo Day pitch, was also useful in providing further insights. Here, they found a positive relationship between sunshine and investment, but also that the association was mediated by the mood of investors. This information is a significant step towards better understanding seed-stage investment decisions, while also calling attention to the role of contextual factors in this line of research.