The influence of venture capital investors on the mental well-being of startup founders
All the love is gone
When asking first-time founders what their next milestone is, they often respond by getting some venture capital funding. Many of those founders cannot wait to become part of this prestigious club of VC-backed founders. On the other hand, if you ask this same question and follow-up questions to second-time founders, they will most often tell you to avoid venture capitalists for as long as possible. So what happens between the first and second companies that make VC investors go from high school crush to dreaded ex-partner? Actually, your high school crush goes through very much the same process when they become your ex-partner.
In the beginning, everything looks so promising, almost perfect for you. They have precisely what you need, and you are perfect for them. After a while, we start to notice cracks under the facade and poor communication (on both sides) usually does the rest.
The effect of investors on mental well-being
Through a representative study, we found that investor relations have a strong influence on mental well-being indeed. Starting at a base level of 0 %, a good investor relationship can add around 10 % to mental well-being. In comparison, a bad relationship can reduce mental well-being by some 10 %. Setting these findings into the context that around one in five founders is at high risk of burn-out, this relationship can make the difference.
Unfortunately, we also found that investors usually deduce from mental well-being. This finding is highly adverse to the investors’ goals as unhappy and burned-out founders will not create company value – ignoring the moral implications of pushing a human being over the edge.
In more detail, we can see that investors positively affect the mental well-being dimension of social interactions – as is expected. However, the problems arise in loss of confidence and depression. Two fields where founders need to be on top to create a properly working entity.
In total, the effects are not quite as strong as the co-founder relationships. However, we can collect some best practices for investors to improve a proper connection with their investments.
Best practices for founders
A statistic always has only limited implications on the individual situation. In this case, there are many opportunities to beat the odds by methodically scouting your investors. Of course, only the luckiest startups have the chance to pick and choose among a wide variety of willing investors. There are still optimisation methods. First of all, according to our findings, the most important quality of an investor is compatibility and communication skills. In other words, if a founder has a bad feeling about an investor’s motivations and senses some dishonesty or hidden motive, this investor should be avoided. Similarly, a founder-investor relationship starts on a lack of chemistry (the founder would not like to go out for a beer with the investor), and the relationship starts on a complicated turf. Regarding the importance of the effect of an investor on potential well-being, it might even be a consideration to pass on a funding round if the investor shows no chemistry or compatibility.
Once on the board, the relationship between investor and startup requires urgent care, just as every other relationship. This care comes in the form of regular check-ins, making time for informal exchange and open communications of needs and issues. Markets, in particular, often come not from the individual investor but from the investing entity, usually a fund or family office. Hence, the needs in the form of company goals are often explicit somewhere, and the common understanding can easily be enforced by pushing through those needs.
Best practices for investors
As the effect from investors on founders is primarily negative in mental well-being, and higher well-being leads to better company performance, the conclusion seems to be just to leave the founders alone. This notion could not be further from the truth. A lack of communication always results in impaired communication. Instead, investors need to learn to communicate openly and to provide unrestricted support to their founders. Like the founders, the investors are in for the long haul, and there is no easy way out.
Furthermore, the investors must accept that they are no experts in the businesses they invest in – most of the time, they fall prey to the Dunning-Kruger-Effect instead – and that their founders are no better. It is non-negotiable for every founder-investor relationship. The investor must appreciate and accept the founders’ needs and decisions. Investors can and should consult and give advice; making decisions, however, is the divine right of the founders. Also, don’t invest in founders who have no chemistry and compatibility with you.
Basis of these claims
We ran a quantitative study among startup founders from Germany, Austria and Switzerland in December 2022 and January 2023, asking about their core relationships. All results are significant on at least the 1 %-level and were checked for robustness and correction factors. We used a reliably prevented self-defined test and the GHQ-13 methodology for surveying.
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