Founding team breakups are common in early-stage startups but it is not well understood how such events are perceived by external stakeholders such as investors. As a result, it is unclear how breakups may affect a startup’s external funding prospects. Building on the premise that team and venture qualities are difficult to observe at the early stages, we argue that investors use team breakups as a form of “soft data”. We predict that investors will penalize startup teams that experienced a breakup and that such a penalty is especially strong if investors uncover relational conflict as the underlying cause. To explore how founding team breakups influence investor perceptions and decisions, we first interviewed 15 early-stage investors across the globe to identify common causes for founding team breakups and gain insight into how investors perceive such events. We subsequently performed a pre-registered online framed field experiment on 538 crowdfunding investors. We find that start-up teams that experienced a breakup are perceived by investors to have lower competence and resilience, and that these perceptions reduce their willingness to invest. We also find that such a breakup penalty primarily applies when investors identify relational conflict as the cause and is much reduced or non-existent when they have no information on the underlying cause, or the break-up reason is business-related. Our research sheds light on the nuanced dynamics of founding team breakups and their impact on investors’ perceptions and decision-making.
