WORKWEEK

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(Editor’s Note – Today’s essay was written by Matt Harris. Matt is the founder of TwentySeven Nine, a company that builds products and services in order to make the founder journey easier. In addition to coaching over 10 founders backed by VCs like a16z, Index, Deciens, General Catalyst, and Harlem Capital, Matt has also founded several fintech companies like Bloom Credit and Claimsetter, and invested in businesses like TrueAccord, Karat Financial, and HMBradley.)

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VC investors are not paying nearly enough attention to founders’ mental health, and whether they know it or not, this is hurting their returns.

The Problem

I saw that Jacob Brody shared this on Twitter about a piece written in Fortune and I wanted to briefly expand on it.

The number of founders in the ecosystem who are experiencing mental health conditions is, at minimum, 40%, according to psychiatrists like Michael Freeman. If you relax the definition from “condition” to “challenges,” you likely are above 70%, according to data from Startup Snapshot.

This means that as many as three out of four of the founders who are operating in the ecosystem are experiencing mental health challenges. 

Often times when you are in the midst of a mental health challenge, your brain is operating in fight or flight mode. This means that the part of your brain responsible for making good decisions and planning (your prefrontal cortex) takes a back seat to the part that manages the fight or flight response (the amygdala). Your prefrontal cortex is what we describe as your “cerebral’ function, while your amygdala operates out of association and assumption.

It doesn’t take a neuroscience degree to conclude that taking the part of your brain that makes thoughtful decisions offline in favor of the impulsive decision-making apparatus is going to be the root cause of major mistakes.

What’s surprising to me is how few VCs are seriously concerned about this. 

Avoiding Human-Centric Problems

VCs pride themselves on their ability to add value beyond the checks they write. There’s a very good reason why the phrase “Let me know how I can be helpful” is a meme amongst founders — VCs say it a lot!

And I genuinely think that most VCs mean it. They want to help. They want to bend the odds of their portfolio companies succeeding in as favorable a direction as possible. It’s in their own economic interests to do so.

The trouble is that while VC investors are often good at helping their portfolio companies on matters of business and technology, they aren’t nearly as good at helping the humans running those companies.

According to Noam Wasserman at Harvard Business School, at least 65% of startups fail due to “human-centric” reasons. 20% of those were due, specifically, to mental health reasons. 

In the piece that TechCrunch wrote on the issue quoting Wasserman, they offered the following analysis:

Let’s assume that in a portfolio of 20 companies, 15 of them fail or underperform and that Noam Wasserman’s 65 percent statistic holds true. That would mean that 10 of the 15 companies (65 percent) failed for avoidable “human-centric” reasons. If a firm were able to help even half of those companies avoid failure caused by burnout and mental strain, that would mean an additional five companies would be successful, doubling the number of successful outcomes in the portfolio. 

The most important word in that quote is “avoidable”. The mental health challenges that startup founders face are actually EXTREMELY avoidable. The reason is that many of them are caused by running a company in a manner that is incompatible with the biological constraints of the founder. 

Some obvious ones are not sleeping enough, working more than 50 hours a week, and loneliness and social isolation. We know beyond a shadow of a doubt that sleep is vital to good judgment and that working over 50 hours a week will lead to the breakdown of the prefrontal cortex (and a whole host of health issues that include heart disease and increased risk of stroke). And loneliness and isolation cause a massive number of mental and physical health challenges by themselves (more on that later). 

Why Founders’ Mental Health is Becoming a Bigger Priority

It was easy to ignore this during the ZIRP era. Companies were going up and to the right all the time. Given the macro conditions, managing a fund was comparatively easy. 

Now, investors are facing increased scrutiny from LPs, leading to the lowest total dollars invested in VC funds since 2017. The VC business model is not meant to account for mispricing and down rounds, yet so many companies had to take these types of rounds to survive that we’re seeing even long-established funds like OpenView shut down after raising large funds.

Last year, $285 billion was invested in startups globally. This means that if 65% are likely to fail due to avoidable reasons, roughly $185 billion of that is at risk. The venture ecosystem can’t afford to have such a large amount of its capital wasted unnecessarily at such an important time. 

Simply put, no one has the margin for error anymore to just chuck such large percentages of their fund down the proverbial drain as the bar for success gets raised across the board.

Mental Health is Difficult to Talk About … Let Alone Help Alleviate

Here’s the thing: I get that mental health is ambiguous. It’s hard to fully quantify, understand, and predict the nature of inputs and outputs. 

So let’s take it out of the context of mental health and put it in physical health.

When an athlete tears a ligament, it’s fair to say that even if they could still move the appendage the ligament was attached to… you’re probably not performing at a high level. I lived for 7 years with a torn ACL and still went running every day for years. The truth is, you’ll still function. But the ability to compete at the highest level is no longer afforded to you. This is why we ultimately have tools for the rehabilitation of something like a knee ligament. Because while it is painful, it’s ultimately very possible to fix that ligament to perform at a high level again.

The same is true with our mental health. 

We know that elongated exhaling and cold exposure are easy means of activating the vagus nerve (the tool our nervous system uses to coordinate our sympathetic and parasympathetic nervous systems and fight-or-flight response) and providing an easier path to clear and creative thinking. 

We also know that being attached to email all the time blocks the prefrontal cortex from firing, hence why neuroscientists often avoid it in their work. 

At the end of the day, our goal is to optimize the use of the prefrontal cortex and minimize the use of the amygdala in decision-making. And the ways to do this are pretty well understood! 

Yet, we still too often assume that being anxious, lonely, and burnt out is how things will always be for those who choose to found companies.

For VCs, this is bad fund management. Plain and simple.

What You Can Do

It’s not exactly a revelation to say that being a founder is a lonely job. However, it is important to emphasize that being socially isolated often causes an increased risk of anxiety, depression, and lack of sleep (which, again, hurts judgment).  

What drives this isolation and loneliness? In the Startup Snapshot research I referenced above, you find that 81% of founders are not open about their stressors with the people in their lives. Friends and family care, but often don’t understand. Employees and co-founders might understand, but they are relying on the CEO to lead the business. As a result, it can be hard to tell an employee, “I’m having doubts about the direction of the business,” and still expect them to be motivated to show up to work the next day. So often, founders don’t share this. 

Investors might understand, but their success is determined by founders’ success. Bad news can often result in increased speculation and pressure or even directly hurt founders’ ability to raise future financing. Indeed, according to the Startup Snapshot research, 90% of founders claim they are not open with their investors about what is stressing them out.

This creates a massive challenge for VCs – how do you help your portfolio company founders when they (likely) won’t be honest with you about their stressors and mental health challenges?

I have two recommendations:

1. Start from the assumption that your founders (even the most upbeat, optimistic, and seemingly successful ones) are quietly dealing with stressors on their mental health.
2. Help create spaces for founders to be open and honest with each other.

One of the most significant (yet under-discussed) consequences of the pandemic is that so many founders founded their companies in isolation. They never got to know each other during the early formative years the way so many other founders did before them.

Having other founder relationships is vital because it allows you to speak about your challenges openly and honestly and co-regulate. These days, most founders arrive at a networking event and already feel the need to signal that they’re “killing it.” This further drives social isolation as it reinforces the dynamic of people not being honest with one another when everyone in the room feels pressure to tell a version of their story fit for their Instagram account.

We need to get founders back in the same room so they can be open and honest with one another. We need to reintroduce that state of co-regulation around the job and accelerate founder learning as they begin to realize the problems they experience are not just happening to them but to every founder of their size and stage. 

At TwentySeven Nine, we’ve already experimented with this concept by having four Seed/ Series A stage CEOs come together for a weekly call to discuss issues they were having and provide feedback in a nonviolent, “no virtue signaling” container. The initial experiment yielded fantastic results, as each participant had their best quarter yet ( as defined by revenue growth). (If you’re interested in getting involved in these experiments, I’m currently piloting three more of these programs with Seed-stage companies around working together to raise an A round. Reach out to me at [email protected], and let’s see if it makes sense for your portfolio companies)  

There are several places and programs like Reboot, Econa, and Venwise, among others, that already run similar programs. There are even funds like Resolute Ventures that make the dynamic of founders supporting founders a core part of their thesis (and, as a result, have been able to consistently attract tier 1 LPs and be the earliest institutional investors into many unicorns). The results speak for themselves. These types of programs and initiatives provide a vital place in the ecosystem where founders can learn to understand how they’re not alone in what they’re going through. To find community, understanding, and perspective.

So as a VC, what’s your role? 

To create structures and settings where founders can openly and honestly communicate. Doing so is the first step in being able to more directly impact your investment outcomes, to increase your founders’ resilience and decision-making capabilities.

In today’s environment, it’s one of the most helpful things you can do.