Scholarly and anecdotal evidence show co-founder breakup – the replacement or the departure of a co-founder – is common in early entrepreneurial teams. In the absence of objective evidence on inherent venture quality, investors evaluate young start-ups using diverse quality signals derived from the limited information available about the founding team. We show co-founder breakups work as “soft” data, informing investors about the quality of the founding team and thereby affecting their evaluations. In parallel with in-depth interviews with professional investors, we conduct two pre-registered survey experiments on 1,452 individuals who have experience with start-up funding in the form of crowd-funders, business angels, and venture capitalists. We ask these investors to evaluate start-ups with versus without co-founder breakup, using real business cases that are identical across conditions. In Study 1, we find investors perceive the quality of start-ups whose team experienced co-founder breakup (compared to start-ups whose team did not) as lower in terms of viability, competence, and warmth, and, in turn, are less likely to invest. In Study 2, we find the penalty is reduced when the breakup is due to a business-related reason (e.g. inadequate skill set). In contrast, we also find co-founder breakup due to personal and emotional conflicts among co-founders significantly increases the penalty. Our research sheds light on the nuanced dynamics of co-founder breakups and their impact on investors' perceptions and decision-making, which has important implications for the startup ecosystem.
