It is so exciting when someone has a great idea for a business. They have spotted a big need in the marketplace, came up with a solution, and have a whiz-bang presentation. You are eager to help them, either as a business partner, or as an angel investor. You are willing to put either time, money, or work in to help them succeed, and make a healthy return for yourself.
But what if you are dealing with a psychopath? What if you are handing your money, reputation, and work over to someone whose sole intent is to exploit you, leaving you with debt and pain? It happens far more often than you think. One angel investor estimated that 30% of their investments went to psychopaths. Just think of Bernie Madoff, and remember how many wealthy people he fleeced.
A business start-up actually is an excellent opportunity for a psychopath. Their silver tongue and glibness helps them give excellent presentations. They have an unnatural ability to persuade people, even experts. For example, a psychopath will get a shorter prison sentence than a non-psychopath for the identical crime. They will get parole sooner than the non-psychopath, even though they are far more dangerous to the public. If psychopaths can fool judges, parole boards, and psychiatrists, they can certainly fool investors. Their narcissism comes across as self-confidence, which can wow potential investors. They have no hesitation about fudging the numbers, since they are liars by nature. Because psychopaths are easily bored, they love to pump up a presentation or new business. They tend to wander off when it is time for the long-term, hard, steady work of growing a company.
The problem is clear. Potential investors or partners are in an environment that is an ideal hunting ground for a psychopath. And unlike parole boards (who at least know they are dealing with criminals), investors have no accurate way to separate the wasps from the bees, who will work hard and bring in the honey.
But that is only the first half of the problem. Because a new company is more than just the founder. It is the employees as well. And how the employees relate to their manager has a massive impact on the survival of the company. Over and over, the research shows that the single best predictor of an employee’s productivity is the quality of relationship they have with their manager. If they strongly trust their manager, they will be highly productive, be healthy, and stay as long as possible with the company. If they do not trust their boss, then productivity will tank, and they will run for the doors. I watched one start-up replace half the staff every year because the founder was such a bully. The boss would stomp around, tell people their work was a 2 out of 10, and lie to them repeatedly. Meanwhile, he presented himself as an expert in emotional intelligence.
But this huge problem was ignored by an independent valuator. The valuator saw an excellent market opportunity, low competition, and sales that increased year after year. They created spreadsheets and reports that said the company was worth multiple millions. Two years later, it was basically worthless, largely because of the crippling turnover.
This shows a deep flaw in how companies are valued by potential investors. They look at cash-flow and debt and other financials. They listen to the founder’s pitch. But they never measure the single best predictor of an employee’s productivity, and length of stay with a company. They have no data on whether employees will give it their all, or will sprint for the exits. And if investors ever do talk to the people who will do most of the actual work, the founder is standing next to them, making sure the employees say the right things to the person who could pour badly needed cash into the company.
No wonder 90% of investments made by angel investors tank. No wonder so many business partnerships break up. These major decisions are made without any data on whether the founder is a psychopath, or a businessperson with a great idea. And the company valuation process does not collect the data on the single best predictor of an employee’s productivity and length of stay in the start-up.
The solution is to gather the right data. There are scientifically valid ways of assessing trustworthiness. People leave clues all through their life, if you know where to look, and what to look for. It is also is possible to accurately measure how much employees trust their manager. As a psychologist, I have expertise in both of these areas. I assessed psychopaths for parole boards and for the courts for many years. I also have worked with companies to assess trust between employees and managers. So if you want to make better decisions as an investor, or in forming partnerships, by knowing how trustworthy the person is, and how much their team trusts them, then send me an email at email@example.com .
Dr. Eric Kuelker R.Psych.