Ok, so in images:
I have a folder setup within a tab:

If I don't have the Open folder as a menu option set, everything works...

But if I have the Open folder as a menu checked it doesn't launch anything.
The primary difference is that if I don't have the Open folder as a menu checked ... and I select More->Open file location ... after right-clicking on the game to launch...

It points to the shortcut file ...

Where if a use the similar option with the Open Folder as a menu checked ...

It points to the .exe of the game ...

Please keep in mind that the shortcut properties contain the .exe to launch, along with additional information (like which directory to launch from) ...

And this is the primary difference I see between Opening the folder as a menu (or not) and to be honest, I'm not sure why the two options would point to different files to launch. It's also interesting to me that when I right click on the game to launch, the options are different between when I have the Open folder as a menu checked (or not). When it isn't checked, it seems like it's Start11 related options, and when it is checked it's Windows related options.
I hope this clears things up.