[A long read – because it is important]
Investable management teams start with their investors. Investing the time to create the organisation and then building its core asset – its people. The best investments are in teams
The recent rash of failed/failing IPOs attest to the importance of teams and quality of their advisors. It underscores the draconian realities of start-up failures.
Regardless of type and longevity, at its essence, building and managing a business is all about people. It is the defining element of any company’s success, especially in times of volatility. Start-up, Restructuring and Turnaround phases have their particular wrinkles but the lessons remain the same.
“Investable” by its nature suggests a team’s focus is to generate high or at least above average returns. An investable team is one that doesn’t hold the business to ransom but can mitigate the known and unknown risks that will impinge on the business. More seasoned investors appreciate that absolute returns and sustainability are important dynamic aspects for continuing growth; as opposed to dramatic bullet improvements with limited duration.
This perspective is based on the team building experience of successful investors such as. Sir Richard Branson; James Dyson, Reid Hoffman or even turnaround stars, such as Enrico Bondi, working on behalf of institutional backers. Once built, team leadership is essential.
For a start-up there are 10 aspects an Investor should consider as one builds the organisation and then leads it.
>Team building: during the creation/set-up period
Sometimes the Investor has the luxury of being involved from the very beginning; often times not. As arriving Investor, s/he needs to set the stage for the organisation.
1. It starts with the Investor
Investors are much a part of the team as the day-to-day management.
Regardless of the metric, “management” is invariably cited as the main factor affecting success of the enterprise. Statistics reveal that a new venture’s success varies from 50 to less than 10% over a four-year period. Failure seems inevitable. Also the average tenure of turnaround CEOs is less than 30 months.
In short, all the best business proposals and plans are worthless without reliable implementation, and that means an “investable” management team.
2. Context is all
Context sets the frame for expectations, requirements and basis for success. Context applies to the nature of the investment opportunity as well as to the investor type. The business angel will have a different set of metrics versus that of a fund manager, institutional investor or even a private equity house. “Measure risk!” exclaims Charlie Munger, which is his (and Berkshire Hathaway’s) first rule for investment success.
3. What are the investor’s objectives?
The investor must act a responsible principal and determine a realistic set of objectives.
Essentially, this objective is how much one is willing to invest (and loose) and what are the return parameters: time to realise and amounts. This clarity will allow the principal to determine the type of persons and structures required. These need to be reasonable and realistic within the context of the business. A start-up has very different demands and challenges than an established enterprise. Size, scale, performance history & prospects, organizational legacy and competitive forces all shape this complex dynamic.
Without this objective firmly set there will always be issues with regard to the team and its performance. According to Hoffman, “You want to measure your endeavor as soon as possible. You want to be able to gauge the viability at the earliest possible moment, so that you can change and adapt your model as needed”. It is important to define an investment’s “failure point”.
From the team’s perspective the importance of this aspect is reinforced. A recent study of 300 high performance teams by Ashridge revealed that 81% cited “clarity of goals, outcomes and deliverables” as being essential to success. This clarification process will reinforce the importance of free cash flow (and how it is generated), rather than other more mundane business, operational and financial measures.
It is surprising how rarely the investor’s objectives are discussed or shared with the teams as a means of communication or even sanity-checking.
For Hoffman a business’ success is meeting a clearly differentiated consumer need. “Good entrepreneurs try to measure what they are doing sooner, and adapt to a changing market place”.
4. The team is more than just management.
The success and durability of an organisation is the formal and informal network of individuals and the changing roles they play: be they founders, original and later stage management. There is a dynamic flow & ebb to a successful organization.
In any enterprise there are probably at least three formal teams and certainly an additional two to three informal clusters: six in total. The investor needs to recognise the hierarchy, composition and interaction of these component teams.
Broadly speaking, the formal team consist of three parts:
- The Management team, with its critical positions of CEO, CFO Sales/Marketing. There is no business without direction, attention to performance and revenues.
- The Board of directors. This should be composed of experienced CEOs or former CEOs: people with relevant experience and committed to the business. Two aspects to watch are: the relationship between the Chairman and CEO as well as; the independence of the NEDs.
- Finally, the professional support team. Essentially the accounting and legal advisors who should be bringing both expertise and objectivity to the organisation.
The informal team is more important with start-ups but will be present (in some form or fashion) in established organizations, beyond functions and departments. There are at least three components here.
- The Engineering team, which is often the `sweet spot´. It is the “easy part” for most entrepreneurs, be they: technologists, architects, programmers, designers etc. As such it demands attention from the investor.
- The Customer team. Even without a product you need someone to interpret `customer needs´ and why the company’s product/service is relevant and meets these demands.
- The Technical/Market Advisory team, who are experts in the company’s chosen competitive arena, who will add value to your ideas for product & market.
As an investor one needs to understand the totality of the teams and their potential to realise value. Remember – investable teams attract customers as well as funding!
5. Profiling Reputation & “track record”.
Many like to speak of a “track record”. It is often taken as a proxy for independent assessment, an informal seal of approval. In its extreme can be a brand for certain individuals, such as Branson or Dyson.
The issues are relevance to the situation at hand and related metrics. There are numerous aspects that go into track record or desired profile.
- For the savvy investor, that means understanding the relevance of past actions.
- More importantly the: persona, skills, capabilities and context of past success.
- Understanding an individual’s or team’s `failure´ is as useful. Rare is the success-only individual. If one’s assessment is that the individual has learned from the relevant experience then that is a positive sign.
- A more fulsome definition of the task may well allow for a non-obvious candidate to be considered and rewarding decision made.
Any decision will involve compromises. Often an investor is having to decide between individuals who have similar experiences against the correct attitude and aptitude for task at hand.
The ‘Skill/Will’ framework is a useful one. It encompasses:
- “Skill of the candidate for the task” versus “Willingness to undertake the task”.
- ”Willingness” is invariably a more important attribute than “skill”; as attitude suggests ongoing development, whereas skill is static.
Ranking an individual along these two dimensions is a useful shorthand as well as understanding the underlying reasons as to one’s judgement.
Too often investors will overly penalise individuals for not being a perfect fit. It is rare that one can find individuals, let alone whole teams, that can be transplanted from one situation to another.
>Team leadership: keeping the team performing
While individuals and their skills are important (and in a start-up personality may play a larger role) the notions, and the display, of collaboration and balance are important. These attributes are most apparent if one considers the “team” requires a “whole brain”: shared intentions, complimentary skills, emotional maturity.
A related issue is that an organization’s requirements change with time and context. The ideal team of a start-up may not, in its entirety, be the most appropriate one to take undertake a fundamental change programme or deal with a crisis beyond the narrow initial confines of the original venture. Better investors recognises this evolutionary process and frequent review their team decisions.
So how does one know which individual and team is investable? Interview well, recruit and then monitor coach/train. At the core: constantly ask “why?” against one’s agreed success criteria, test issues, listen carefully and make an objective determination. From this basis there are a few fundamentals that must always be considered.
6.Manage a structured assessment process
From all the decades of observations and research one would say by definition these are investable. ‘High performing’ [(AKA Investable) teams’ have three common essential elements: capabilities, temperament and fit with others.
Too often decisions with regard to HR and senior appointments do not dwell nor penetrate to the real issues. More time is spent on numbers rather than empathy. If the investor is engaged or will be engaged in the business on a day-to-day basis the need for objectivity is even more stringent.
A thorough & structured research & interview process will reveal the strengths & weakness of a candidate. A full assessment of character and potential needs to be set against the (appropriate) task at hand. Myers Briggs testing, or other such methods, are useful tools – but they are not an alternative for a decision. Don’t be afraid to go beyond desktop analysis. Go directly to the source and speak to the individuals concerned.
With that as a base the investor can begin discerning his/her team performance and keeping it investable.
7. “360° (degree) communications”
360° is an apt phrase as it captures the need of any investable team. It is more than just transmission but also encapsulates the skills of listening as well as assimilation by Investor and team member(s). The Managing Director/CEO must be an above average practitioner. It needs to be second nature to him or her. Yet the team members must also display this skill individually and collectively.
As importantly is evidence of active feedback, listening and learning. The same Ashridge study showed that 75% of the better performing teams cited “regular and frequent reviews” as being an important characteristic of their successes. “Team happiness” is an interesting concept.
This reflects an ability to take decisions and making things happen; particularly in the absence of perfect information (especially in new ventures).
Hoffman’s view is straightforward. “Entrepreneurs tend to want to launch only when their product or service is perfect. The problem is that waiting undermines the ability to evaluate whether the idea works as quickly as possible, so that you can correct course. Correcting course frequently is key to success. For example, we successfully incorporated changes from PayPal into LinkedIn”.
This ability to adapt, progress and take decisions entails a high tolerance for risk as well as an ability to make decisions based on imperfect knowledge (often the case).
Better teams are self-correcting; making their own HR decisions or proposing changes. While rare such actions are to be encouraged and rewarded.
9. Power, Influence & Trust.
PIT attributes set the basis for action-orientation and a sustainable working environment. Being able to tap and leverage an informal network is as important as formal structures and routines. Making decisions is predicated on clear decision rights and applied empathy or “emotional intelligence”.
Investable teams also display an ability to understand and take the `owner’s perspective’. Their actions being driven by the concept of doing: “what is right; not who is right”.
Interestingly, Hoffman point of view is adamant: “I have never invested in a startup that wasn’t initially recommended by someone I trusted”.
Venture capitalists, as a rule, are less worried with the dominating ego of the inventor or founder; as long as interests are aligned and control mechanisms are in place. Private equity investors on the other hand, are further along the spectrum, as too family-owned business. They may seek a key appointment who adds to a more harmonious working environment, only drafting in a “recognised star” for specific tasks.
At the end it is a matter of ‘fit’ with the Investor as well as within the team. You as the investor must have developed both an agreed business approach as well as empathetic fit with the team.
As the investor you should imagine yourself as a yacht-owner choosing the crew and all its supporting requirements including the yacht. Such a construct helps clarify a great deal of the imponderables. In determining whether a management team is in investable, the skipper & crew must be fit for purpose.
“Investable teams” are rarely found fully formed; they are shaped and nurtured by their investors and experiences. Clearly enunciated and share goals coupled with a probing process and ongoing review provide the best chance for success- creating value.
Do read my other blog entries!
Justin Jenk is business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard universities. Justin can be found at justinjenk.com or www.raktas.ee or researchgate.