(A.K.A. The 1% Investor Challenge)
I often hear from CEO’s and Investors that one of their strategic guidelines is to “invest in the team” and that talent and culture are strategic differentiators. Based on my experience, I think they mean to find “ready-made” leaders and executive teams and give them money to succeed in their plans. In the past 25 years, I’ve worked with thousands of leaders from front line supervisors to middle managers, and from senior executives to entrepreneurs, founders and board members. Not one of them was a “born” leader.
Successful leaders have many stories about how their experience has shaped their approach to business, people, and customers. Many are “self-made” leaders, having learned quickly from their mistakes, adapted to unforeseen circumstances, or demonstrated relentless curiosity. All great leaders are made over time, with dedicated focus and effort toward personal and professional effectiveness. If you look closely, there is sufficient evidence in someone’s life to inspect and evaluate if he or she is effective in key aspects of “scalable” leadership, but this is too often left unexamined by investors.
Having worked side-by-side with founders at dozens of start-ups, I can tell you the demands on company executives are tremendous. They face high speed, complex, ambiguous, uncertain conditions all day, every day. It strikes me as odd that investors don’t actually “invest” in the leaders of their companies. They hand over millions of dollars to the Founder/CEO to build a company, but they rarely spend any of it on the leaders themselves. I think this is an incredible oversight in diligence, and a gaping hole in fiduciary responsibility. Hope is not a strategy.
It seems unreasonable to assume a CEO (even a serial entrepreneur) will be successful leading a fast-growing, 100+ person organization with no attention to his or her personal effectiveness. Their very nature makes it more likely they will end up like Travis Kalanick than Sheryl Sandberg. Leading a complex organization (anything over 40 people) requires a well-honed set of interpersonal skills, professional presence and strategic talent planning (see Facebook and Google) to be successful. Yet most investors stand by passively while CEO’s and executive teams struggle with leadership basics and burn their money. The failure rate of start-ups is very high… conventional wisdom says 9 out of 10 don’t make it. There is much agreement that leadership and management mistakes are often the main cause of failure.
Recently I’ve approached dozens of venture capitalists and private equity investors with a proposal to invest in their executives through proven leadership tools and programs. Nearly all of them have responded with some form of “that’s nice to consider some day, but we don’t have enough money right now.”
What they’re really saying is, we don’t care about the actual people in the company. We make a bunch of investments and hope like hell at least 1 pays back enough to carry the fund. This is called spreading the risk, but is essentially gambling. All that people stuff is too messy and soft to address so they just ignore it.
I think it’s time for investors to start owning the outcomes of their lack of attention to leadership and talent. If you want to make a difference in the world by building companies, you should conduct diligence on your executives, not just the company finances, addressable market and customer traction. If you think talent and culture are strategic differentiators, ensure that proper efforts are being made to develop the CEO and the executive team. Otherwise you’re just hoping some whip-smart founder will somehow figure out how to transfer zero experience working in groups to high impact organizational leadership.
I’m here to tell you that execution matters,
and execution is all about people.
The average Series A deal size in 2016 was $5M. Series B average was $12M, and later stage deals average over $25M. I’ve heard more than one CEO say they put their money on advertising and engineers, not HR. That might get you traction, but it won’t get you sustainable high performance. If you are in the game for a quick flip, I get it. But if you are really trying to build a high performing company, leadership is not “nice to do,” it’s an essential catalyst that unlocks sustainable growth.
Here’s my challenge to any investor willing to test it:
Earmark 1% of your next investment for executive development. If you’re putting in $1M make sure $10K is spent on development for the CEO and the leadership team. If you lay down $10M, certainly a $100K investment in the top team will improve your chances of success. Even better, consider investing 1% of your total fund in the proper resources to support leadership development in the full portfolio. You can achieve much better economies of scale and cross pollination in that approach. You can even develop a unique portfolio advantage by doing this better than other investors. It’s a true value add for your money. And it will pay you back with better performing companies and a pool of talent you can tap over the long haul.
I understand that not all development is worth it, and that some efforts are a complete waste of time. Run your 1% investment like any other A/B test. Identify the intervention and track the progress. If you have any questions about what kind of leadership development works best, feel free to contact me or check in with an executive development specialist you already know.
If just one more of the companies in your portfolio steers clear of the failures of executive leadership your fund will be twice as good. That’s smart money.