Almost any venture capitalist will tell you that in the final analysis, what made the difference between an investment that worked and one that failed is the management who created and then executed the plan.
This is a tough thing to admit because what venture capitalists do well is understand business plans, create market reviews, develop SWOT (strengths, weaknesses, opportunities and threats) analysis and create complex spreadsheets. What they are often not specialists in is the softer people skills
Finding a chief executive for a VC-backed business is often very straightforward. He or she will almost certainly be the person who came up with the business idea and, either directly or through a broker, has approached the VC.
At that point it is a question of looking at the experience they have had running a successful entrepreneurial business, or if they haven’t, are they genuinely an expert in the product or service they now want to sell. In depth professional interviewing and conventional referencing will tell the VC if they have had a successful career and have created successful teams before.
The hard bit is both above and below the chief executive.
The right chair
A good CV can tell the VC about an individual’s experience and track record, but psychometric assessment and profiling is the ‘must have’ when trying to understand more about the values, behaviours and competencies of a potential member of the management team.
The logic is simple; if you can understand how an individual reacted previously to a certain set of challenges, you have a very reliable indicator of how they will react in the future to the same or similar challenges.
The VC needs to find a solid non-executive chair acceptable to both themselves and the management. The hiring of non-executives is sometimes still left to the old boys’ network, with the inevitable consequence that you get an “old boy” and not necessarily someone who can act as an ambassador for the VC when conflicts with the management team arise, nor as a referee when, as almost always happens, some of the original management team need to replaced.
So a prospective non-executive chair needs to be psychometrically tested so that the VC can predict what behaviours they will display under pressure, and how they can act as a bridge when genuine conflicts between the VC and the management arise, such as when to sell.
Below the chief executive, it is even more crucial. The make-up, experience, character and skills sets of the management team are almost always what brings an investment to fruition or not. The days of the single heroic leader are gone – now what matters is team-work, the ability to fill in gaps and the will to persevere in adversity.
One of the hardest tasks a VC often faces in the early days is to be honest with the prospective chief executive and tell them that one of the team they have brought with them is not acceptable.
It is therefore not just a matter of interviewing and testing the candidates individually but reviewing the team as a whole, and ensuring that a wide range of skills and behavior types are available within the team. Too many entrepreneurs, sales people and marketing gurus and not enough risk assessors, financial controllers and project managers and an investment is almost bound to fail.
The reality is that the VC world lags a long way behind the most forward thinking businesses when it comes to picking the best people to work in their portfolio companies. Perhaps it is time to put arrogance and gut feel to one side and take some expert advice for once.
Wanda Goldwag is an advisor to Smedvig Venture Capital, Non Executive Chair of a business owned by Barclay’s Ventures and Non Executive Chair of True North Human Capital Ltd who help Venture Capitalists solve these sorts of problems.