As an investor, how much time do you spend looking into the founders behind the start-up? Getting to know them outside of their LinkedIn profile, track record, or pitch meeting. Diving into not just the founder’s ideas for the business, but what makes them tick as a human being?
A business idea is only so valuable on its own and the main reason companies succeed or fail is a human one. The best ideas in the world meet their demise due to incompetent (or perhaps just underdeveloped) leadership.
Here are a few stories that will likely sound familiar:
- An inexperienced leader insisting on a flat company hierarchy, causing delays in decision-making and tensions among team members, ultimately resulting in the company running out of capital before producing a viable product.
- A founder or executive who pays himself more than the company can afford, effectively using start-up capital to bankroll a lavish lifestyle while the company flounders and eventually fails.
- Unclear or conflicting visions from founders resulting in development of a product that doesn’t meet the needs of their target audience.
Millions of dollars of investment resulting in failure and not because of a poor concept or market issues, but because the founders screwed up. A good idea needs the right people behind it and the right guidance to bring it to fruition. We believe that by assessing only the idea and not the human, you are missing out on valuable information when making investment decisions; a proper assessment of the investee’s personality is vital for maximising the return on investment.
The Case for Support
And once you send founder out into the big wide world with your cheque, how much time do you spend nurturing their success? Do you know precisely what they need to ensure the success of their venture?
A more thorough assessment of the human beings behind the business idea is necessary to avoid costly investment mistakes. It allows you to weed out those who are not a good fit for your funds and removes instinctive bias from your decisions. However, no human is perfect, so any assessment will throw up potential reasons not to invest. If there are no red flags you’re not looking hard enough. So, how do you ensure that founders will not let you down?
Just because a founder has character flaws doesn’t mean they should be immediately written off as a potential investment. That may be true in some instances, but as much as possible we believe that a person should be given the opportunity to develop themselves and grow into their role. Entrepreneurs in particular are a breed of human that is driven to grow and change, so if the business is otherwise sound, we believe that the training and development of an investee is a sound way to guarantee ROI.
Why not spend $10k to turn a $1m opportunity into a $10m one?
If a founder is lacking confidence as a leader, provide them with leadership training. If the business idea lacks vision and clarity, instruct them to work with experts to refine their idea before spending any more time on development. This approach isn’t limited to the initial investment phase either; if a company in your portfolio is not delivering on the returns it should be, work with them to assess the cause of the issue and get back on track. (We guarantee it will be a human or systems issue, but that is the subject of a future article.)
A carefully implemented closer working relationship between the start-up and VC firm can only lead to greater gains for all involved.
The Case for Outsourcing
How do you know if the investee is being genuine with you? Can you really be impartial when it comes to making these decisions?
All too often humans agree to decisions simply because we “like” the person, and human psychology says we often like people that are similar enough to ourselves. This means the people you say yes to are more likely to be of a similar gender, race, or psychological profile to you. However, it doesn’t mean they have your skills, experience, or mindset, and it certainly doesn’t guarantee their success.
A good leader recognises that they need a different kind of person from themselves to fill a different kind of role. The same applies to investment: different kinds of businesses need different kinds of people at the helm.
How many people have you said “no” to simply because you didn’t like them?
We understand that it’s challenging to assess someone well enough in a short period of time to get a true sense of them, especially given the power dynamics at play in the founder/investor relationship. Not only does it require time, but also the ability to filter through a maelstrom of information to map a person’s psyche. Given these factors, it makes sense to outsource this assessment.
Enter Steel Mountain Services. We have the business and psychological backgrounds that make us experts at assessing founders and their businesses. As external consultants, we can spend time with founders without the pressure of being the one writing the cheque, allowing us to cut to the core of who someone is and what they need to succeed. We provide you with an unbiased report that paints a complete picture of who you are investing in: their strengths, their weaknesses, and what they need in order to succeed and generate returns for you. We are looking for investors that are interested in increasing their portfolio’s overall returns, so please get in touch if you would like to explore this approach.
If even a small percentage of potential investments were assessed from a psychological perspective and offered ongoing support, we believe investors would see an increase in overall ROI, and a much more capable and robust economy.