Steel Mountain Services

Why We Need to Get to Know Founders Before Investing

When a business fails, more often than not it is because of the people behind it.

We recently had the opportunity to meet with Sam*, founder of a budding recruitment agency in Malaysia. His business proposal was simple: import qualified professionals from the US and UK, and lease them out to Malaysian employers. Sam’s company would deal with the administration required for the Western professionals to live, work, and play in Malaysia. The employers receive qualified, good quality staff from a local point of contact with whom they can work out any issues. In return, Sam’s company clips the ticket on his team’s wages to cover his cost of sourcing and managing. On paper it sounds like a win-win-win. Unfortunately, we don’t believe this business has the potential to succeed long term – and the issue isn’t (only) with the business idea. It’s with Sam.

Why the business could work

We went out to dinner with Sam and he pitched us on his idea. He was very open with us and the conversation meandered between getting to know the business and getting to know Sam. There were plenty of reasons why initially his business looked like a good deal.

  • Founder background. Sam sounded like the right person for the job. He shared with us how he had deliberately diversified his background to give himself the best possible chance at being a successful business owner. He made it very clear that he always considered himself entrepreneurial and was prepared to do what it takes to succeed.
  • Founder personality. Sam’s role in the company involved acting as the middle man between employers and his team, as well as nurturing a community of professionals to ensure they stayed. It appeared that he would thrive in that role: he loved meeting and connecting with people, and also gave the impression that he wouldn’t shy away from conflict and would be firm when needed.
  • Strong business idea. There seemed to be a gap in the market for Sam’s offering, and based on preliminary financials it appeared there would be sufficient margin to pay Sam’s wage and some profit. There was even potential to partner with a UK-based charity to reduce costs – a unique and creative selling point.

Why the business wouldn’t work

By the end of dinner, we were sold: Sam has a great idea and has what it takes to make it. And if we’d ended the night there, we likely would have recommended him to investors. However, we wanted to dig deeper so decided to go for a few drinks.
As the night wore on and we spent more time with Sam, we found that there were plenty of reasons why his business would probably never succeed.

  • Founder background. We started talking about Sam’s past and his passions. He told us about a career path he was incredibly passionate about that he hadn’t pursued further in several years, despite it being very accessible to him. He also shared that he couldn’t bring himself to complete a project he had committed to because he disagreed with the organiser’s vision. This indicated an inability to see things through once encountering hurdles, despite best intentions.
  • Founder personality. We asked Sam about his personal life. His friend group consisted of loose contacts with little regular contact, which indicated to us that perhaps his nurturing personality wasn’t as compelling as we had initially been led to believe. He also revealed an unrequited romantic interest with his business co-founder, which is a potential interpersonal conflict that could put the business in jeopardy.
  • Strong business idea. A more detailed financial analysis revealed that the proposed margins were likely not enough to cover Sam’s expansion plans for the business, or meet any investor commitment.  

Why We need to get to know founders

There was more, but hopefully this paints the picture. There is more than meets the eye at first glance, and looking at the people behind the investment is key to assessing its success. And that that look needs to be detailed. A quick meeting and a pitch presentation isn’t enough to look behind the curtain and get a sense of who someone truly is. Assessing founders from a psychological perspective can paint a very different, very valuable picture that can lead to drastically different investment decisions.

We don’t believe in dismissing Sam’s opportunity entirely. Nobody is perfect and if we expected perfection from founders before investing, no money would ever be spent. But for us to consider Sam’s business venture we would want to see some changes as a condition of investment; these would include executive coaching, conflict management training, and regular check-ins for accountability and support. We would also want more detailed financials to ascertain the company’s true growth potential. Lastly, we look for a humbleness and a willingness to learn. Most founders are eager to improve themselves in the name of giving their company the best possible chance at success, and when that isn’t the case we always recommend walking away.

Would you like to prevent mistakes by getting a better read on someone? Whether you are assessing candidates for investment, hiring, or partnership, being able to get a more accurate read on who someone truly is is immensely valuable.  Contact us to organise a workshop at your company, or check out our free Bias Tools here.

*Names and details altered to preserve anonymity. Sam is still pursuing his business idea and we wish him the best of luck.

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