How is the invisible gorilla impacting founders’ Investment Readiness Level?

Synopsis: There is a robust theoretical basis in entrepreneurship research regarding the impact of the founders’ top management characteristics on organizational outcomes and its key role in venture capitalists’ evaluations of venture proposals.

The author is looking at this from different stakeholder lenses, and from he’s own lived experience partnering with start-ups who are facing challenges of growing productivity crossing the Death Valley, by increasing their transfer of learning. Should the evaluation of the Management Team due diligence be the norm with trending impact investment? We believe the top management team remains the invisible gorilla outside of finance in the entrepreneurial ecosystem.

Have you seen the ‘invisible gorilla’ on YouTube, one of the best-known experiments in awareness psychology?

You have six people-three in white shirts and three in black shirts-passing a basketball around. The exercise is to count (silently) the number of passes made by the people in white shirts. At some point, a gorilla strolls into the middle of the action, faces the camera and thumps its chest, and then leaves, spending ten seconds on screen.

Would you see the gorilla?

When Harvard researchers conducted this unusual test in 1999, half of the people who watched the video and counted the passes missed the gorilla that was visible onscreen for nearly ten seconds. It was as though the gorilla was invisible. This test has been repeated numerous times all around the world and the results are always the same and correlates with my own lived experience with clients during leadership workshops. Try it and see what happens*

The experiment revealed two things from our perceptual awareness: that we are missing a lot of what goes on around us, and that we have no idea that we are missing so much - This phenomenon is called “inattentional blindness.”

Inattentional blindness happens in business all the time and from my perspective in the human evaluation with investors’ due diligence and/or with entrepreneurs in their investor readiness process (IRL).

When venture capital investors are doing due diligence, they focus carefully on the technology, marketability, business feasibility and management perspectives. Does the company have an interesting business model? How big is the addressable market? What are the growth plans of the company? They use advanced data tools and subject matter expertise to answer these questions to ensure their fund return (i.e. IPO exits) and thereby relationships with LPs.

However, when it comes to evaluating the start-up team, gut feel, and intuition tend to be the main due diligence instruments that come into play with some exceptions with existing proprietary tools. As a Team coach expert since launching Belbin Ireland back in the days, working with hundreds of executive teams, I know this isn’t a great approach. Data shows us that 23% of start-ups fail due to matters of co-founding teams or 14-18% due to team problems (CB Insights 2021).

With entrepreneurs, at each significant life-cycle milestone of their start-up, there’s a danger zone – a Valley of Death – that each company must get through in order to reach the next milestone. If you’re not prepared for growth, and you wade unknowingly into a Valley of Death, you may not emerge on the other side.

In other words, do investors favour the jockey (entrepreneurial team) or the horse (strategy and business model) during their due diligence process? What about the founders – how much time do they spend aligning their senior team prior to a next round of funding?

Latest research from HBR 2021 How Venture Capitalists Make Decisions, found that VCs believe both the jockey and the horse are necessary—but ultimately deem the founding management team to be more critical.

From our experience of supporting management teams of fast-growing start-ups in the TRL 5-9 product-market fit phase, coaching 100+ Scale-ups across Europe with different accelerators, we believe it’s the jockey with limited scientific data on horse ‘matchmaking’.