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’.
Every deal flow generation is different pending the investment thesis of the VC, and novice and experienced VCs may differ in their evaluation of start-up teams / human capital - some investors, as well as founders’, focused primarily on the entrepreneurial skills and market competences of the individuals, whereas others focused on the team as a unit.
At BC Team Coaching we prefer to focus on the unit of the team as research states that Leadership has a 10 to 15% impact on financial performance and a 25 to 30% impact on market valuation. (Ulrich & Allen HBR 2017).
What makes a successful start-up team? Characteristics that are frequently mentioned by VCs as desirable features of start-up teams are industry experience, leadership experience, managerial skills, and engineering/technological skills.
In our own assessment of coaching hundreds of start-up teams across Europe, seeking to understand the linkage between leadership team performance and organizational performance, partnering with our clients on the ‘founder-market fit’ and using our systemic team coaching model with Team Data Instruments, it’s all the above with 22 executive factors shown to be highly correlated with fiscal efficacy. …etc
VCs expect the companies they invest in to use data to improve their decision-making however, using an objective, data-driven process to evaluate teams is not common. With the surge of impact investments, where investors are trying to make a social or environmental impact through their investments rather than just make money for themselves, what is the role of the different stakeholders, entrepreneurs, private investors, public support bodies…etc in the S of ESG?
Women and millennials, who are holding an ever-increasing percentage of the world's wealth as our collective values shift, are generally more likely to focus on social impact issues when making investment decisions, or partnering with investors, supporting the continued growth in this area.
Bernard Chanliau, an award-winning Master Certified Coach (MCC ICF), owner of BC Team Coaching Ltd, is a sought-after professional Executive Leadership and Business Start-up coach / advisor working from the CEO level on down. He has helped hundreds of senior leaders in the last decade (directors and above) accelerate their leadership careers and achieve business objectives in a wide range of industries.
Bernard works at the intersection of organisational dynamics, systems thinking and integral psychology and helps you challenge everything – and reveal the core purpose of how and why you do business.