First published in the Financial Times on the 5th February 2013.
It takes great skill to spot talent. It is as much art as science
Almost every venture capitalist I know says that the most important factor in any investment is the management. And yet how much research do we really do into the people who run the companies we back? Do we truly know them? How can we be sure the team is right?
Many entrepreneurs are naturally persuasive. They are as good at selling their personalities as their inventions and business plans. It is easy to be taken in by a promoter, as I have been on numerous occasions. Moreover, often they do not have conventional CVs, with traditional qualifications and career history. The typical indicators may well be missing – and would, in any case, be irrelevant to the task of creating a company.
Obviously someone’s past accomplishments matter enormously. Generally speaking, the best bet is a founder who has made money in previous endeavours. But there are some who embellish and lie about their true contribution, or indeed their entire past history. Investigating people is not the same as checking the title deed of a property or receiving an audited set of accounts.
A few years back we supported a turnround. The business was on its knees because a high-flying chief executive had been appointed just 18 months beforehand. The chief executive came in with great fanfare and proceeded almost to destroy a successful business that had enjoyed a 15-year history of profits and stability. It took several attempts to fix the damage after the departure of the executive, who nonetheless enjoyed a stellar public reputation.
Spotting talent is a great skill. It is as much art as science. I wish there were a reliable formula that would always prove accurate in picking the winners and losers. I still find it difficult to be sure each time. The hardest ones are the outliers.
I recently bumped into a fellow from Turkey who brought me an oil deal from Azerbaijan many years ago. At the time, every warning light flashed red: vagueness about money, a patchy record, lack of a work ethic. I turned the project down – even though the upside seemed substantial. The deal made hundreds of millions of dollars and I missed a huge opportunity.
We all know that interviewing and taking references is a legal minefield. I’m afraid that far too many disreputable individuals apply for jobs, conning employers and investors with fraudulent credentials. Many will have been sacked for incompetence, criminal behaviour and suchlike but are still touted round by headhunting firms.
And so, yet another type of adviser springs up to help. These are experts one can turn to who carry out psychometric testing and even analyse handwriting. Others forensically check references, and everything in a résumé to ensure you understand the full picture. It is probably worth the expense: if you hire the wrong managers, the costs and disruption of replacing them are enormous – and sometimes fatal.
I have owned different companies with leaders who were alcoholic, suffered mental breakdowns, had undisclosed heart conditions or issues with cocaine abuse. Perhaps medical assessments would have revealed these ailments.
Always take credit references on potential business partners. Study their personal life as much as circumstances permit: if it is chaotic, beware. Such complications frequently spill over into their professional life.
You can draw up a list of traits to look for when judging entrepreneurs: self-discipline, honesty, numeracy, confidence, industriousness, enthusiasm, optimism, decisiveness, commitment and ambition are critical. A few particular attributes I like are domain knowledge, frugality, an understanding of risk, a hands-on approach to operations, a sense of urgency and a belief in kaizen, or continuous improvement (even if they don’t call it that).
Finding all this out in a few months while you are trying to assess a proposition can be almost impossible. Superficial emotions can distort one’s reasoning – it is easy to be charmed or put off by inconsequential facts. Forming a dependable opinion about someone’s character – which is really what you are doing – should properly take an extended period.
Ultimately, I have found that many of the best deals I’ve ever done, from PizzaExpress to Gail’s, have only happened after years of acquaintance with the entrepreneurs concerned.