Founder due diligence is a topic of hot debate. Some VCs rely on gut instinct and pattern recognition to try to spot the signs of success they’ve seen in other founders, while others approach it more scientifically, relying on diagnostic tools and psychological analyses to find the right entrepreneurial profiles. However, very little attention has been paid to the assessment of teams, despite the pervasive sentiment that getting the team right is just as important as having the right product.
Organisational strategy offers a solution to this for Series B investments and beyond. It allows investors to evaluate founders and their teams against the roles and outcomes that will be critical to the company’s success in the next phase. Rather than relying on historic patterns, it looks towards objective goals that the entire team is committed to and creates room for a wide range of styles and experiences. This article explores how organisational strategy can be used in evaluating individuals and teams in VC due diligence processes, with the goal of not only creating better investments, but establishing effective partnerships post-investment.
Organisational Strategy as the Starting Point for Evaluation
The first article in this series discussed how investors can build their understanding of a company’s organisational strategy during due diligence. As a quick reminder, an organisational strategy is the core choices a company makes around organisational design, ways of working, governance and/or talent to help the company reach its strategic objectives.
Consider the example of a Series B, B2C Fintech company looking to expand from Europe to the US. Their organisational strategy may include:
- Transitioning from a functional organisational structure to a matrix model to support both regional and departmental priorities
- Evolving how the product roadmap is prioritized to appropriately weight the needs of the US market against and the legacy European users
- Increasing company expertise on the US market, specifically around the regulatory environment, marketing channels, and customer personas
Ideally, the organisational strategy gives an investor a clear sense of the competencies required for the next phase of growth that can serve as a basis for assessing the management team. That said, there is value in investors developing their own perspective, as they may bring ideas and lessons learned that the management team hasn’t considered. To demonstrate this using the Fintech example from above, investors might press on the fact that the organisational strategy doesn’t mention adding management team presence in the US, despite it being critical to the company’s success. Because organisational strategy is a key component of the overall company strategy, testing it is a critical part of due diligence.
Evaluating the Members of the Management Team
Armed with an understanding of the company’s objectives and strategy, investors are almost ready to begin their assessment. They just need to determine who to evaluate.
Historically, VCs have focused their assessments on founders and technical leaders. In seed stages, this makes sense, but once a company has an established product and monetization strategy they are preparing to scale, there are significantly more dependencies across the management team and thus more critical points of failure. Given this context, it’s advisable to not only evaluate the CEO and CTO/CPO, but anyone who has significant responsibility for driving company strategy – likely those overseeing Sales, Finance, Marketing, Operations, and/or People.
The goal of the individual management assessment is to determine a leader’s fit for their role in the next stage. While someone’s success to-date may point towards their strengths and weaknesses, it certainly doesn’t guarantee success in the future. In preparation for conversations with each leader, VCs should reference the organisational strategy and consider:
- What is this individual’s role today and how will the role scope evolve tomorrow?
- What experiences and skills are need-to-haves for the next phase of growth? What are the nice-to-haves?
- What are the key hurdles this role will need to overcome to be successful in the next phase?
The answers should provide the basis for a list of the requirements for each role to evaluate the members of the management team against. With this prepared, it’s time for interviews. If possible, get an hour with each interviewee to cover:
- Their experience to-date
- How they believe their function supports company strategy
- What their role requires today and how they see it evolving in the next stage
- How they work with other functions and where the pain points are
- What needs to change within their function and the broader organization to achieve company priorities
- What unique perspective they bring to the executive team
- What they see as their strengths and development areas
From these questions, an investor or talent partner can determine whether the individual meets the role requirements identified going into the conversation. But it’s also an opportunity to pinpoint areas for development if an investment does take place. This type of feedback is invaluable for leaders and helps build an open and honest relationship between investors and management teams from day one.
After reviewing the management team as individuals, it’s useful to take a step back to consider them as a team. Again, the purpose here isn’t just to get to a yes/no investment decision, but also to ascertain if there are any gaps that should be prioritized when hiring in the next stage and to identify any problematic group dynamics. Typically, these can manifest in teams as:
- Lack of scaleup experience
- Lack of experience in an area of strategic priority
- Lack of diversity in gender, ethnicity, and/or culture
- Critical psychological roles that aren’t being filled
- Group think / lack of healthy debate
- Inability to effectively set or communicate priorities
- Inability to resolve conflict
While it can be easy to discount issues as interpersonal concerns with limited scope, they may be replicated across the organisation if they aren’t mitigated quickly. This is of particular concern if the company is scaling quickly. Consider a company where the CPO and CRO don’t see eye-to-eye and thus avoid coordinating. It’s likely this relationship will be reflected across the broader Product and Sales teams to the detriment of the entire company. VCs benefit from having this context early on so they can take a more hands-on approach shaping the organisational roadmap even before investment.
The Role of Psychometrics & Personality Tests
Psychometrics are increasingly popular in due diligence processes, but VCs should think carefully about how they’re being used. If the intention is to start a discussion around personality at both the individual and team level, they can be a useful datapoint. The key is to ensure they’re interpreted and applied correctly. Personality tests are not all equal, and it’s advisable to use one that is scientifically validated, like the Hogan Assessment, and to ensure the interpretation is done by a qualified practitioner who can contextualise the results.
Rather than using psychometrics and personality tests to disqualify an individual or team, consider them as a helpful starting point for inquiry and coaching. Here are a few ways they can be used effectively:
- Beginning a conversation with a Founder or management team member on likely strengths, motivations, and derailers in times of stress
- Identifying the psychological roles that might be missing from a team, which they might prioritise in future hires
- Diagnosing the personality drivers that may impact the culture of a management team
VCs are strongly encouraged to share back the results from the personality test and, if relevant, use them as an opportunity for discussion. Particularly with founders, this is both an opportunity to reflect and to respond to the findings by adding their own nuance. The goal of psychometrics shouldn’t be to reduce people down to a few categories, but rather to tease out what makes them unique – a distinction which should create much more opportunity for a range of personalities.
The VC community is still in the early days of formalising a process for evaluating management teams that is as rigorous and data-driven as their financial analysis. But as the due diligence process evolves, organisational strategy provides an invaluable starting point for assessing leaders by looking ahead rather than backwards. There are consistent, yet painful, challenges that most every tech company must overcome on the hypergrowth journey, but by selecting and preparing the right team early on, VCs can make a profound impact on the trajectory of their investment.