Unravelling the human dynamics of an investment
Many high potential businesses do not fail because of intrinsic problems with the product or service, poor market conditions or, even, simply bad luck. They do so because the people running the enterprise lack the right attitudes, motivations, and confidence. Many investors have a hunch that something may not be ‘quite right’, but don’t have access to the expertise to assess the risks or improve the chances of success.
Mention ‘due diligence’ to most investors and they describe their analysis of the business, its’ market potential, product or service capabilities, past performance and ownership history. They may have met members of the executive team and developed an impression of their likely abilities, often by reading a few carefully prepared biographical notes that focus on qualifications and experience.
In the past, recognising the importance of a balanced leadership team, a few investors have used psychometric assessments to get a picture of the relative and combined strengths and weaknesses of the proposed management team. While this gives some insights into the individuals, such instruments are not usually contextual – they don’t tell us how the individuals are likely to cope with the growing business, whether they appreciate the ways in which their role will change, how they will respond to very different expectations and performance measures. Nor do these tools give us any real insights into the motivations of the individual as they embark, often for the first time, on a path in which they will be expected to demonstrate far more autonomous leadership than before.
At the senior management level, we generally expect individuals to have the knowledge and essential skills to perform their job. A large corporate structure is highly protected and doing well within it is very different from doing so in a smaller, investor-backed, business. In this situation, two qualities come to the fore: individuals’ attitudes and their confidence. These are subtle and rarely assessed by a ‘scientific’ method and yet they are crucial to the success of the enterprise AND YOUR INVESTMENT.
You will have plenty of experience, I am sure, of leadership teams that fail to deliver despite the promise of their proposition. When that failure is examined retrospectively, technology, markets, external economics and, even, luck will be given as reasons. Rarely will the confidence and attitudes of the team members be considered even though there is evidence that as much as 90% of performance is dictated by these. Whether led by one charismatic individual whose personal agendas (usually ego-driven rather than financial) dominate their decision making, or their confidence crumbles when they’ve no external authority reinforcing them, cajoling or incentives will not turn them around.
The art of investment depends not only on a scientific approach but also on an understanding of the subtler dynamics at work within the leadership team, and that is where I help investors.
Drawing on a background in Behavioural Science, a training in psychotherapy, 20yrs experience shaping cultural aspects of work-place performance, and over a decade in leadership development, I have worked with a small number of investors in the assessment of the potential human risks associated with a possible venture. I make no excuses – my approach is steeped in the art of psychodynamics and depends on my ability to establish an intuitive connection with the individuals and the organisation that they are leading – if it was purely scientific, then anyone could do it. That said, psychodynamics is one of a handful of branches of psychotherapy recognised by the NHS as scientifically valid.
Over the years, I have highlighted individuals whose personal needs dominate their decision-making, others close to meltdown, some critical to the success of the venture who were protected by their peers despite being unable to fulfil their role. I have helped expose fears, projections, and disabling mind-sets. Quite extraordinary dynamics within teams that have predetermined the outcome of discussions and prevented effective action, have been unravelled, and glue that appeared to bond some teams together has been seen to be based on pre-existing pathologies rather than healthy factors.
Typically, asked by an investor to visit their prospective* client, I combine a tour of the organisation with one-on-one interviews of the leadership team and a few other critical staff. No one is expected to reveal more of themselves than they are prepared to, but individuals often report that the interview itself was particularly helpful to them in exploring their doubts and uncertainties. At the end of this process, I prepare a succinct report outlining the strengths and potential threats associated with individuals, observations on the collective and how it might work, and any other overall observations. I see no value in couching this in vague terms – it aims to inform not obscure. I expect the report to be treated in complete confidence, and to be a part (not the whole) of the wider diligence process. IF we agree that it is appropriate, I am happy to discuss elements within it with the team and explore how they can be more effective in the future.
* From time-to-time, I am asked to fulfil a similar role within an existing investment. While the process may be slightly different I am happy to work in this way too.