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Due diligence is the backbone of any investment decision. Scenarios pondered and red flags caught can mean the difference in making a multiple on your investment or taking a steep loss. In the world of venture capital, due diligence can take months, while teams pore over financials and market projections. Often during this time they are also conducting due diligence on the management team, evaluating its strengths and weaknesses.
Often, large VC firms will consciously and subconsciously evaluate whether or not they think a startup’s management team has what it takes to go all the way to an exit. Consciously, they may notice that a founder has taken a previous startup (or several) to a successful exit, while subconsciously they may follow their gut with a less experienced founder. Unfortunately, the vast majority of investors stop at this surface evaluation of the founding team. However, digging deeper into the current or potential employees of a company often shines brighter light on just how successful that startup will be in the near term and long term.
“In my experience, the proximate cause of most startup failures is because the team is not up to the next task,” Paul Jones told Forbes. Paul is a former Silicon Valley resident with Cooley Godward and current Co-Chair of the Venture Best group for Michael Best and Friedrich, as well as Director and Investment Advisor for Angels on the Water. “It’s usually at those various pivot points where a team proves dysfunctional under stress and implodes because of it. So your team is of paramount importance.”
VCs have been known to say they would rather fund a bad idea with an excellent management team, than a great idea led by unaccomplished managers. Companies like Kleiner Perkins and Kholsa Ventures have specialized staff who give them visibility to where the gaps are in their portfolios of companies. Likewise their pipeline of potential people at the C level is pretty strong. However, smaller firms, and the venture arms of corporations have traditionally been hands off when it comes to talent strategy within their portfolio companies. This puts their investments at a higher talent risk. Additionally, both large and small firms often fail to look beyond the C-Suite for potential talent risks that could impact a startup’s growth trajectory.
Element 8 is an angel-investment group that understands just how critical the team can be to early-stage startups. Partnering with a firm like Enertech can help support them in their evaluation of potential portfolio companies who apply for their funding. While they size up a company in terms of its technology and market, a talent partner can size up the talent assets and risks of the company. This is an effective, cost-conscience and symbiotic relationship. The investment group gets valuable insight and the talent partner gets early looks at firms that can be great clients as they grow.
Today’s market for grid edge ‘A players’ is extremely competitive, especially for technology, sales and marketing positions. As a result, we have the ability to help groups like Element 8 start their talent asset evaluations early. Questions firms can analyze include:
By assessing the future talent needs over the entire runway of a partnership, investors can get a clearer picture of potential challenges in accessing and competing for great talent, which could materially and dramatically affect growth, relevance, legitimacy and exit.