From an investor’s perspective, effective leadership teams add as much as 25-30% of a company’s market valuation. All told, this adds up to billions of dollars in the investment and startup economy.
There’s just one thing – consistently placing the right executives in the right roles can be incredibly difficult.
That’s the challenge Private Equity and Venture Capital firms face every day. Not only must these firms build their own competitive leadership teams, but they also tackle this intimidating task on behalf of their portfolio companies.
To better understand how Private Equity and Venture Capital firms build winning leadership teams – and help founders position themselves for success as investment looms – we sat down with leaders from Oak HC/FT, Francisco Partners, and Providence Strategic Growth.
Here are the behind-the-scenes insights we uncovered:
It’s tempting to think that you can evaluate an executive with a resume or “business scorecard,” but there’s no one metric or accomplishment that can tell you who the best person for the job will be. It’s a much more complex and relationship-focused process.
“Assessing talent in the portfolio is ongoing and always top of mind, and I don’t think anyone has nailed it,” says Lori Ali, Managing Director at Providence Strategic Growth, who specializes in organizational dynamics and operations within portfolio companies, as well as coaching CEOs in her portfolio. “No matter what kind of assessment tools you use, at the end of the day, it is fit and synergy and other nuances that are very hard to measure.”
“When we go to the investment committee, we take a hard look at the talent,” explains Ali. “A lot of what I’m processing is gut instinct, conversation, and experience. If they have a good track record, references, strategy, we’ll use the diligence process to suss out talent-related issues.”
In the Private Equity and Venture Capital spaces, it’s easy to get pulled into a niche or area of specialty and stay there. But while domain expertise is incredibly valuable, variety of experience is critical when building executive teams.
“I try to bring together people with different levels of experience, such as a mix of early stage and late stage growth to introduce rigor into the team,” says Leah Scanlan, Partner at Oak HC/FT who does a lot of internal recruiting and relationship building to develop the firm’s company culture and nurture a network of seasoned talent. “Finding people that are synergistic and who bring skills and experiences that are different but compatible ensures they can learn together well.”
“For example,” Scanlan explains, “If I had a full executive team with many years of healthcare experience, I’d think about bringing in someone who has been in other industries to disrupt their habits and introduce some out-of-the-box thinking.
The brilliant, visionary founder or CEO is one of the most prominent cultural stories we tell. But success in building executive teams is not all about smarts – it takes other things like emotional IQ and grit to make it in this industry.
“When I think of what kind of company we’re looking to invest in, I can’t think of a better word than scrappy – an executive or team that has the right mix of EQ, IQ, and grit to survive and thrive in the private equity world,” says Ryan Greene, Operating Partner at Francisco Partners who applies his wide-ranging leadership consulting experience to building his company’s network of prequalified, PE-ready C-level candidates.
“Leading a private equity-backed company is a high-speed way of doing business, and that requires people who are decisive, move with alacrity, and are not afraid to roll their sleeves up to their shoulders when required to get the job done.”
“There’s also a big push towards high-performance objectives, so the person in the role is going to be stretched to new levels,” continues Greene. “They need to be self-aware, agile learners who know how to assemble the right team and capability set around them to take the hill and achieve those lofty goals.”
Company characteristics like culture and workplace dynamics play a critical role in determining the best fit for a leadership team or the best organization in which to invest.
“As investors, we look for talent within our portfolio the same way we do internally,” says Ali. “Some red flags that are non-starters for us include ego issues, homogeneous thinking, and a non-collaborative approach. To make sure we get an accurate sense of these aspects of company culture, we’ll have a lot of different people interview the talent, and we push each other on what we think in terms of candidates.”
While it may be tempting to focus on the product, the market, or revenue, HR infrastructure is also important. It says a lot about where an organization is today, and gives investors a benchmark with which to evaluate the organization over time.
“It surprises me sometimes to walk into companies and find that they are not using HR technology the way they should,” continues Greene. “Using psychometrics and assessment tools can offer an important, data-driven way of evaluating individual and team talents in your company, and there are many tools now in the market that do this well.”
“We’ve implemented talent management best practices across many of our portfolio companies, and we often run diagnostics to see how well the HR function performs now and how to improve it,” says Greene. “Especially in an M&A situation, you need to make sure you get the people and company culture aspects dialed in early, and then put in the appropriate KPIs, analytics, and dashboards to know that you’re making progress in a meaningful way.
When a company gets its first infusion of capital, that’s a sign it’s on the right track. But what gets a company to its first rounds of investment won’t get it through the next one. A lot of change must occur, and the company and its leadership team must be open to that.
“When a company raises money and gets a significant investment, we’re lifting the curtain and trying to figure out all sorts of things to accelerate growth within a certain amount of time – there are a lot of changes that need to be made,” says Ali. “With that as the backdrop, you need a team who wants to go for that ride. Gone are the days when you project a sale and log it into Excel. You have to be able to look at your team and figure out if they’re the right team to take them through those ups and downs.
One of the most underrated attributes of a successful founder is their ability to attract and retain talent. Without that skill in place, it’s hard for investors to have faith that the company can continue to grow.
“When we look at entrepreneurs to back or to run some of our companies, we’re not just looking at people who have a track record of having done the job before,” says Scanlan. “We’re looking for people who know how to attract great talent and build great teams. When an entrepreneur values the people they work with and has attracted individuals who will jump into the fire with them, you can augment the rest of the pieces with other great leaders.”
Executive recruiting is a complex, data- and instinct-driven endeavor that requires the support of trained professionals – professionals who have worked hard to build up experience and hone their intuition to know when there’s a potential fit between an executive and a growing company. Without that connection, an organization is at risk of losing a lot more than 25-30% of its value – they also run the risk of never fulfilling their true potential, limited by leadership bottlenecks that could have been avoided with the right guidance.
Sean Walker is a Partner at The Bowdoin Group, a boutique executive search firm based in Massachusetts that specializes in leadership search and strategic company build-outs for growth-stage organizations across the Life Sciences, Healthcare, and Technology sectors. At Bowdoin, Sean co-leads the firm’s Digital Health practice and works closely with investors and management teams to help find and hire top talent into C-suites.
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