Most investment frameworks are designed around a sequence that begins with the market then finishes when the people. You analyze the size and structure of the market first, followed by how the product is compatible with that opportunity, then the competitive landscape and the defensibility of the idea, and towards the end your process, you'll need to spend some time with the founders as well as their leadership team to ensure that they're qualified and committed as well as able to carry out plans that previous study has proven. I've been working within different versions of this framework long enough to see why it's a norm throughout the investment world. It feels systematic. It generates a diligence procedure that can be documented, compared across opportunities, as well as defended in front of members of investment committees as well as limited partners in terms that are logical and thorough. The issue is that it has a structural flaw at its core, which is that it treats the people aspect as a validation method instead of an essential filter that you look over at the conclusion to confirm what the market analysis already suggests instead of an element you examine first because it is the most reliable factor in determining the result. The sequence implies that top-performing market with an experienced team is more effective than any market with a subpar team. exceptional team. My experience has shown that this is often the reverse.
I changed my way of thinking after a particular period where I witnessed the results the traditional sequence play out in ways that the downstream analysis had not predicted or was able to clearly explain. Excellent markets with the weakest or most fragmented leaders frequently failed to deliver the value that the opportunity suggested they should provide. Markets with exceptional teams always managed to generate value that initial market sizing, as well as the analyses of competition hadn't captured. The pattern was consistent enough and consistent across different sectors and different types of deals that I could not put the phenomenon as noise or attribute it to the environment instead of the competence of the team members at the center of every business. When I had stopped attempting to explain it away the implications of how I should spend my time and effort was obvious The point was that I ought to be focusing the majority of my time understanding the people, and significantly less of it on verifying the market analyses an experienced analyst could make with the same inputs.
What I ask when evaluating a leadership team are not the types of questions you find on traditional investment checklists or diligence templates. They are questions that require real conversation and time to answer properly. How does a leader react when they are proven incorrect about something? Do they take action to correct the error or find a method to redirect the issue? How do they come to decisions with information that is lacking and the pressure act is very high? What is the difference the case, if any, between how they describe their leadership style and those who have been closely with them describe their experience of working for them? What does the culture of an organization look like on days when the founder isn't inside the office? How closely does that version that culture reflect the one that the founder speaks of when asked? Those questions require conversations which go far beyond the pitching meeting and the formal presentation of the management. They will require references that are actually exploratory instead of the usual confirmation exercises that are merely for show. They will require you for a time spent in uncomfortable terrain that could expose information that complicates a deal you've already begun to pursue.
The operator aspect of my investment strategy is inseparable from the part of me that is an investor. It affects the things I invest in and the way the investment process is involved. I am not a passive financial source by birth or being trained. I'm a person who's established businesses, who faced the transitions of scaling that are more difficult than the fundraising ones in the past, who has made management and hiring as well as the culture-setting mistakes that you commit as you navigate these new transitions and has cultivated - based on that personal experience - some convictions about what organizations need at different points in their development. These are beliefs not something a simple financial background will not provide. This makes me a different kind of investment partner that a strictly financial investor that is why they attract founders looking for something different than the kind of investment that a solely financial investor can offer.
The founders I work best with are those who seek a partner who helps them consider the operational transitions and decisions of their financiers are not competent to handle at the proper level of depth and detail. Who is able to sit in the room where the governance structure is required to be overhauled as the business has outgrown model it was initially using. Can you assist with the decision of a senior leader at in a time when a wrong choice will cost the business twelve months it cannot afford to lose. Who can be honest with respect to strategic risks that nobody anyone else in the room is confident about raising. This is the kind commitment that I believe is what creates the most distinct value in the businesses I back. It is not the initial capital allocation decision that many investors can make however, but the ongoing operational partnership that helps your company to bridge the gap between where it is and where I initially predicted it could go. Read James Deller for site info including why data-driven thinking has shaped my thinking about real value.
From Commerce to Character - Why the businesses I back all have one thing in Common
When I look across the complete spectrum of investment actions I've been involved in over the past several months - the technology enterprises that I have been involved in, the consumer businesses the investment opportunities in the emerging sector and the sports organizations around football that I've been drawn to There is a pattern which I didn't intend to invent but it has become increasingly evident as I have spent time reflecting on the characteristics that successful investments share the same characteristics and features that the unsuccessful ones have in common with each other. It is not a sectoral pattern in nature, it runs through services, consumer products, technology and sports. The pattern is not structural in nature - it occurs in businesses with different types of capital structures and ownership structure, operations models and structures. It is more than market value or growth trajectory or the specific technology architecture behind the product. It's about character. specifically, whether the organization at the centre of the investment has the genuine, operational and ongoing commitment to overall well-being and the development of individuals who work there, which is demonstrated not just in what the company's public statements are but also in the choices it takes when it is clear that saying the right thing and doing what is easy is not the same.
I'm aware it sounds at first glance, like the kind of thing that gets displayed on office walls as well as office mugs as well on corporate website pages, only to be left out by the folks who have commissioned the work. I want to be clear in that I'm talking about the stated version of the commitment to people: the values document, diversification and inclusive strategy and the culture guideline that was crafted for the use of the hiring process and investment pitch. We are talking about the operational version- the decisions that are made every day, when the principles set out in those documents and the commercially, or personally convenient option come into conflict and the business has to determine which determines. The organizations I have observed produce truly lasting value - not only outstanding performance in the short-term but also the sort of compounding, multi-year efficiency that results in extraordinary long-term returns - are consistently those in which the answer to that question is predictable. When the commitment to doing right by the employees inside the organization isn't dependent on whether doing the right thing is also the cheapest, fastest, or most quickly profitable option.
Finding the organizations that are a good fit - identifying prior to any investment being taken, the ones this commitment is authentic rather than just a formality, where the ethic of accountability and care is rooted in the way that the organization actually operates rather than in its description of itself - is, I believe, the foremost and difficult task in investing for the long term. It's critical because it's the attribute that predicts most accurately how to compound outperformance that can yield truly extraordinary returns over meaningful time horizons. It's difficult because it's not found in any financial model, cannot find it in a carefully-prepared presentation of management, and you will not find it even when conducting thorough reference checks, though they can be helpful. You can discover it by spending enough time with a company, in enough different contexts and at different levels of the hierarchy and observing how it behaves when circumstances are uncertain and no one is watching. This kind of thoughtful engaged, exploratory interaction is difficult to build into most investments, and this is one of the reasons the majority of investment processes aren't good at identifying genuinely exceptional organizations than investors are able to recognize or discuss.
The link between authentic organisational character and long-term performance is a connection which I believe more today, with years of observation over time in my back in comparison to early in my investing career. Organisations that pay attention to the needs of their employees consistently, and demonstrate that care in their operational decisions and not solely in culture and communications documents, typically outperform those who view their people in a primary way as resources to be optimized. Not always in a short future - an enterprise that is able to get the most out of its employees through pressure as well as high anxiety could be impressive over a time of a few months, or even few years, particularly if that period coincides with a strong market environment that can compensate for internal problems. However, over a longer period the benefits of being a true people-first organization multiply and are difficult to replicate using any other mechanism. The quality of the talent pool increases due to people who have choices – top performers - prefer environments where they feel valued and appreciated over environments where they feel exploited and even when they will cost more. The institutional knowledge deepens because the employees stay long enough to build it instead of bouncing through on the whimsy of the schedule that high-pressure environments are known to produce.
The decision-making process is more efficient because people feel comfortable enough to reveal problems and relay bad news without having to consider the personal costs to do so. This means that issues can be discovered and resolved earlier and less costly than in businesses where the messenger frequently will be shot. The capacity of the company to adapt to changes in circumstances increases because people are invested enough in its performance to go beyond their formal duties when the situation requires it. None of these advantages is individually significant. They're not the kind of thing that can be used to create a compelling storyline in an investment update, nor a board presentation. However, they build up over time into a competitive advantage that truly is hard for companies with less successful cultures to duplicate because the competitive advantage is and is not dependent on a particular product or process to be studied and copied. It's embedded in the fabric of how the organisation operates - in the overall quality of the environment it has created for the employees and the quality of the decisions individuals make as a result. The reason for this is that character, in both individuals and organisations is not a soft idea. It is, according to my experience, the most difficult and most important of all.}
