VCs' Insights about Enterprise Management

What is the ‘value’ of an enterprise’s management? According to Smart (1999), the value of an organization’s human capital is conceptually the present value of their expected future behaviours likely to increase the valuation of the organization’s business. In this sense, knowing what those behaviours are and being able to assess specific individuals’ and teams’ capacities for those behaviours ought to result in better investment decisions. In addition, being able to develop or influence those behaviours would be valuable post-investment activities provided by VCs.

Unfortunately, at the present, there is no theoretical or empirically supported method to guide management assessment. VCs seem to show a preference for the work sample technique (which suffers from management recall bias) while only 20% use job analysis (which is based on a human capital needs assessment). This may account for why VCs I interviewed exhibited an underappreciation for the tasks of financial management and the professional capabilities required to perform them effectively. My dissertation contributes to alleviating this gap by creating a stage-of-development model illustrating a growth-oriented entrepreneurial venture’s (‘GOEV’) evolving needs for financial management and the matching competencies required to meet them. These progressive competencies can usually be accessed in higher levels of financial managers (i.e. Controller, VP Finance, CFO). Smart was able to determine that assessment accuracy was proportional to the amount of effort invested, but there is no empirical evidence to suggest which of several assessment methods is inherently more accurate.

The 3T-series of articles on this website explain some of the important aspects of developing effectiveness in management teams. Teams are crucial to venturing success because there is so much to create/develop/build, etc. and “it is difficult to clap with one hand” (Cooney, 2005). Article #1V9 describes evaluative criteria for management teams that some VCs use like whether members have prior venturing experience & industry-specific experience, whether they have worked together before, and how they think & behave. VCs may assess team members’ cognition & behaviour by exploring thought processes underlying key decision the team has made as well as their opinions on what they would do in various scenarios. However, this process is at risk of the similarity-attraction paradigm where VCs tend to prefer people who think like them. Two key issues regarding teams are their functional diversity and history of member changes or turnover. There are different schools of thought on the diversity issue about how it varies by stage-of-development due to the differences in the nature of exploration vs. exploitation activities. And, while new member additions are generally a good sign, turnover is not and may indicate leadership problems in the investee.

Empirical evidence indicates that, on average, teams are more successful in entrepreneurial venturing that solo-preneurs. Yet, in my research, I noticed that VCs with early-stage investment preferences remain highly focused on assessing the entrepreneur-leader almost exclusively. Obviously, a key criterion VCs should assess about the entrepreneur-leader is his/her team-building capabilities and track record. But, I found little evidence that efforts in this regard are effective, if they occur at all. VCs do attempt to assess what is known as ‘entrepreneurial capital’ – essentially the capacity to identify new (winning opportunities), marshal scarce resources, and see new initiatives through to fruition. VCs also seek prior entrepreneurial experience (they have a tendency to avoid paying for learning “on their dime”), general intelligence & learning capability (to adapt/pivot to environmental discoveries or changes), and leadership style (preferably democratic rather than domineering) and this is related to team-building capabilities. The article also contains a list of 10 personal attributes that VCs commonly seek in the entrepreneur-leader.

Lastly, VCs are also seeking “chemistry” with management. Like anyone, they want to work with people they get along with and with whom they anticipate partnering will “be fun”.