Investors Invest in Management

[BusinessAdviser]

Investors Invest in Management
Column by Michael Lechter

The team you have in place will figure prominently in an investor's decision to fund your business.

One factor that almost always figures into a savvy potential investor's evaluation of your company is your "team" -- key management and advisers. This is particularly true for a young company with no track record of its own.

Why do investors tend to base their decisions to invest on management teams? The answer is in large part because there are so many imponderables about any emerging business. Even a great business idea sometimes simply can't succeed on its own strength alone. The idea may be too revolutionary, too unproven or otherwise lack sufficient credibility. It may involve a product or technology that is simply too complex for the potential investor to understand, or market projections that are simply too speculative. This is when you have to rely on the management team to give the business credibility. The history of the management team may be the only solid, understandable, non-speculative information available to the potential investor.

Investors tend to look closely at the experience and track record of the management team. A business must be able to succeed in the face of rapidly changing conditions. Relevant experience gives the potential investor comfort that the management can spot the issues and challenges and are flexible, skilled and objective enough to be able to deal with those conditions.

Of course, what really counts is experience that's relevant to the specific needs of the company. For example, experience in a Fortune 100 company may not be particularly pertinent to running a start-up. In fact a common perception is that someone whose experience is entirely from big companies will tend to throw money at a problem, and may not be sufficiently flexible to deal with a small-company environment where inexpensive alternatives are necessary. It is also important that the experience be in the relevant industry. Experience in the lingerie industry may not be particularly germane to a software development company.

However, experience, skill and pedigree are not the only factors that investors look for. Integrity and commitment are also typically a must. Investors want to see a high level of work ethic on the part of management. They need to feel comfortable that all of the key players are committed to, and have enthusiasm for, the company. (For example, many investors consider it important that the key individuals involved in management have "skin in the game," i.e., have themselves invested in the company).

The wrong management team can be deadly to potential investor interest. You can have the greatest technology in the world or the best marketing plan, but if your management team cannot execute the business plan, or if they alienate the customers, or cannot hire and manage good people, then the business likely will fail.

Charisma in a management team is good, but too much can get in the way. Savvy investors want key players to have egos that are big enough to get the job done, but not so big that the individual can't be a team player or can't accept advice. A sophisticated investor often looks for investments in industries in which the investor has relevant background and expertise -- and expects to be able to contribute his or her expertise to the venture. If the investor perceives the management as too arrogant or egocentric to accept advice, prospects of the investment being made are minimal.

"Guerrilla" management that is perceived as likely to ignore professional advice (e.g., from attorneys and accountants) also tends to be problematic for investors. In the book OPM, I introduced a hypothetical character called Louis (Loose) Canon, whose mantra is, "I'm not going to let those attorneys and accountants run my company!" Sophisticated investors tend to run away from the Louis Canons of the world, and unless the company's team includes (or the investor is able to place) other key individuals with sufficiently strong personalities in positions with sufficient clout to counterbalance and keep the "Loose Cannon" in check, the company's prospects are dim.

Another pertinent factor is the "completeness" of the team. Do you have, or is there a plan to place, a strong individual in all of the important positions? But what makes an individual "strong" or a position "important"? That depends upon the nature and stage of development of your business. The definitions of "strong" and "important" positions are moving targets. The team necessary for a start-up seeking only that funding or resources necessary to establish "proof of principle" for a product might require no one other than the person that came up with the idea. However, as a business develops and grows, so do the positions that are critical to management. These can ultimately include the functions of chief executive officer (CEO), a chief financial officer (CFO), a chief technology officer (VP of Engineering, Chief Information Officer (CIO)), and a director of sales and marketing. (Of course, sometimes a single individual can fill more than one role.)

In a nutshell, potential investors want to know that they can trust you and your team with their money. They want to feel secure that you and your team will succeed in the business and will protect their interests. Your job is to put together a team that will give potential investors that confidence.
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Courtesy of Inc.com

[pbeale24]

I think this post is right on and such an important point. Investing in an idea alone is of no interest to an investor, they are investing in a business which incorporates so many different things, and of least importance is the idea. You would have a better chance of obtaining funding for a shoelace manufacturer with a capable "team" then you would the startup of a company touting a "revolutionary" idea with inexperienced management.

I met with a group of people yesterday who have started a real estate development company that will focus on emerging markets. They have never developed a single piece of real estate together but have already secured $10mil in financing from a private investor in the UK for their first project. Between the 5 members they have all the right ingredients, experience, and impressive resumes. As they explained real estate development in emerging markets is by no means a new idea, in fact you could call it one of the oldest business ideas in existence, but that only encouraged the investor.

The difference between them and some of us is that they have a proven track record in their various fields, and each member of their "team" is vitally important to the whole. They do not have one less or one more member than is needed. It was enlightening to speak with them and it is certainly a valuable lesson for us all. Can you make it without the resume and the experience? Sure. But I bet you won't be starting out with $10mil of someone elses money.