Amongst the daily cut and thrust of starting and growing companies, doing deals and seeking investment, it is sometimes easy to lose sight of the fact that the venture capital and private equity industry is hugely ‘relationship’ driven. Look little closer at what is at stake on both sides of typical venture capital deal though and this is readily understandable. When management team is seeking an investor it has its livelihood, reputations and dreams wrapped up in the deal. But the venture capital firm also has its livelihood, reputation and dreams at stake – this is its business. Venture capital fund investors pay the managers of those funds to produce excellent investment returns. If the manager fails to do this it is unlikely they will get another chance to prove themselves.
Perhaps it’s not surprising then that when it comes to identifying the single most important consideration for venture capital firm when it is looking to invest in company – it’s not even contest. Usually, whether you are in New Zealand, Australia, the UK, the US or elsewhere, the quality and depth of management is the key factor. Or looking at it another way, lack of strong management team is the number-one reason why venture capitalists will decline to invest in company.
Whether it’s venture capital being invested in an early-stage company or private equity being invested in an established business, the venture capitalist will concentrate primarily on the competence and character of the company’s management. Most venture capitalists will agree that even an average product can be successfully produced, promoted and distributed by an experienced and energetic management group.
They look for group that is able to work together easily and productively especially under conditions of stress resulting from the occasional business downturn and competitive and market pressures. These challenging times are inevitable for almost all companies and so the ability for management and the venture capitalist to work amicably and effectively together in these times is extremely valuable. Venture capitalists know that even excellent businesses can be ruined by poor management. As result, many are investing primarily in management capability rather than the product or market potential.
Venture capitalists need to have confidence that the management team can professionally execute on the business plan or strategy. Many regard this ability to implement and execute to be the most important business discipline and therefore an essential ingredient in their investment decision. Obviously, analysing managerial skill quickly and effectively can be difficult for the venture capital investor. Therefore, successful managerial experience or proven track record is key characteristic of quality management team. Integrity, honesty, dedication, commitment, passion, energy, vision and the ability to articulate that vision are also high on the list of sought-after management characteristics. Failure by managers in the past is not barrier as long as lessons have been learnt.
Venture capitalists usually require that the company under consideration has full management team in place – although one key way that venture capitalists can add value over and above their financial investment is by assisting the company to fill immediate management gaps and then others as the company grows. Venture capitalists seldom seek managerial control; rather, they want to add value to the investment where they have particular skills including fundraising, mergers and acquisitions, international marketing and networks.
In addition to thorough understanding of the industry, each member of the management team must be totally committed to the company and its future. Venture capitalists often talk about the need for an “alignment of interests” amongst all investors. The venture capitalist and the management team must share common vision for the company and must both be motivated to achieve great return on their investment in the company in due course.
With venture capital investment though, the need to pick your partners carefully definitely cuts both ways. venture capital investment in private company has long-term horizon, typically three to seven years. For the company, it is also critical to select venture capitalists with whom it is possible to have good working relationship over that period. The management team therefore needs to do its own due diligence on the venture capitalist. It must be satisfied that in addition to the money and other value-added input that the venture capitalist brings to the table they can see themselves working effectively with those people, in good times and not so good, over prolonged period.
Ultimately though, the combination of management team and venture capital investor that are both talented, motivated and work with the highest levels of integrity is very powerful one for any company taking on the world.
Chris Twiss is executive director of New Zealand Venture Capital.
