I’ve recently spoken to a number of venture capitalists that all seem to be facing the same problem: how can they improve their due diligence and lower their risk of investment?
Traditionally, investment decisions are based on existing, typically historical financial and market data. Due diligence is done on current versus future performance, taking into account a company’s financial record. No matter how complex the matrix used, the analysis is almost always limited to financial data.
On the rare occasion, due diligence is taken a step further, with a 360 on the company’s management. But this is inherently tainted by subjectivity – personalities and relationships more often than not colour the analysis of a company’s executives.
Which leads to the problem that started this conversation. Investing in a company based purely on its financial history and current (or predicted) market forces ignores perhaps the most important part of the success equation: its human capital.
The key is to avoid subjective methods and perform a scientifically proven workforce analysis. Relying on your experience or perception of individuals to get a ‘score’ is open to risk. And even if successful, applying the same principles to assess the management ‘group’ is even more risky.
Imagine you’re investing in a company that’s performed well, financially, for the past five years. But your plan is to merge it with another company and pursue an aggressive growth strategy. Without an objective analysis of the people involved, how would you know if the people that steered the company to success are up to the task after the restructure?
Likewise, when analysing a poorly performing company, how would you know its people have the potential for vastly improved performance, given the right market conditions or some new sales tools? Could it be that the people at the helm aren’t suited to their roles and, therefore, underperforming, obscuring the potential of an otherwise solid investment?
If you have a scientific, proven method of analysing a company’s workforce, both as individuals and teams, and understanding their strengths, weaknesses and suitability for certain roles, you can make a far more informed investment decision relevant to your investment plan and match the right jockey with the right horse, so to speak. Oftentimes it’s not the horse that’s the problem, it’s the jockey that’s not suited to the horse.
Change the jockey, not the horse, and you may find yourself making a very astute investment in an increasingly competitive economy.
- Anthony Walley, CEO