Due Diligence: Subjective Leadership Interviews

In recent years we’ve had a string of high profile implosions out of Silicon Valley. In the rush to find and fund the next big thing, I think investors are taking shortcuts that cost them not only money but also future opportunities. The investment community is small and tightly connected, and a bad recommendation or missed opportunity can cause you to miss out on something that might have been a better fit for your money, and more importantly, your time.

On the other side, if you’re too cautious about your investments then you can miss the boat altogether. I was recently at a private equity investment group meeting, and the deal lead was lamenting that the investor group missed out on an opportunity because due diligence took too long. The fact is that with early stage companies, you’re probably investing based upon a founder’s vision and not a product or operating leadership team. You’re making an educated assessment based upon founder interviews, selected references, and hopefully some in-depth knowledge off the market fit. 

I’ve worked in and with many startups throughout my career, and I am never surprised when a particular company fails. In many cases the company failure could be alleviated by digging deeper into the organization to find the real story. For companies that are founder driven, it’s essential that you get access to people two or three levels down in the organization. This is where the actual work gets done, day to day, and you will find problems that affect time to market, product fit, and quality. At least two of those items will affect the success of a company, but hopefully you’re finding an investment that hits all three.

When I start asking questions about business operations and the leadership team starts closing ranks to stonewall or otherwise derail access to line workers, I know there is a deeper issue going on. In early stage startups, you may only have a founder and some part time advisors, but in almost all cases you can find someone who worked for the founder in a previous role. The pushback will be that specific people know the founder’s work and you shouldn’t read too much into negative feedback. 

My answer here is that nobody is universally loved, and even your own mother probably had times when she realized you weren’t perfect. The idea is to collect a range of feedback from different sources and then put these all together into a leadership profile that can be used to gauge operational risk. If your founder didn’t have disagreements with others in previous roles, I’d be concerned that either he or she was not close enough to the product or does not have conflict resolution skills.

In my experience, the biggest source of failure in startups is due to a lack of transparency and truth. By the time the truth comes out, the problems may be too big to fix with the time and budget remaining. Make the extra effort up front to dig deeper into the organization, down to the roles that do the work, not just lead the teams and make the presentation decks.