Startup investing: the importance of a strong management team
To attract investment, startups must show they have the leadership talent to unleash their potential.
No matter how ambitious their vision, without the right people at the top they will struggle to even get off the ground. The management team’s performance directly influences your investment.
Do those behind the business have what it takes – individually and collectively – to grow from your hard-earned funds? Do warning signs emerge under your thorough questioning?
Startup management teams are rarely the finished article. You are not looking for a fully stocked corporate boardroom befitting a City empire. Certain gaps can be overlooked until further in the enterprise’s journey.
But there are a number of key traits investors generally want to see from day one.
A clash-free zone
Active startup investors keen to play their part in driving the business forward will regularly meet with the management team. Even hands-off investors in the shadows will speak to them from time to time.
Personality clashes are not conducive to successful investor / startup relationships. Investors should really have some form of rapport with the people they back. After all, the journey to an exit could realistically take five or 10 years.
Relationships between members of the management team must also be healthy. This doesn’t necessarily mean a perfectly harmonious group of people who agree on everything. Questioning decisions and strategy is important in the battle to win over customers and crack markets.
Every member of the management team offers a different perspective on a particular challenge - it is when two management team members are consistently pulling in different directions that startups can veer off course.
Doing it for the right reasons
In 2014, the Harvard Business Review coined the phrase “entrepreneurship porn” to describe the false pretences that lure some people into the arena. Entrepreneur Morra Aarons-Mele wrote about the “airbrushed reality in which all work is always meaningful and running your own business is a way to achieve better work/life harmony”.
Often startups are merely set up to give the founders autonomy and freedom from the ‘nine to five’. But, as Aarons-Mele explains in her article, true entrepreneurship can be at odds with these ideals. "Starting a company doesn't mean being freed from the grind; it means that the buck stops with you, always, even if it's Sunday morning or Friday night," she writes.
The more the startup grows, the less freedom and autonomy the founders are likely to have. Instead of a responsibility to one boss in the job they left behind to go it alone, they are responsible for an entire workforce, and answerable to customers and investors.
The other obvious attraction to becoming an entrepreneur is the chance to get rich. Such motivations are perfectly legitimate in the early days, but without some greater mission, they're unlikely to keep the founders interested for the years it takes to reach a sale, merger or IPO. More enduring startup goals could be to innovate, disrupt or create jobs and opportunities, for example.
The stereotypical startup entrepreneur is perhaps a tech-savvy 20-something built in the mould of Facebook founder Mark Zuckerberg.
But a recent study by US-based research university MIT suggests that the average age of a successful startup founder is actually 45.
Researchers reported that founders with three or more years of prior work experience in the same industry as their startup were 85 percent more likely to launch a highly successful enterprise than those with no experience.
Experience both in the relevant sector and in business generally is reassuring to potential investors, although it offers no guarantee of success. A young management team’s innovative new take on a stagnant industry may be so compelling that it offsets their lack of experience - but most savvy investors demand some track record of success in business.
Two skills-based considerations of the startup investor are:
- Does the management team have the skills to execute its plans?
- If not, is it aware of these gaps and is planning to fill them in future?
Every business has different skills requirements. Sophisticated investors will be adept at assessing what these are and testing whether they are on board within their prospective investments.
No definitive startup skillset exists, but many have tried to define it. Among them is Bernd Schoner, author of ‘The Tech Entrepreneur’s Survival Guide’.
In his book, he describes the six personalities he believes are vital ingredients in the startup’s founding team.
They include the "prima donna genius" which every startup needs, the "superstar" who busily completes key tasks, and the "clear leader" who steps up when tough decisions need to be made.
The other three roles are the "sales champion", the "industry veteran" with the inside track on how things are done in the relevant sector, and the "financial talent" to track numbers and keep risk in check.
Certainly, technical, leadership and sales skills are widely considered essential startup management team attributes, whilst another desirable quality is a willingness to adapt, learn and take on new ideas.
Most investors will have valuable expertise and experience in business, and startups willing to take on advice and change things that aren’t working are more likely to succeed.
When major corporations misread the market, their vast resources and agility usually enable them to quickly recover. Take Microsoft for example.
It missed out on the mobile computing revolution that rival Apple enjoyed, with CEO Steve Ballmer even dismissing the iPhone’s chances of market domination in its early days.
Yet Microsoft today is reaping the rewards of its foray into cloud computing and its smartphone misread is well behind it.
For most startups, no such luxury exists. Failing to understand the market and deliver exactly what it demands can kill the business before it has even reached break-even point. The management team should have analysed the market from every possible angle before they attempt to move into it.
Market knowledge should also include an understanding of how the market is likely to develop or change in future. This enables the startup to second-guess the next moves of the market incumbents and any emerging competitors.
Understanding the startup’s management team
The people at the helm of the startup are the ones who will navigate it to success - if they’re the right people to do so. Being passionate is important, but it’s just one quality. Investors need to have confidence that the team is skilled, experienced and knowledgeable, and will not only do as much as they possibly can to see success, but will have the understanding of what actually needs to happen to achieve it.
And with the most successful startup teams the most open and honest, as an investor, ask questions. Go in-depth. Look for the weak spots. Do as much as you possibly can to understand and appreciate the team, as ultimately these are the people who will be securing the return on your investment.