What Do Investors Look For in Management Teams?

I recently participated on a panel in the 2011 US-Israel Venture Summit in New York City.  This is the fourth consecutive year where I have spoken at this summit, which is amongst the premier global forums for leading Israeli companies to interact with North American investors. One of the more common questions posed to me by CEOs this year was, “What are Investors looking for in management teams?”

In my experience, the management team constitutes the single most important determinant of investment outcomes.  I have seen great teams successfully pivot challenging businesses into successful outcomes and, unfortunately, I have also witnessed weak management teams undercapitalize upon unbelievable opportunities. Most investors spend a lot of time on the “people” aspect of a deal and invest an inordinate amount of time and effort in getting to know the individuals on the management team.  In some cases, investments are approved on the condition that certain “holes” in the team are filled prior to, or in conjunction with, the closing of the deal.  

At the same time, the investment business is rife with temptation to overlook the quality of the team.  For instance, when evaluating exceptional growth-stage or later-stage businesses, it can be enticing to overweight the financial performance and historical momentum of the business and convince yourself that management, despite potential investor concerns, is capable of continuing to grow the company.  Of course, existing management may not necessarily scale as the magnitude and velocity, and therefore complexity, of the business grows.  Glossing over management team concerns is also occasionally true in earlier stage businesses where the deal, for whatever reason, has become very competitive and “needs” to be “won.”  In this case investors can coax themselves into believing that they will have the ability to upgrade or augment the team in a timely and effective manner when needed.  Timeliness and effectiveness are the key assumptions in this case – anyone who has ever commissioned a search for a new CEO for an early stage company knows that the process can be tedious.

A great student of “human nature” and an individual who has impressed me with his ability to gauge the strengths and weaknesses of management teams with alacrity and insight is my colleague Peter Bell. One of the things I enjoy about sitting in on company presentations with Peter is that we are typically highly complementary – my initial bias is to focus first on facts and metrics, while Peter’s initial tendency is to zero-in on the people. As a result, we often come out of such meetings with a more harmonized and balanced collective perspective.

Based on my experiences, below are some key traits that investors look for in management teams and CEOs:

Early Stage Company

  • Super Smart, Aggressive, Confident
  • Coachable – ability to listen, receive advice
  • Communicate and Act Decisively
  • Ability to attract world-class teammates
  • Persistence, Creativity, Hunger

Growth-Stage / Later-Stage Company

  • Ability to create momentum and manage growth
  • Proven ability to hire and retain a great team
  • Track record of management team having worked well together
  • Visible and perceived favorably within their sector
  • Desire to achieve greater success
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