People Powered Startups

I’ve known Rick for 2 decades. It was his research, when we were at The Forum Corporation, that showed me the power that people have to impact a company’s performance.  When we spoke recently, it was no surprise to find out that he had brought this knowledge into his angel investing approach. Following our conversation, I sent Rick a few follow-up questions. I thought you would be interested in his responses. I am interested in your thoughts.

Who is Rick?

For more than 25 years Rick Harris has been a consultant to business leaders and their teams, helping them create more strategic focus and better results. His clients have ranged from executives in the Fortune 50 to early stage start ups. But they all have shared one thing: as their teamwork improved, their performance improved.

Rick is currently an angel investor with Launchpad Venture Group in Boston helping portfolio companies to use teamwork as a strategic weapon. Launchpad consistently ranks as one of the top five angel groups in the country by the Angel Resource Institute’s annual HALO poll of deals done and dollars invested. He is currently working on a project to help better match the needs of portfolio company CEOs with the human capital that angel investors bring to the table. The ideas expressed in this post are his own.

Q1. As an angel investor, part of your focus in diligence is not just looking at the team’s credentials but looking at the team dynamics.  Why is this important to you as an investor?

Credentials are the price of entry. You want to be able to invest in people with the strongest track records. After you’ve established that you have people worth investing in, the question becomes can they work together? If the company has some history, the question is, “Are they working well together?” You want enough difference of perspective in the team that conflict can surface, but not so much that drama takes the place of real work. I look for three things to give me a clue about their dynamics:

  1. Are they aligned around a common direction?
  2. Are the roles clear?
  3. Who talks most/least and does it affect decisions?

By listening to answers to the first two questions and watching the behavior of the team in group discussions, I have a pretty good sense of whether the proceeds of a funding round will go to the purposes outlined in the investor deck, or whether the proceeds will be gobbled up by a muddled team.

Recently I was in a scouting meeting with two co-founders. After several minutes of discussion, one of my colleagues said, “So which one of you is the CEO?” They both said, “I am.” My rule of thumb is that you don’t want to invest unless you feel really good about the answers to these three questions

Q2. What do you look for that indicates a positive team dynamic?

In a seed stage round you’re typically looking at the dynamics between co-founders. And the first thing I look for here is discipline diversity. Ideally co-founders should come from different disciplines—a technical person paired with a marketing person, for example. If that’s the case then I’ll ask one person to tell me why they need the other person’s knowledge at this stage of the company’s development. If they can’t give me a coherent answer, red flag. What I’m looking for is the ability of each founder to talk knowledgeably about the other’s contribution, not necessarily to have the same depth of knowledge. Occasionally co-founders are both technical. If this is the case, I’m reluctant to invest because they haven’t proven they can create a positive team dynamic with other disciplines—something that will be needed to support the company’s growth.

 For an A round the team dynamic tends to get more complex because there are not just co-founders involved. I’m still looking for appreciation of other disciplines. In addition, I’ll also have a chance to see the team in action at an investor presentation. My preference is for the CEO to make the pitch and hand off questions to the right team members. That gives some insight into the extent to which the CEO will leverage her team on other issues and it gives the team member a chance to show their stuff. Series A diligence will also include interviews with individual team members where I ask them to describe how other team members’ efforts contribute to theirs. I’m looking for an indication of interdependence.

Another thing I’ll ask about is conflict: what is an example of a conflict that was handled well and one that wasn’t. I’m looking for insight into how they manage their differences. If they have trouble answering this question, I’m suspicious that people are avoiding conflict. Maybe somebody told them that they should be a “team player”. Good team players hold each other accountable. I don’t want them making nice to each other if they are not in sync with key decisions. That’s how you burn capital without getting anything done.

Q3. What suggestions do you have for founders that are looking to create a positive dynamic?

  1. Step back from the day to day and ask yourself “Why is what we’re doing important?” People love to work for a winning team, but in a start up the wins can be a long time coming and the work required to get there can wear on people. It helps to remind them that what they are working on is part of something bigger than the next line of code or the next market test.
  2. When talking about the importance of what you’re building, be sure that you’re saying something that is truly inspiring to you. Genuine feeling is way more important than rhetoric. If your team can get inspired then the chances are good that your customers will be inspired…and that’s the real goal.
  3. Create a set of values that have meaning for people. Start with the question: “How do we want to treat each other as we work together each day?” Then branch out to asking the same question about customers, and perhaps other stakeholders. You can start with the co-founders or open a discussion with the entire team.
  4. Acknowledge people publicly when they act on the values.
  5. Ask for feedback on how you can do your job better. People love to give advice. Let them feel part of the team by giving the founders some helpful suggestions.
  6. When going through a rough patch (they happen), increase your contact with the team. People can disengage during hard times. The team will perform better if they don’t.

Follow up note: With all the controversy swirling recently over the toxic effects of a bro-culture, I’ve asked Rick to weigh in with his perspective on the role leaders play in feeding such a culture and what they can do to keep their company focused where it ought to be…on customers and growth. Look for his response in an upcoming post.

 

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