Work on Your "Short Game"
When I sit through pre-investment management meetings, I repeatedly see that out of the 100 questions that are asked less than 5% of them are about the Human Capital part of the business.
You seem to do a really good job at understanding the company’s financials but given how much time you spend properly assessing the management team, it is impossible to say you are doing a really good job on the Human Capital side of the equation.
Similar to your short-game in golf, the most important determinant of the success of your investment is where you also seem to spend the least amount of time and resources.
When you think of it that way, it just does not make sense.
You are smart, highly educated and successful people so, I started to ask the question as to why you do this if you know it doesn’t make sense. I have concluded that the three primary reasons are:
1) You have a poor or non-existence process to assess Human Capital
2) You have never had any training in how to assess Human Capital
3) You have convinced yourself that you are good at it because you have been doing it for so long and the performance/results have been great
While I cannot offer you a crash course in human behavior – at least not in this short article – what I can give you are some key points to consider the next time you find yourself speed dating before you pay up to get married.
1) Have someone on your team at the meeting focus only on the Human Capital rather than the business metrics.
2) Before the meeting, identify the 5-10 traits or characteristics that your team thinks are important for a strong manager or management team to have. Here is a list of some of the things that I pay attention to during my PE Fund client’s pre-investment meetings
- Passion for the business
- Desire to Win
- Knowledge of the business
- Ability to build a team
3) Score the management team or key members of the team in each of these skills on a scale of 1 to 6.
4) Type up comments or data points you uncover during the meeting to justify your scoring
5) Create a list of follow up questions or concerns you have or want to dig deeper into on your next “date”
6) Keep an ongoing data base of this information so you can revise/improve your process throughout the life of the fund and future funds.
7) During exclusivity, you can do a much deeper dive into any areas of concern you may have
8) If you end up making the investment, then you will have a solid idea about who you are marrying which means, less surprises down the road.
9) You will also have a road map of what type of coaching and/or upgrades may be needed which means decisions for improvement to management can be made quicker and with minimal disruption.