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Though I have spent nearly 20 years now investing in private businesses and their teams, I still find myself spending a great deal of time trying to unravel why some teams / executives succeed, some tread water, and others fail.  Of course, the attributes and dynamics of the business, the business model, etc. all matter a great deal – and can often make or break the probability of success.  But, once you’re in, if you’re going to succeed, more often than not you need a great leader and team.  And in the case of venture capital, where I spent the formative years of my investing career, the business or business model may not even exist.  In that world, you really are backing people with ideas.  So why do some succeed where others fail?  Increasingly, I believe there is one attribute that can make a huge difference – passion.

I started listening to a new (to me) podcast recently called StartUp by Gimlet Media, and in episode 1, the “founder” meets with Chris Sacca, a legendary early stage VC.  Chris talks about passion as one of the key differentiators he looks for in a founder and team.  I also happen to be re-reading Poor Charlie’s Almanack – a compilation of writings mostly by and about Charlie Munger, Warren Buffett’s partner (I won’t go into detail here about Charlie, but here’s a link to another post).  Charlie also says “I would argue passion is more important than brain power.” If you step back and look at it, these two guys couldn’t be investing in more different types of business. One was an early investor in Twitter, Air B-n-B, etc. and the other wouldn’t likely touch a tech start-up if a reincarnated Steve Jobs walked it into his office with Bill Gates by his side. And yet, despite their stage focus, and all the other differences one can draw between a seed stage company and a large, established business, these two legendary investors in private companies have a very common high level screen – passion of the leader.

My own experience, obviously on a much smaller scale, reinforces this view.  It’s not easy in our world to find passionate owners who want to stay on, or passionate new leaders in the event the existing owners do move on, but we talk about it, and worry about it, a lot.  Perhaps you should too…

We’ve always believed in taking the high road and attempting to behave in line with the best ethical standard we are capable of and also strive to identify leaders and partners that exhibit similar characteristics.  We believe this increases both our, and our portfolio companies’, probability of success over time.  It also hopefully lowers the probability of us blowing ourselves up over some selfish, sleazy, or illegal activity.  A recent article in the Mind issue of Scientific American by Taya Cohen points to recent research which is beginning to prove this out empirically.

The article, titled The Morality Factor, points to emerging research results which are indicating that a personality attribute roughly equivalent to “honesty-humility” correlates with stronger leadership abilities and better achievement of results from teams.  Interestingly, the article also points out that research has yet to find a correlation between leadership effectiveness and GMAT scores.  Certainly, intellect can be an important factor in business success, but there appears to be a stronger leadership effectiveness correlation to something called “guilt proneness” – that is, one’s ability to factor into their actions whether they might feel bad later about doing something they are about to do – even if no one ever finds out.  The point?  Intellect alone does not predict that someone will be an ethical leader, one who feels responsibility for others (i.e. peers, direct reports, investors, other stakeholders, etc.).  In fact, I would argue in my experience it is precisely the incredibly bright person with no moral compass who should be feared — and weeded out — the most.

I have long be fascinated by the inner workings of teams.  Starting out early in life primarily on sports teams and school related activities, then transitioning to business, philanthropic and government affiliated organizations during my professional career, I’ve always been interested in what causes some teams to succeed where others perform in an average, or quite frankly miserable, fashion. Throughout my career, I have been fortunate enough to have worked with some amazing leaders and teams.  Combining that experience with a ton of reading and reflection, I have come to believe that a strong leader, heading up a team of good people in a culture that embraces learning, change and evolution in a positive way should be able to out-perform many if not all of their competitors.  Not always of course, and in the case of business, if the business model itself or end market are below average or hyper competitive, or capital intensive, etc., even a strong team’s success can be dampened.  But on a relative basis, I would still much prefer to partner with the strong leader and star team working in a great culture – even in those more challenged circumstances.  While that’s probably obvious, and people in the investing and leadership world talk about things like “I’d rather have three “A” players and pay each of them above market than be stuck with a larger team of “B” and “C” players who are less creative, less productive…” the reality is, most organizations don’t have a team of only “A” players.  I was reminded of this recently when discussing this topic with a good friend of mine who recanted the story of his father who spent his career in the military.  In the military, in most cases, you don’t get to handpick your team of “A” players, you get what you get, and your job becomes how do you get the most out of the team.  This lesson stuck with my friend, and its the cold hard truth in most businesses as well.

It might be a theoretical panacea to say “we only hire and retain “A” players…”, but other than the likes of Ray Dalio at Bridgewater, not too many companies realistically even try to pull that off.  They may talk about it, Steve Jobs famously used to tell people ” “A” players hire “A” players, and “B” players hire “C” players…”  However, the reality for most leaders or managers is different.  They have what they have, and the goal more often than not is how do you get the most out of the team you have?  Well unfortunately, there’s no secret formula, it often comes down to being a good motivator and mentor in my experience.  You need strong people skills.  You need to spend a chunk of each day and week pro-actively thinking “How can I get the best out of these individuals and this team?”  You must be willing to invest time there.  Some leaders are naturally good at this, many aren’t.  But as with anything else in life, if you choose to focus on it, you can improve.

In doing some research on the topic, I stumbled onto an interesting 2010 HBR article, Managing Yourself: Bringing Out the Best in Your People, which articulates a model wherein there are two different types of managers – “multipliers” and “diminishers” – each use different tactics across five areas of leadership – talent, culture, strategy, decision making, and execution.  While there are many good nuggets in there about collaboration, leveraging strengths, etc., what struck me is how their “multiplier” managers basically mirror in their leadership the idea of the “growth mindset” – a concept of motivation and learning aptitude coming out of research done by Carol Dweck.  Dweck’s work, at a high level, breaks people down into two categories – those with a “growth mindset” and those with a “fixed mindset.”  Growth mindset oriented individuals tend to believe that they are capable of evolving, learning and growing when they apply themselves.  They tend to be more resilient, and, often times more successful.  Multiplier leaders seem to have this same view with their teams – they seek out ways to allow people to take responsibility, leverage their strengths, work collaboratively and to think independently – the seek out ways to allow them each to improve.  There are plenty of anecdotes of success I’m sure by dimisher leaders, but in playing the probabilities, I’ll take the multiplier profile with a growth oriented mindset every time.  What can you do to behave this way if it doesn’t come naturally?  One tip from the article – ask questions – “Stop worrying about having all the answers. Use your knowledge of the business to ask insightful questions that prompt the members of your team to stop, think, and then rethink.”  Amen…

Over the course of the last couple months, I have had several new acronyms join my ever growing list of anecdotes leading me to conclude that continuous improvement, properly implemented, may be the most important tool for success in business (really any type of business) and, in my opinion, in life in general.  Whether you call it a feedback loop, or prefer military jargon such as an “AAR” (after action review), or “OODA Loop” (observe, orient, decide, and act), or software methodologies such as Agile or Scrum (ok, Scrum is arguably a derivative of Agile, but still at their heart is continuous improvement), or manufacturing approaches such as Lean, Kaizen, Six Sigma, or “QRM” (quick response manufacturing), it all traces back to one place – continuous improvement.  The newest one I picked up is “the 4 A’s” – assess, analyze, articulate and adapt – which comes from author Amy Herman who has a new book out called Visual Intelligence.  Admittedly, I haven’t read it yet, but I heard her on a podcast, and the idea is pretty much the same – learn to be observant, reflect, and improve.

Whatever you call it, it’s the basic W. Edwards Deming idea that if you look at a system (and a business, the execution of that business, each function within a business, etc. are all “systems”) there is information / feedback (in Deming’s case, statistics).  Deming was a pioneer in business process re-engineering, and he taught an entire country (Japan, not the U.S. initially…) that if you look at the feedback, you can use it to improve.  And over time, these process improvements have evolved out of the world of manufacturing into distribution, services, and office procedures (procurement, finance, etc.).  And they also apply to our lives – what are you doing professionally or personally that you want to improve?  Assess the system, analyze it, articulate the improvements and adapt.  But it’s the focused doing that is of course the real challenge for us human beings – if it weren’t, we’d all be thin and in great shape.  So I encourage you to start small – pick a process somewhere in your personal or professional life, document it, think on it, improve it, and track the results.  Sometimes it is just that simple, we just lose sight of the forest for the trees…

One of my resolutions for 2016 is to read more across a breadth of topics.  In full disclosure, most of the book content I’ve consumed in recent years has been via Audbile.com which I love and recommend highly – you can speed up the content and consume some voluminous stuff pretty quickly, particularly for a slow-ish reader like me, and you can do it on the go.  I am guessing Audible will still be my preferred content consumption method, but I’m diligently working on reading more too.

To kick off my year, I picked two books to parallel process – a re-read of How to Win Friends & Influence People (one of my all time favorites, quick read, timeless content) and Poor Charlie’s Almanack.  Many of you probably haven’t heard of the Almanack, or, for that matter, Charlie Munger for whom the book is assembled.  Munger is the longtime business partner of a fellow named Warren Buffett, and probably one of the least well known obscenely successful investors in history.  Sure, anyone in the financial services world would know who he is, the same way they would know who Ray Dalio is. (Dalio by the way runs the largest hedge fund in the world as of this writing, Bridgewater, and is an amazing, eccentric guy…here’s a link to a prior Ray related post).  But outside our world, not many folks would’ve heard of Munger.  But his discipline of learning and thinking are of great value to anyone who aspires to be successful and happy in their life journey.

I’m about half way through, and the Almanack thus far hasn’t disappointed.  Charlie is voracious reader, a deep thinker and a lover of learning.  One his key tenets is to view problem solving / decision making / investing, through the use of a “latticework of mental models.”  That is, Charlie believes that understanding the fundamental foundations of as many different disciplines as one can improves one’s ability to make decisions.  Here’s a recent article that does a much better job of explaining this approach than I will endeavor here, with examples / explanations.  This idea in and of itself is a somewhat deep topic, and not conducive to a blog post, but I recommend exploring it – regardless of your field of focus.  I would venture a guess, that when you look back at some of the good decisions you’ve made, they were enhanced by your own ability to synthesize information across multiple disciplines.

While the idea of considering the people on your team or in your group or organization as “projects” could sound controversial and sterile, it’s a method I have tried to use working with business executives and leaders to try and get them to both focus their attention and to set rational and realistic goals for themselves and their teams.  And given it’s the beginning of a new year, thinking about your 2016 projects is of course always energizing (well…if you’re a personal development dork like me anyway…).

The intent of this concept – to consider your people projects – is to basically try and convince any leader who is working with a team to realize that, whether it’s a star performer or an average contributor, the likelihood that they will change on their own is quite limited if you as their leader don’t spend time on it.

A quick example:  An executive I know had a business development team that had several stars and one question mark.  We discussed the questionable performer from time-to-time until at one point I told the group leader “Look, this person is not changing.  And it’s not their fault.  How many times have you met with him to discuss his goals and your expectations?  How often do you check in and offer support, guidance and feedback?  Have you established a consistent rhythm of communication and accountability – specifically around their performance and development?”  The answer was no.  This was a busy executive and other than group sales meetings, occasional joint sales calls and an annual review, little effort to focus on the development of the sub-par player had been applied consistently over a period of time.

So what should a manager expect?  Your “A” players are often self motivated, driven to evolve, and thrive on positive feedback and rewards.  Thus, often its precisely the question marks that need help.  Their development is your job – their development is a project.  And if you ignore the project, or have so many projects (or other things to focus on) that you don’t focus on THIS project, what should you expect?  Do you think they will change of their own accord?  If you want something (or someone) to change, grow and evolve – consider it a project – apply effort to it – and it will move.  It might not move as fast or as far forward as you would like, and then you can make whatever decision you want.  But if you ignore the project, you have no one to blame but yourself for its continuation on the same path…

I was reminded recently of the story about the first meeting between Warren Buffett and Bill Gates.  As told in The Snowball by Alice Schroeder, Gates’ mom, the host, asked the dinner guests at the table what the single biggest factor was in their success.  Both Gates and Buffett chose the same word – focus.  When Jobs returned to Apple as CEO, one of his first actions was to eliminate a plethora of product development activity and to narrow to four products – everything else was slashed – he brought focus.  He is quoted as saying “Deciding what not to do is as important as deciding what to do.”  And he’s right.

“But you chose Jobs, Gates and Buffett – it’s easy for them to pick out focus with hindsight – they’re among the most successful business people that ever lived” you might say.  “True” I would respond.  However, I have also had the good fortune to work with some wildly successful, and some not so wildly successful, executives and teams and I have seen this play out time and time again.  Focus matters, and if well applied, can forge the structure of success.  As a leader, entrepreneur, or manager, your #1 role is to allocate scarce resources toward hopeful success.  Every nanosecond spent outside your area of focus is arguably a wasted resource.  Every new project you agree to take on, or allow your team to take on, dilutes resources and focus.  I’ve never understood why choosing a focus, and sticking to it, is so hard for so many people, but I can tell you I have seen the the results at both ends of the spectrum.  And if you can improve your ability to focus, learn, and to be patient over long periods of time, you can improve your probability of success.

I have played roles on all sides of acquisition transactions – and I have always believed keeping talented people is hard and requires a thoughtful approach and high touch.  But I had not seen much in the way of empirical data.  However, I recently attended an M&A conference hosted by Transaction Advisors, largely to see a session about talent retention and cultural integration post an M&A event featuring research by Towers Watson.

The data and content concluded that, while retention bonuses have become much more the norm, once they run out, cultural issues often drive people away.  Specifically, the TW data indicated that over two-thirds of the firms offering retention packages were able to keep 80% of the targeted employees — for a while.  However, once the retention period expired, less than half of the respondents had figures anywhere near that successful.  The number one reason given for their departure?  The were uncomfortable with the new firm’s culture.

What to do?  Not surprisingly, taking the time to engage, communicate, and to treat your new employees as people who matter can make a big difference.  The TW folks indicated studies have shown a 50 point success gap in employee retention for firms that use a combination of financial and high touch inter-personal tools and programs such as having senior leaders reach out consistently to their new team members, mentoring programs, recognition programs, development programs, etc.  This supports my empirical experience as well.  If you ignore the cultural impact of a new leader, new ownership, etc. – you run a huge risk of losing much of what you thought you were acquiring.

As most professionals in and around the private equity industry are aware, wealthy families – or “high net worth” families who perform sophisticated management of their assets via a “family office” staffed to manage their often generational wealth – are increasingly showing interest in investing directly into private equity change of control transactions.  However, their methods for doing so vary, and generally, they tend to have a few trusted relationships with whom they seek to partner.  Oftentimes, these relationships will consist of a few independent sponsors such as firms like ours.  John Rogers, a very experienced PE attorney who also represents many families in these types of transactions, recently wrote a short article summarizing his current view on the trend.

We at KCG also call on and have existing relationships with a number of family offices.  Why?  Because they support us in our model of patience.  Patience to buy and build.  Patience to weather economic storms.  Patience in understanding that if your goal is to grow and evolve an enterprise, oftentimes that’s hard to do within the boundaries of a traditional PE fund duration.  We believe this family office trend will continue and become yet another standard facet of the PE industry, and further see it as a good thing for sellers of businesses.  This alternative – professional buyers who have patience – provides sellers with additional options outside sale to a strategic or a financial (i.e. traditional PE fund).  The more options sellers have, the better for them and their organizations.  But more importantly, just understanding this option exists – to sell your business to someone who isn’t in a hurry sell it again – we believe creates a wonderful opportunity all sellers should at least consider.

I was recently reminded of a great book about management written by Andy Grove – High Output Management.  The book was published in 1995 and in it Grove summarizes expansive wisdom gleaned over an incredibly successful career as an engineer, manager and leader, most notably at Intel.  You can pick up the book, or you can listen to it online here for free (listening has become my preferred method of ingesting much of the new content I find – if you haven’t tried podcasts or audio books, give it a try on your smart phone).  I was reminded of this book while listening to one of my more recent favorites – The Hard Thing About Hard Things – by  Ben Horowitz (yes, the a16z Ben Horowitz).  I personally think Ben’s book should be mandatory reading for any new VCs or PE types as well as any budding or new entrepreneur.  It’s a great read (or listen) and is full of practical wisdom.  These two books give you a sense of how to manage – Ben’s particularly so in a VC environment.

So why does a PE independent sponsor investor consume books about being an operator?  Because we need to understand the management teams we partner with, respect them, be able to identify the great ones, and also be able to support and help them.  If you are selling your business to any type of financial buyer, or taking any type of “professional” capital from the outside, I would encourage you to make sure your potential partners have an appreciation for what it takes to be a strong operator, CEO, entrepreneur, etc.  And fundamentally I recommend you make sure they understand how to be exceptional listeners and don’t think they have all the answers.  As Ben or Andy will tell you, managing and leading are hard work.  There are no shortcuts.  And partners who understand that and support you on your journey are critical.  Particularly those who are also your investors.