Investing Early is About the People First and Foremost
The success of investing early, be it in a company or an emerging alternative investment manager, is predominantly linked to the caliber and qualities of the senior people involved. Of course, the market opportunity and underlying strategy must have merit, but ultimately success or failure are inextricably linked to the people who are executing. Accordingly, an investment decision is heavily weighted on assessing the individual or individuals leading the charge. Evaluating relevant experience is the obvious starting point; however, I think in many situations that criteria will be woefully inadequate. An investor heavily relying on this factor would never have even considered investing early with business visionaries like Jeff Bezos or Howard Schultz. Direct experience can be nice when it is available, however, I believe it pales relative to a handful of intangible characteristics that define a genuine leader and builder.
I look for a series of intangible traits that are foundational. Their existence doesn’t guarantee success, but it’s hard to imagine achieving enduring success without them. These qualities, or the lack thereof, will shine through one’s background and as they tell their story. These characteristics won’t be communicated through words but through actions, attitude and track record. Recognizing these intangible traits through subtle clues should be a key focus for anyone who is accustomed to betting early on people.
They Are Passionate and Have a Purpose
Since early stage investing is essentially a bet on the jockey, it is vital to assess their underlying drive and level of excitement. Ascertaining why they are doing what they are doing is an important factor in determining whether I want to be their partner. The venture should not be a job or project, but rather a fundamental reflection of who they are. Where possible, I am ideally looking for a core purpose behind the passion, beyond simply the quest to make money. Embarking on something new rarely proceeds as smoothly as planned. Staying the course through inevitable speed bumps and course corrections requires an unwavering motivation. A relentless passion and purpose will push one to deliver herculean efforts and inspire others to join in the mission. A rock-solid passion and purpose helps materially thwart short-termism from subverting long term pursuits.
They Check Their Egos at the Door
A successful endeavor typically requires getting others on board and subsequently empowering them. The power of a team is perfectly described in the analogy used by Duke University’s legendary Coach K: “A fist is considerably stronger than an individual finger.” Building and embracing a team culture is virtually impossible unless the leader’s ego is in check. A leader must keep their head out of the clouds and filled with humility. Over the years, I have read voraciously on leadership and none captured the essence of true leadership better than Sir Rabbi Jonathan Sachs, “A good leader creates followers. A great leader creates leaders.” Finally, an ego in check allows one to admit mistakes and to ask for advice. Building a successful business is hard and complicated and there will regularly be missteps. Of course persistence is essential but so is recognizing these bumps are opportunities to learn. A great leader must have a never-ending pursuit for improvement which must include learning from others. This critical quest may be seriously compromised by an outsized ego.
They Have a Solid Unwavering Moral Compass
Everyone will have their own list of the traits that make up a “good person” but for me they are straightforward. At the top my list is high integrity – I want to invest with someone who stays true to their word. They do what they say they are going to do, and they do it while maintaining a strict adherence to ethical values. This honor applies when things are going swimmingly, and more importantly, when they aren’t. As Martin Luther King Jr. said, “The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy.” Any new business will have bad news and it is vital to have someone “play it straight over tackle” to promptly and proactively deliver news that is honest, transparent and concise. I want to invest with someone who forthrightly takes accountability and accepts responsibility particularly when things don’t go according to plan.
They Are Focused and Flexible
A new business or an emerging investment manager will constantly be presented with options and opportunities outside the primary objective. The constant barrage of seemingly beneficial prospects requires maturity and discipline in order to avoid a dilution of focus. It is hard to say no, but the ability to pass, temporarily or permanently, will increase the likelihood of success.
Notwithstanding the importance of focus, it is also important to realize that rarely will a business unfold according to expectations. There will most likely be unforeseen developments and the ability to adapt is an invaluable skill. Interestingly, the skill of adaptability is what Charles Darwin observed in his seminal work The Origin of Species as the key to evolution. Over time his core finding has morphed into “survival of the fittest” when in fact his discovery was that evolution was based on “survival of the most adaptable,” not the fittest.
In my view a great manager is one who can balance on the tightrope between staying focused and remaining flexible.
They Are Committed and Aligned
In a poker game, one is “all in” when they put everything on the line. In this scenario, they are fully committed — if they lose, they go home. I want this level of commitment to exist in every decision. This doesn’t mean cavalierly taking risks. It means being fully vested and assigning gravity to each key decision. Any early pursuit is difficult, so having the rigor to approach each decision on an “all in” basis will serve to increase the likelihood of success.
Investing in someone who is fully committed is critical, but I believe it needs to even go one step further. It is critical that everyone’s incentives are aligned. To the extent possible, create a situation where both parties are on the same side of the table – they win together and lose together. I only invest in situations with an alignment of incentives so that the principal agent conflict is minimized and drastically mitigated.
They Have Done Their Homework
While it may sound trite, I want to invest with someone who has done their homework. Startups are inherently risky and rarely resemble the beautiful spreadsheet or typical SWOT (Strengths, Weaknesses, Opportunities, Threats) prepared at the onset. Seasoned investors and entrepreneurs know the difficulty, or rather impossibility, in correctly forecasting the future. As a result, planning for contingencies, even highly unlikely ones, becomes of paramount value. Investments, be it a business or a portfolio, are about taking risks. However, many risks can be reduced through preparedness. Before investing with someone I want to know they have thoroughly considered the risks and embrace both Andy Grove’s mantra “only the paranoid survive” as well as Louis Pasteur’s “chance favors the prepared mind.” I am not expecting someone to know all the answers for every possible scenario, but I do want to understand the thoroughness and range of their thinking in advance.
I am not sure there is a magical formula about what personality traits lead to success. Possessing these personal traits in abundance rarely overcomes a faulty business plan and cannot ensure success. However, I believe the absence of these traits significantly diminishes the chance for meaningful and enduring success. Ideally, I want to invest in someone in whom each of these characteristics shine.