The most difficult, but also perhaps the most important, part of due diligence is assessing the management team. No organization can succeed and survive without strong leadership. If an organization is great in spirit, it is because the spirit of its top people is great. If it decays, to borrow from the proverb, it does so from the top down.
Gleaning insights into a team’s management and leadership skills can be difficult, but any successful effort starts with knowing what to look for. Let’s talk about what those topics are and how you can ask the right questions to get the information you need.
Important Topics to Consider
- Credentials/Competence: It is important to make sure that the entrepreneurs have the necessary skill set and experience to lead the proposed venture. To externally validate any claims, investors should do their own reference check. Start by talking to references that management provides (i.e. former employers, other investors, etc.), either over the phone or better yet in person, but then ask those references for more names to expand your scope. LinkedIn can be another useful tool to augment your reference check as it allows you to see who knows who as well as who already works for the start-up in question. If they don’t have the credentials, make sure they have contacts that do or that they plan to add new people to fill the proposed gaps.
- Leadership: A CEO’s leadership abilities are a critical source of motivation for current and future employees. It’s important to keep in mind that while visionary leadership may be the leadership style many people first think of, there are many different leadership styles that work better for different situations. Leadership knowledge can be gleaned from history or literature, but leadership skills come from experience. Look for whether you see leadership potential in the management team and whether they’re exercising that potential.
- Mindset: An individual’s passion or personal stake in the business can give you an idea about their mindset. You want to work with people who are intrinsically motivated, but also face some external pressures to maximize resilience.
- Honesty and Integrity: This is absolutely critical, as so much of a new venture is based on trust. Unfortunately, this is tricky to assess when you’ve probably only just met the entrepreneurs. Thus, it is important to spend time with the management team during the due diligence process and if you detect any lack of these traits, drop the company.
- Agility and Judgement: Most likely the entrepreneurs will have to switch gears or change the business model at some point. Look for how well they work on their toes, in a crisis, or in a pivotal process. If signs of poor judgment show up during due diligence, that should be a big warning sign.
- Organizational Culture: A small company should have a relatively flat hierarchical structure where there is an open exchange of ideas. They should be focusing on innovating, not on politics and who is ranked more highly.
Asking Yourself the Right Questions To Get the Information You Need
Credentials/Competence
- Who are they?
- Do they have the combined requisite skills and experience?
- Do they have a track record as entrepreneurs?
Leadership
- What leadership style do they express?
- How do they view their leadership duties and responsibilities?
Mindset
- Do they seem passionate?
- Do they have skin in the game?
Honesty and Integrity
- How is their communication?
- Is their character worthy of being emulated?
Agility and Judgement
- How did they respond to the challenges they faced?
- Are they trying to proactively control for uncontrollable factors?
- How did they make major decisions about their business?
Organizational Culture
- What is the organizational structure?
- Is the management open to feedback?
- Are they easy to work with?
As a rule of thumb, you should feel enthusiastic about thinking of the management team as partners. By focusing your attention on the key topic areas mentioned above, you will have more confidence to invest in (or reject) the management team.
This page was written by Crystal Yan and Jeffrey Camp. Ms. Yan is a member of the Cane Angel Network investment team and is pursuing her joint MD/MBA at UM graduating in 2021. Mr. Camp is the Managing Director of the Cane Angel Network.
