Leaders Are Made, Not Born

I hear from CEOs and investors that one of their strategic guidelines is to “invest in the team” and that talent and culture are strategic differentiators. I think they mean they try to find “ready-made” leaders and executive teams and give them money to succeed in their plans. In the past 25 years, I’ve worked with thousands of leaders from middle managers to senior executives, entrepreneurs, founders and board members. Not one of them was a born leader.

The successful ones have many stories to tell about how their experience has shaped their approach to business, people, and customers. Many are “self-made” leaders having learned quickly from their mistakes, adapted to unforeseen circumstances, or demonstrated relentless curiosity. These are all good things to look for when evaluating a leader, but too often are left unexamined and under appreciated by investors. Most great leaders are made over time with dedicated focus and effort toward personal and professional effectiveness.

Having worked side-by-side, in the trenches at dozens of start-ups, I can tell you the demands on leaders are tremendous. They face high speed, complex, ambiguous, uncertain conditions all day, every day. It strikes me as odd that investors don’t actually “invest” in the leaders of their companies. They hand over millions of dollars to the Founder/CEO to build a company, but they rarely spend any of it on the leaders themselves. This is an incredible oversight in due diligence and gap in fiduciary responsibility to the fund. Hope is not a strategy.

It seems crazy to me that seasoned business people assume a CEO (even a serial entrepreneur) will be successful leading a fast-growing, 100+ person organization with no attention to his or her personal effectiveness. Their very nature makes it more likely they will end up like Travis Kalanick than Bob Iger. Leading a complex organization (anything over 75 people) requires a well-honed set of interpersonal skills, professional presence and strategic talent planning (see Facebook and Google) to be successful.

I’ve approached dozens of Venture Capitalists and Private Equity investors with the proposal to invest in their team through proven leadership tools and programs. Nearly all of them have responded with some form of “that’s nice to consider some day, but we don’t have enough money right now.” Huh? What they’re really saying is, we don’t care about the actual people in the company. We make 100 investments and hope like hell at least 1 pays back enough to carry the fund. All that people stuff is too messy and soft to be of value.

I think it’s time for investors to start owning the outcomes of their lack of attention to leadership and talent. If you want to make a difference in the world by building companies you should conduct due diligence on your executives, not just the company finances. If you think talent and culture are strategic differentiators, ensure that proper efforts are being made to develop the CEO and the executive team.

The average Series A deal size in 2016 was $5M. Series B average was $12M, and later stage deals average over $25M. I’ve heard more than one CEO say they put their money on advertising and engineers, not HR. That might get you traction, but it won’t get you sustainable high performance. If you are in the game for a quick flip, I get it. But if you are really trying to build a high performing company, leadership is not “nice to do,” it’s an essential catalyst that unlocks sustainable growth.

So, here’s my challenge to anyone willing to test it:

Earmark 1% of your next investment for executive development. If you’re putting in $1M make sure $10K is spent on development for the CEO and the leadership team. If you lay down $10M, certainly a $100K investment in the top team will result in a favorable ROI. Even better, consider investing 1% of your total fund in the proper resources to support leadership development in the full portfolio. You can achieve much better economies of scale and cross pollination in that approach. You can even develop a unique portfolio advantage by doing this better than other investors. It’s a true value add for your money.

I understand that not all development is worth it, and that some efforts are a complete waste of time. Run it like any other A/B test you use in marketing. Identify the intervention and track the progress. If you have any questions about what kind of leadership development works best, feel free to contact me or check in with an executive development specialist you already know.

If just one more of the companies in your portfolio steers clear of the failures of executive leadership your fund will be twice as good. That’s smart money.