Ideas are commodities. Execution is not. The most important critical success factor in business is investing in the right management team and not investing in the right idea. Why is it that most business schools don't dedicate any time to assessing the quality of a company's management team? Shouldn't this be the most important thing to consider before making an investment in a company?
We spend far too much time analyzing business models, markets and financial statements and we often overlook the most important investment quality, which is who is running the company and are they the right choice?
This is especially true in the money management or venture capital industry where the most important success factor in any investment is making sure that you have the right management team in place. The right management team can pivot, adapt and react to a material crisis or constantly changing end markets.
Past performance is indicative of future performance if you have the right CEO and the right management team. Yes that was a very controversial statement, but I believe that if you bet on a management team that has been extraordinarily successful in the past, then your chance of success betting on this management team in the future is materially higher than it is betting on a B or a C management team.
The best CEOs and entrepreneurs don't have a job; they have a passion. Superb examples of passionate CEOs and entrepreneurs include Richard Branson of Virgin, Marc Benioff of Salesforce and Christian Chabot of Tableau.
The best CEOs and businesspeople in the world are passionate salespeople with unbelievably positive attitudes. Their positive attitudes lead to an incredibly positive corporate culture. Fly on Virgin America or Virgin Atlantic and you will understand why Virgin is an exceptional brand. Virgin employees are so happy that they don't appear to have a job! Rather, they have a passion. Watch an interview with Richard Branson and you will understand why.
How do we assess if a CEO or an entrepreneur is worth backing? We can use www.Glassdoor.com and read reviews of the management team written by employees. Marc Benioff from Salesforce has a 97% approval rating according to Glassdoor.com from employees and Christian Chabot from Tableau has a 98% approval rating!
How do we do additional background checks on a CEO before deciding to invest in the company? Never call references that the CEO provides as nobody would ever provide a reference list of people that wouldn't say something positive. Rather, use LinkedIn and find contacts that you (or your friends/colleagues) have that know the CEO or people that work at the CEO's company. Then simply call these contacts and ask for feedback on whether or not the CEO is an effective salesperson and leader.
For private companies, read about the background of the management team on the company's website. For publicly traded companies, you can read the annual reports, which all have descriptions of the background experience of the executive team. You can find a wealth of information online at www.sec.gov.
The productivity of employees of a company with a passionate, visionary leader is materially higher than the competition. More productive employees leads to enhanced shareholder value over time.
We will all be much better investors if we spent a lot more time analyzing management teams. Only after we feel comfortable backing the right management teams should we start doing due diligence on the business model or the total addressable market.
Ideas are commodities. Execution is not. Always bet on the jockey and not on the horse.