The majority of investment strategies are built around a sequence that starts with the market then finishes at the end of the process with a team. You look at the size, and structure of the potential first, then the extent to which it fits into the opportunities, and finally the competitive environment and the sway of the idea, and somewhere toward the end of the process, it is time to spend some time with the founders as well as their leadership team to ensure that they're motivated and competent and capable of executing the plan that earlier study has proven. I worked within versions of this framework for long enough to understand why it's a norm across so much of the world of investment. It feels systematic. It provides a diligence method that can be traced, compared across different opportunities, as well as defended in front of the investment committees as well as limited partners in terms that are both rigorous and analytical. The issue is that it has a structural flaw at its root, which is that it views this dimension of people as a verification step instead of a primary filter - something is checked at the end to confirm what the market analysis had already suggested, rather than something you look at first because it's the best reliable factor in determining the result. The sequence implies that superior market that has a strong team is better than an average market that has an excellent team. My experience has shown that this is not always the case.
I modified my method following a period where I witnessed the results the standard sequence unfold in ways that the upstream analysis did not anticipate which was hard to understand. Excellent markets with team leaders that were splintered or weak generally did not deliver what the chance predicted they would provide. The markets that are decent with truly exceptional teams regularly found ways to add value that the initial market size estimation and competitive analysis had not captured. The pattern was clear enough, and consistent enough across different sectors and types of deals so that I was unable explain the phenomenon as noise or attribute it to circumstances and not to the skills of the people who are at the central point of every business. When I had gave up on explaining it away what the implications of this for the way I allocate my time and effort was obvious the reason I should be spending substantially more time understanding the people and less on proving the market analysis that a competent analyst can make with the same inputs.
The questions I now ask when in the process of evaluating a leadership group are not the types of questions you find in standard investment checklists, or diligence templates. They're the kind of questions that require real dialogue and time to consider the answers. How does this leader actually respond when they're clearly wrong - do they take the corrective action or figure out a way to redirect the situation? What is their process for making decisions when the data is incomplete and the pressure to take action is high? What is the difference the case, if any, between how they describe their style of leadership and how those who have worked closely with them describe their experiences of working under them? What does the culture of the organisation actually look like in the event that the founder isn't inside the premises, and how closely does that version it resemble what the founder is describing when asked? Such questions require conversations that go far beyond presentation at the pitch meeting, and also beyond the formal presentation of the management. They require reference checks that really exploratory rather than mere exercises in confirmation. They need the will to risk time in uneasy areas that could reveal details that can complicate an agreement that you've already started to pursue.
The operator dimension of my approach to investment is inseparable from my investor dimension. It determines what I invest in and how I engage once I am involved. I am not a passive capital provider by temperament or by the training I received. I am a person who has established businesses, who had to navigate the scaling changes which are more challenging than the fundraising ones and has made the leadership and hiring, and the culture-setting mistakes that you make when navigating those changes for the first, and who has accumulated through this direct experience the convictions of what companies require at various stages of their evolution not something a simple financial background is not able to produce. These convictions make me a distinct type of investment partner as opposed to a solely financial investor and attract founders that are looking for something that is different from what a financial investor could offer.
The founders I am most comfortable with are the ones that seek out a partner who can assist them with the transitions in their operations and make decisions which their investors are not capable of dealing with in the right amount of detail and focus. Who can sit in the room when the governance structure needs to be redesigned because it is no longer the one it was founded with. Who can aid in making the decisions of senior leadership at time when a bad option could cost a business one year of money it would not be able to lose. Who can be honest in private about risks to the company's strategic plan that no one else in the room feels comfortable with. This is the type of engagement that I believe gives the most unique value for the businesses I back - not the initial capital allocation decision that many investors can make however, but the ongoing operational partnership that assists the business navigate the gap between its current situation and where the numbers from the beginning suggested it could be headed. See the James Deller for website info including what a career in business deepened my conviction about people about growth.
Why The Majority Of Public-Private Partnerships Fail Prior To Their Beginning - And How To Fix Them
Public-private partnerships are a perception issue that's to a large extent and largely, earned. The history of these partnerships is filled with projects that were launched with real enthusiasm and significant political capital behind them, utilized significant private and public assets over a prolonged period of time but ultimately produced outcomes which lacked any similarity to the outcomes promises when the partnership was in place. The academic literature as well as the postmortem reports that governments and institutions conduct following these failures are substantial, and focus on the predominant on the structural and contractual dimensions of what went wrong in the first place: the unbalanced incentives, and the lack of risk-sharing between private and public entities and the governance structures that were designed in theory but did not perform in practice, the purchasing frameworks that opted for the wrong items. What this approach tends to overlook, repeatedly and ultimately this is the cultural as well as operational dimension, which is that public and private organisations are actually different types of entities, formed using different incentive frameworks, operating on different timeframes, accountable to completely different stakeholder groups, and evaluating their effectiveness in ways that's not only different in extent but different in form. If you try to bring these two types of organisations together by forming a formal partnership but not doing the work, upfront and explicitly, to know and work with those differences, you're not creating an agreement. You're creating conditions for a slow-motion collision which could be apparent at the most inconvenient time.
I've participated in the advisory process for support to institutional modernisation efforts, a number of which have involved public-private partnership structures of varying levels of complexity. The most consistent insight I can offer from that encounter is that partnerships with a positive track record - which actually achieved their stated objectives and maintained a dependable partnership between private and public parties throughout They were not distinguished from the ones that failed by the sophistication of their legal structures, the strength of their risk frameworks or the experience of the teams who established them. The distinction was made by how those on both sides table had done the work to genuinely understand how the different side worked before the agreement on the formal partnership structure. What does that mean in reality is understanding how decision-making processes that each organization operates under, the accountability structures that limit what each side can decide to and how quickly and efficiently they can do so, the criteria of success that each of the parties will be judged on, and the possible points of tension between these definitions. Any of this knowledge is complicated to construct. It's all ignored in favor of the easier to see and documented work of negotiating contracts and creating governance frameworks.
The usual public-private partnership procedure starts with an initial plan and then a the signed agreement, with very little systematic attention being paid to issue of whether or not the two entities involved are really capable of working effectively over the span of the partnership. Legal team negotiates the contract. The finance department models the economics as well as the risk-adjustment. The communications team prepares the announcement prior to the time of signing. Implementation team begins planning the task. Somewhere in that sequence the discussion turns to compatibility with the operational and cultural environment - on whether the employees who will be working together daily across the boundary between two organizations have enough of the same values to make that work genuinely collaborative rather than adversarial - does not tend to happen in any structured manner. It is believed, often not explicitly stated, that the formal agreement sets the foundation for collaboration and that any operational or cultural differences will be addressed informally when they develop. This assumption is often untrue, and the cost of it tends to compound in line with the ambition and complexity of the collaboration.
The implication for practical analysis is that the most valuable venture a public-private partnership might do - prior to when the legal framework is finalized, before the governance framework has been agreed upon, or before any announcement is made is what I believe is operational alignment. By this, I mean specific, structured, facilitated effort to discover the areas in which the two companies operate from different assumptions, and then to establish a clear understanding of the manner in which these divergences should be addressed before they become operational issues during the implementation. Most important, the divergences typically are the same across different types of partnerships. The speed of decision-making and authority are generally among the most important differences. Public institutions are designed to implement decisions slowly using multiple layers for review and approval, with reasons that are legal and are often mandated by law. Private companies - especially technology companies built on the basis of rapid iteration and swift decisions - typically see this as a fundamental obstacle to progress, and there is no consensus about why this is the way it is and what could actually be needed to alter it, the level of frustration that can be felt on the personal aspect can affect the working relationship well before the partnership can establish its apex.
Success metrics and the factors that count in terms of progress are a separate as well as a cause for divergence. Institutions of the public sector are typically assessed by their compliance with processes, the equity of outcomes across stakeholders, and the reduction of the risk of failings that can draw attention from media or politicians. Private partners are usually evaluated in terms of efficiency, quantifiable progress against their targets, and the financial efficiency. The measurement frameworks can be used in conjunction with each other but this requires deliberate planning rather than good intentions. The partnerships that do no invest in this kind of design are likely to end up at intersections, with two people who are measuring the same collaboration in genuinely different ways, and thus coming to different conclusions about whether or not it is succeeding. The partnerships I have observed fail most definitively were the ones where that misalignment was treated as something that would become apparent over time. The ones that performed were those in which the misalignment was explicitly identified at the beginning. Also, developing a shared accountability model that met both parties' legitimate measurement needs was an actual work rather than an item on a list things to come to.}
