Investor: What I Look for in Startup CEOs

Written by Marc Lederman

August 06, 2015

For growing companies, securing the right leadership is both a critical and daunting task that can have broad implications for the future success of the company. As a private equity investor at NewSpring Capital, I have a unique vantage point into the hiring and evaluation of C-level executives.

In my line of work, we must thoroughly assess the capabilities of management teams before making an investment into their organizations. We have to be absolutely certain that executives looking for investment capital will be fully capable of leading the expansion of their enterprises. The careers of many professionals rely on such decisions, so naturally we only invest in the most competent leaders. Years of taking this approach has yielded a wealth of knowledge into identifying the most capable business leaders and placing them with the right company.

We believe that executive leadership and human capital are the most critical ingredients to running a successful business. NewSpring created a ThreeM underwriting framework to assess and monitor its investment opportunities and portfolio companies – Management, Market and (Business) Model.

While all are important, management is the most crucial. In real estate, they say the three most important things are location, location and location. In business, it’s management, management and management. Growth-stage investors usually partner with the existing management team of a company to help grow their businesses and realize their visions by providing capital and advice. So, choosing the appropriate management teams to partner with is critical – particularly the CEO.

Whether assessing the existing management team at the time of a potential investment or assisting a portfolio company in hiring a C-level executive to supplement or upgrade its team, we believe there are key attributes, both tangible and intangible, to focus on when determining the likely success of that individual.

The tangible attributes — such as educational background and accomplishments, work experience, career progression, promotions, and tenure — are usually the easiest to evaluate. These are typically known as “check the box” type qualifications that are freely gleaned from a résumé. While we use these attributes to make initial judgements, the tangibles only paint part of the picture. Many prospective executives have an outstanding résumé, but intangible attributes make a great leader.

Intangible attributes are some of the most important and most difficult qualities to assess, especially in C-level executives. They are the more abstract concepts such as leadership skills, loyalty and ability, capacity to coach and to be coached, work ethic, and integrity. With no proven science or standard by which to measure such attributes, we utilize our networks to find people who know candidates or have worked with them in the past. Investors rely heavily on the opinions of trusted advisors. In any industry, a good reputation is paramount.

When hiring talent for smaller companies, it’s essential to gauge whether someone with “BigCo” experience will be able to work in the “SmallCo” environment. In a small organization, executives no longer have a brand to leverage, a vast infrastructure to manage, or layers of talent to pull from. Executives for these enterprises need to be player/coaches – meaning they need to be able “to do” as well as manage. On top of this, there also needs to be proper alignment in terms of perspectives. Smaller companies typically cannot pay the same cash compensation as large businesses; therefore we look for executives who have a longer-term view on wealth creation. Smaller companies typically offer these C-level individuals equity packages as part of their compensation that can create real wealth if the company can execute.

Furthermore, outstanding C-level executives have the ability to instill loyalty. If a candidate has been in executive management before, we want to know if any senior-level individuals from their previous company followed them when they embarked on their next role. Talented leaders usually make those around them successful and thus instill loyalty in their team. We have found the best CEOs will typically have one or more people (a CFO, head of sales, etc.) follow them to their next role. Think about it this way, if you see a successful individual (such as a CFO) follow his/her former boss to a second job, that speaks volumes to the leadership qualities of that CEO – far more than any reference check. That individual is literally putting their livelihood in that CEO’s hands for a second time. This is a hallmark of a great business leader.

Good investors will have deep networks of successful and vetted executives. Such a network is the lifeblood of our work and requires our utmost expertise in the evaluation of talent. We have helped hundreds of companies expand their enterprises and know what A-class talent looks like. The right background combined with the right perspective and ability to instill loyalty, can take any organization to the next level.

Marc Lederman is the general partner of NewSpring Capital, a firm that invests in growth-stage companies.