IVCA Feature: Highlights of the IVCA Educational Luncheon ‘Talent, Culture, Chemistry: The Right Team at the Right Time’

September 13, 2017

• Michael Liang, Partner at Baird Capital
• Melissa Mounce Mithal, Principal at Baird
• Ira Weiss, Founder of Hyde Park Venture Partners
• Sam Yagan, CEO of ShopRunner

RHR International is a firm that specializes in Senior Leadership Development, combining management psychologists and consultants who help senior executives transform themselves and their organizations by translating insights into practical and strategic solutions that accelerate overall growth. Dr. Levitan began the Luncheon with an overview of some of the positive and negative factors in assessing the right team, and what to watch out for during due diligence. Afterward, he interacted with the panel by asking specific questions about their experiences in gathering talent.
 
SUMMARY OF OPENING PRESENTATION
 
Dr. Levitan began by expressing that there are different phases and crisis issues for different stages of a start-up. The beginning, the entrepreneurial launch, is all about creativity. But there can be a crisis in leadership, because there is often someone in position who has technical skills necessary at that stage, but not leadership skills. The next phase is the direct leadership management stage, and issues of autonomy emerge... people begin to think they cannot run their own show as the organization grows. That leads to professional management, as an organization develops scaleable processes, and this is about delegating authority throughout the organization. This can lead to a crisis of consistency, for growth also leads to far-flung or multiple departments, locations and sites, and processes start to splinter. This leads to matrix management, the ability to replicate across sites. In this case, it requires too much coordination and often starts to result into too much process orientation and red tape.
 
Out of these phases and issues, Dr. Levitan focused on the following topics, especially in consideration of the due diligence process for potential investments in first-stage companies...
 
Testing for scaleability at the CEO level, and how entrepreneurs fail to scale.

• The first problem was about comrades and family. There are often modest beginnings for companies, and persons that are there from that beginning are often given responsibilities beyond their capabilities as the business grows.
• The second fail-to-scale point was task orientation. There is so much to do that the future of a company is not considered. It continues about getting it done rather than a long term strategy.
• The third area is a single mindedness, which rejects or discourages ideas around them, which causes dissatisfaction and mass exodus.
• And lastly, working in isolation. Many entrepreneurs begin with an idea in a bubble, and are often deemed introverts. Because they avoid the people aspect of a business, departments like sales and marketing, even outside investors, lack vital information.

 
Testing for scaleability at the team and company culture level.

• First, observe the activity vs. process focus... how people talk about not only what they do but why they do it.
• Secondly, role clarity vs. role confusion. Listen to if people can tell you where they fit in the customer supplier chain.
• Third, the level of collaboration, how often are people saying “I” instead of “we.” Those pronouns in practice can throw off activities on either side.
• Fourth area, change capacity vs. “it wasn’t invented here.” Look for examples of outside learning and flexibility in regard to habits.
• Fifth, in the same vein, is recent innovations vs. minor adaptations. How recent are their innovations? Were they commercially driven and are they relevant?
• Sixth, strategic clarity vs. the present tense. Can people anticipate shifts in technology and customer expectations? Can they talk macro trends and extend them to the future?
• And the seventh point was outside focus vs. convenience. Are they customer centric, or focused on what is convenient for them?

Shifting to the other end of the spectrum, Dr. Levitan spoke of the biases on the investor side, during their process of due diligence.
 
Self interest. Do we have self conscious bias in our decisions about what to buy, and do some mirrors need to be held up as to whether we’re looking at these decisions objectively?
 
Falling in love with deal. The loss of perspective because of the complete head-over-heels enamoring of the deal itself.
 
Ignoring contrary opinions and/or group think. The risky shift was given as an example. If a risk is in a group dynamic, it’s more likely to move forward because there is no individual risk, and decisions are made in that dynamic that none of the individuals would have made if they had to decide for themselves.
 
Wrong analogies. A recent successful deal is often used as an analogy for a current one under consideration. Rarely do the analogies fit, because every deal is different.
 
Numbers and percentages. Are these facts or estimates? Mark Twain said there are “lies, damned lies and statistics.”
 
The Halo Effect. Simply over generalizing across the competencies. If someone is good in one or two categories, it doesn’t mean they’ll automatically be good at something that is completely different.
 
The Sunk Money Fallacy. Being in so far, that good money is thrown after bad... or trying to make something work because of the sinking of a large amount of due diligence money in.
 
THE PANEL DISCUSSION
 
Moderator Dr. Levitan used a question-and-answer format with the expert panel.
 
QUESTION: Sam Yagan, since you have experience in this, what happens at the CEO level when you move a company from one stage to another?
 
Yagan talked of his experience at Match.com, when he moved from a company with 20 employees to one with 1200. Leadership and communication were the main differences. “I went from down to up, and up to bigger,” he said. In talking about his current company, ShopRunner, it is in its sixth year. “It’s about bringing in real executives,” he continued, “I wanted as much professional expertise as possible.”
 
QUESTION: What phase are you most comfortable in, from what phase to what phase?
 
“It’s the scaling part that is most difficult,” he said, “going from knowing everyone in a company to not knowing anyone.” He continued, “That is something that very few people have seen and done well, I’ve seen and done it okay.” He added that perhaps it was the small-to-big transitional phase that he was most comfortable with, given the right management team... a luxury if you can get it.
 
QUESTION: What are your experiences in the due diligence stage, when assessing companies going up the scale?
 
“When we get involved in companies, they could have as few as two people or as many as 15,” said Ira Weiss. He went on to explain that most of the focus is on the Founder and Co-Founder in this case, because their investments are most successful when that top level can take a business far... persistence and passion is the key, and ideally a person or persons with leadership skills, that can attract the right people around them. Serial entrepreneurs are also ideal, he concluded.
 
“I would categorize our investments in companies as that personal management stage, far beyond the beginning entrepreneurial level,” said Michael Liang. He noted that they spend a lot of time on the management assessment side, and how to best assess them. Which levels? How much will the assessment cost? What time frame? He then spoke of finding trends, by assessing their successful CEO/teams, and understanding what was common in their management practice, but found that wasn’t giving them enough information.
 
“What we’ve recently done was ask key questions,” Liang continued. He gave both broad and specific examples like, how do they interact? Is the VP of Finance capable of scaling upward to CFO? How does the CEO think? He then talked about how they used objective operational partners, not part of the deal team, and have them sit with senior management... to find answers for those key questions.
 
“It’s about getting the true story of how they do their work,” said Melissa Mounce Mithal. She spoke of communication, priorities, alignment and consistency. She stressed how it’s even more important on the Private Equity side, with specific assessment structures in place, looking for the “maturity” in those structures. If those specific maturities aren’t found, it’s not that the investment won’t be made, but the return might take longer. When will that value start to be seen?
 
QUESTION: Once the due diligence is done, what are your assessment and interview processes for finding the right talent?
 
“When I moved a company to Chicago, I let go of all but one executive.” said Sam Yagan. He went on to explain that skills sets are available, but it comes down to the type of person you want to work with, and that was the biggest thing that mattered to him. “Then you have a chance to have a culture,” he added.
 
“The one person I do not like to hire, and I especially bristle when people are recommending someone to me, is when they say that they’re ‘smart,’ said Michael Liang. “If they’re not smart they wouldn’t have gotten here.’ But he went on to say he hears that description a lot, and in the fields they invest in he found that this “smart” characteristic comes up because technical people like to hire their own. He observed that they would often get in trouble with over-thinking, with a white board covered with ideas after a five hour meeting, that ultimately means nothing.
 
“If you can’t picture your management team driving towards a successful exit, you’re going to have a dip until you can make a change, and it is hard to recover from that.” Melissa Mounce Mithal added. It’s also hard, she added, to attract great talent to sketchy situations... get the team right in the beginning, because it’s a difficult sell beyond that stage.
 
“If you think about the top tech start-ups in the last thirty years – Microsoft, Apple, Amazon, Google, Facebook – what do their founders all have in common?” asked Sam Yagan. “It was in how far each of those founders took the companies from the start.” There are problems, but they took them far, he noted. He added it was in the sense of those crazy outliers that brought these companies from nowhere to billions of dollars.
 
Ira Weiss interjected, “Sometimes it’s not the management team in the initial stage, but it’s the timing of a good number two stage team.” He talked about the founding management getting to a certain number but not beyond, so the timing for a number two can take it to the next level. When asked about his timing for bringing in the number two, Weiss said it needed to be far enough along not to cause material damage to the core business.
 
QUESTION: Ira, was it true you went through five CEOs in a company within 18 months?
 
“I was on the board of a company that went through five CEOs, and it was because the board decided it was time for  change,” Weiss recalled. He spoke about the hiring of a special firm to find the right candidates, and the board made the decision after a thorough process... they thought they found someone later in his career, who had recently retired, but thought he had one more success in him. He didn’t.
 
The reason they went through five, he said, is that after the veteran didn’t work, it was hard to get another candidate lined up. He ended up being an interim CEO, because he was the only one not doing a full time job, and finally they got another search firm into it and settled on their candidate. Although the investment turned out to be a success, “it was very damaging to go through so many CEOs,” he said.
 
AUDIENCE QUESTIONS
 
QUESTION: Sam, you talked about the number of people who report to you. How much is too many, and how do you get the right information from them?
 
Sam Yagan: I once had 24 that reported to me, and that was too many. I think nine is at my ability to manage, I wouldn’t want many more. My view on it is that those one-on-ones become very substantive, because we’re getting super operational. By having fewer reports and broader staffs, the meetings become more meaty.
 
QUESTION: Ira, what was it about that last CEO in the story you told that cracked the code for settling in?
 
Ira Weiss: It was about doing another search. The next person was going to be a stabilizing hire. We were also more careful in this search than the first time, because we knew we couldn’t make another mistake. We also had the luxury of taking our time, and that helped us find the right candidate.
 
QUESTION: For everyone, what is the key to finding people within an organization that will have executive talent later on?
 
Melissa Mounce Mithal: It can be as simple as what they’ve done, how they approached things, and leadership. It’s about taking that functional piece and attaching it to the broader organization, and to break that down into their teams. Those are traits we look for in assessing a promotion beyond their prime position.
 
Sam Yagan: That’s in a question I often ask CEOs. ‘If you have to leave for month or so, are you okay with your VP of finance making all the financial decisions, in absence of your interaction?’ Could they trust that anyone in the organization could represent them? That determines the strength of a team.
 
Mithal: There needs to be a evaluation in such a situation. Again, if someone has been in a seat as a specialist, there needs to be sometime beyond longevity to assess their promotability. Do they have the judgement or ability to take on a bigger role? In earlier stages, companies get into a trap of just wanting to elevate people, because they have been around. It’s becomes complex and strategic in how to address those issues.
 
Ira Weiss: In early stages, we encourage founders to accrue people who are more jack of all trades, for multiple roles. But when it comes down to hiring for functionality, it’s often not clear if the jack of all trades folks can effectively do a functional job. But at some point we need functionality, and that is one of the hardest transitional points.
 
QUESTION: How do you manage distributive teams, meaning management that is scattered in various offices or working at home, and need to come together?
 
Sam Yagan: It works with me. Technology has made that work, for example video conferencing. You lose the drive by conversation of an office, but you have to be aware of that and put the infrastructure of communication in place.
 
Michael Liang: We’re okay with it because we have to be okay with it... and to get the right talent in healthcare, we often have to go to the coasts. They don’t move from there, but they’re willing to do a commuting job. It does affect culture... it can become a wasteful Midwest vs. California discussion. But at the end of the day, we’re all trying to sell the same thing.
 
Melissa Mounce Mithal: You have to be intentional about that, physical location isn’t as big a deal as collaboration. Is there great collaboration, and is there a consistency of culture? You have to be intentional about that, because isolation can create conflict.
 
Ira Weiss: We’re open to it, we have it here and there. But if you’re a CEO who wants a great team, they usually need to be in proximity. If you’re not doing that, you have to be very thoughtful on how you make it work.
 
Dr. Levitan had one final situational inquiry for the panel...
 
QUESTION: Fill in the blanks... I run from the company that has this culture, and I can tell that a company has a great culture when I see...
 
Sam Yagan: I run when I experience politics, defined by putting yourself or a team ahead of the company. I can tell a great culture when I see the open talk, and the overcoming, of failure.
 
Michael Liang: For me, I run when I see certain individualism over teams. Great cultures are the ones that share the goal of believing in and getting a product to market. To see that and ask why, and they believe they can do it better, that’s a key element to success in my view.
 
Melissa Mounce Mithal: Similarly, I’d run from a company if I hear “I” too much. In studying great cultures in due diligence, if we see passion, engagement and alignment to common goals and purpose, those define success.
 
Ira Weiss: Individualism and back-stabbing is not conducive for us. On the success side, there are a variety of cultures that work. I generally want to find a culture that describes themselves in the same way, then you feel like they’re rowing in the same direction, as opposed to receiving different answers from each individual.