Why (impact) VCs must invest in founders’ leadership capacities to boost startup performance and optimize portfolios
It’s the people, stupid!
People are the decisive factor when making investment decisions. This is a common statement made by the most successful venture capitalists. Given that the people leading a startup make all the difference for its success, it is mind-boggling how few investors have systematic processes in place to assess the people behind the idea. What is even more surprising is that most funds will focus on the growth of the businesses they invest in but not the people who make that growth possible, and this even though 65% of startups fail because of people problems (Wasserman, 2012).
Who cares? We still make money!
So why not de-risk your capital by investing more deliberately in the people behind the idea? There are two simple reasons why. Venture capitalists accept a high failure rate, so long as the numbers add up in the end. Accepting startup investing as a “fluke business” as Marc Andreessen called it, clearly shows that investors do not have a real pain point that would drive them towards de-risking their capital through interventions focused on the people behind the startup.
In addition, there are plenty of examples of founders who despite their unconscious and poor leadership have succeeded and become millionaires in the process. Many young entrepreneurs glorify the lone entrepreneurial hero à la Steve Jobs and Elon Musk, casting aside the negative side effects of their leadership styles. Equally, investors too often buy into and perpetuate the narrative of the lone, driven, and ambitious genius.
Why invest in founders and their teams anyway?
If the failure rate does not generate the pressure for change, the opportunities may:
Better leadership leads to better business results.
According to the largest survey on employee engagement conducted by Gallup, companies with high employee engagement by far outperform those with low engagement, with leadership being the most important determinant impacting engagement (70%).
More pointedly, the Leadership Circle found a strong correlation between leadership effectiveness and business results. Drawing on multi-rater assessments involving more than 2,000 companies globally, their data shows that the leaders in the top 10% performing businesses scored in the 80th percentile on leadership effectiveness, while the leaders in the bottom 10% scored in the 30th percentile.
The significance of these results for early stage-stage startups cannot be overstated. While in well-established and larger companies, responsibilities, and the liabilities inherent in poor leadership are dispersed across a diverse set of managers, startup founders have a disproportionate impact on their young companies and teams. They will take the responsibility to evolve the product to fit the market, attract and retain the right talent, generate business, and manage investor relationships. A founder team’s leadership competence is the single greatest lever to unleash a startup’s potential. Investing in their leadership capabilities is therefore not a nice-to-have but a must.
Better leadership leads to the retention of talent.
The world of work is evolving and with it the expectations of the workforce. Young startups, just like established companies, are competing for talent. Startups may attract talent with brilliant ideas, and increasingly, a strong social or environmental purpose, but they are struggling to retain that talent.
The tech industry has the highest turnover rate of all (user experience designers and data analysts and embedded software engineers had the highest turnover rate at 23.3% and 21.7% respectively). On top of the financial costs associated with a high employee turnover rate, the departure especially of senior employees not only brings with it financial costs and loss in institutional memory but can also impact team morale and hence performance.
A LinkedIn survey of 10.000 professionals who changed jobs indicated a lack of opportunities for advancement (45%) and poor leadership (41%) as the main reasons they jump ship, with compensation ranking fifth on the list.
When financial resources are limited, leadership plays an even greater role in retaining talent. Through an appealing and well-communicated vision, a work culture that fosters a sense of belonging and encourages everyone’s best performance, founders create the incentives and growth opportunities that can sway employees to remain with a startup longer than they would otherwise.
Investing in founders means investing in future ideas
Many startup founders often view themselves as serial entrepreneurs and choose the entrepreneurial journey out of conviction. If investors truly believe that the people behind the idea are what ultimately determines the success of a startup, adopting a long-term perspective by investing in the leadership competence and growth of a founder means investing in all their forthcoming brilliant ideas. What’s more, founders are more likely to choose investors that take their growth and personal growth seriously over those who don’t. The single most important way to access top deals is by genuinely caring about the people behind them.
Why good leadership is so hard
Leadership is a complex task that requires an equal focus on self-leadership, people leadership, and business leadership.
Leading self
While self-awareness is a competency any leader should display, a growth mindset and the willingness to accept and learn from mistakes, the ability to adapt to a rapidly changing environment, and the resilience to come back from setbacks are particularly crucial in a startup context. The key to finding a balance is self-awareness, emotional regulation, and self-compassion — in a nutshell the ability to lead oneself.
Leading the business
Leading the business entails the ability to formulate a compelling vision, create alignment and coherence, and deliver results — competencies that most founders will readily relate to but might not necessarily be effective at. It is often the visionary leaders who lack the attention to detail necessary to break down their compelling vision into an actionable plan and build the structures and processes required to execute it. A founder who is aware of their limitations will attract the right partners to fill those gaps. This takes us to people leadership, probably the most challenging of the three for most founders.
Leading people
Startups attract young professionals with the promise of purpose-driven work, more agency, and flexibility but building a healthy team culture and psychological safety while responding to at times conflicting demands of investors, customers, and business partners is an exceptionally challenging task.
Strong people leadership, whether direct reports, peers, or partners, requires a high level of emotional intelligence, including the ability to communicate, listen and effectively manage conflict. These competencies are not taught at any (business) school. And it is the area that particularly ambitious and driven entrepreneurs struggle with the most.
Leadership can be learned
Having worked with thousands of founders over the years, Michael Dearing observed five cognitive distortions of founders, including believing in personal exceptionalism, black and white thinking, and following their intuition at the cost of ignoring data to the contrary. These behavioral tendencies — at their core important gifts and talents and critical to success, are also often a reflection of past experiences and deep-seated insecurities. If they go unchecked, they can derail a founder’s efforts, fuel conflict with others, and lead to internal turmoil.
According to Dearing, however, founders are not doomed to live with the negative side effects of their distortions. Facing their own “shock absorbers” can allow founders to preserve their superpowers while lowering the risks inherent to these behaviors. Hiring talent with complementary skill sets, organizational design, and regular self-reflection can function as such shock absorbers.
Moreover, a founder with a heightened sense of self-awareness, a clear sense of inner purpose, and values can approach challenges from a place of trust and creativity, increasing their ability to authentically engage with and inspire others and create sustainable buy-in and support for their vision.
Transforming the whole system
The pressures of the entrepreneurial experience will never disappear, nor is it realistic to expect a founder to display perfect leadership when faced with ever-new challenges. But as investors, we can help founders better navigate their inner world and balance the dilemmas inherent in leadership. This is likely to increase their well-being, their ability to maximize their individual potential, and have a sustained impact on the people around them over time. Moreover, it optimizes portfolio performance and increases access to deal flow.
But we cannot stop at entrepreneurs. In fact, it would be rather counter-productive and illogical to expect founders to evolve in their leadership when the very people enabling their success remain at a less evolved stage. As Bill O’Brien famously said, “the success of an intervention depends on the inner condition of the intervener”. The system needs to co-evolve as a whole for change to last. Investors need to walk the talk.
Huria Ogbamichael is Nurture Capital Partner at Masawa. She is an ICF-certified Leadership Coach with 15 years of international experience in organizational development, change management, and policy and strategy development. For the past five years, she has been coaching managers in global corporations, international organizations as well as tech startups. She is certified as a Conscious Business Coach and as a facilitator of the multi-rater assessment tool Leadership Circle Profile.
Masawa is the mental wellness impact fund. We invest in mental wellness startups with a bespoke nurture capital approach, for a thriving world. Follow us for more posts on leadership performance and wellbeing, organizational health, mental wellness, and impact investing.
