Capital seems to be chasing companies these days. More and more businesses are having checks waved in front of them at breathtaking valuations, and new deals are announced at a frantic pace.
With the abundance of easy money available to growing companies, there is a danger of business leaders taking growth capital for granted and losing sight of the leadership attributes necessary to meet the challenges inherent in scaling their companies.
Having seen numerous instances where the quality of a company’s leadership is its greatest indicator of future success, our team spends about half of their time evaluating promising leadership. Here’s some advice to CEOs based on the traits we look for before committing our time and capital.
Obvious as this may sound, it is surprisingly common for CEOs to tell you they are targeting Fortune 1000 companies and in the same breath describe the small and mid-sized companies they are pursuing with the same techniques (or vice versa). A CEO with clear, consistent customer segmentation and go-to-market strategies is a must.
CEOs need to know their personal and team’s strengths and weaknesses and use the information productively to hire people with skill sets that will buttress the capabilities they lack. No CEO has all the required skills. The ultimate test is that a CEO should be willing to ask him/herself every quarter, “Am I still the best person to run this company?”
Many CEOs don’t like to hear bad news. They hide it, they ignore it and they don’t want to share it with their board or investors. Some even tell employees “don’t tell me, just fix it.” CEOs must not worry about creating a perception of weakness or believe that they must fix problems on their alone. They need to assess quickly, involve the necessary people and resources, and perform triage immediately.
Small and mid-sized business CEOs need to keep in mind why customers would buy their product or service as opposed to their competitor’s. They have to understand how and why their company delivers demonstrably better value to their customers than their competition. Great CEOs are road warriors, visiting customers and constantly testing their buyers to uncover why they win, why they lose and how they can improve.
CEOs should constantly seek to build their sphere of influence and find ways to give their company more visual heft. Stature and recognition may seem elusive to companies at the $20 million revenue level, but creative CEOs find ways to form partnerships, raise visibility and attract important alliances such as influential board members.
The current supply of money has complicated the ROI equation and put investors in a position of paying very high valuations. We all remember how excessive valuations fueling the ‘90s bubble cost the NASDAQ an estimated $5 trillion in market value.
The problem is that unless you are the next Salesforce.com, reaching for an excessively high valuation puts the company on a high-wire act. One slip-up and you’ve disappointed your investors and destroyed your employees’ ability to exercise their stock options. Do yourself a favor and think reasonably about a valuation that allows some room for stumbles–because they will occur along the way.
To be effective, CEOs must align their teams to the same business objectives and goals. Likewise, when they are considering an investor, they need to be sure they are on the same page. Expectations and risk tolerance will change in some scenarios, but if there is a core alignment of values and clear communication about how the relationship will be structured (timelines, information sharing, plans for a liquidity event) everyone will be happier in the long run.
Often the same passion that helps a founder to recruit employees, raise capital and get a company off the ground, can also cloud their judgment, delude them about their business prospects and cause them to make bad choices. Great CEOs and company founders are able to see things as they are because they have innately good perspective or they’ve learned the hard way from an earlier business experience.
In most companies the lead sales person and the best sales persons is the CEO. Great companies require an exceptional, dedicated head of sales. As naturally as this comes to most CEOs, they must accept that they can’t effectively build their company if they are playing the roles of CEO and Chief Sales Officer.
There is a tendency to view top line growth as the Holy Grail, but this is a fundamentally limiting approach to building a company. As important as growth is–and it is important–a sustainable company that can stand the test of time must have scalability built into the operations. It’s not just about market share. CEOs must recognize that they have to deliver service and product efficiently over long periods of time.
By the end of Q2, 2014 had already seen more private equity investment ($7.428 billion) in private companies in the technology and services sectors than all four quarters of 2013 combined ($7.391 billion). Every last dollar was a bet on leadership’s ability to scale and build an even greater business.
As our private equity firm has learned time and time again, it is far more profitable to invest in a good business run by a CEO who possesses the traits listed above than to bet on a great business with leadership that falls short.
—Jim Madden is a cofounder and managing director of Carrick Capital Partners, an investment firm focused on operationally scaling growing businesses that provide software and technology-enabled services.