This article is the sixth in an ongoing series on Deal Leadership. To learn more about leading a deal efficiently, download this free eBook today: Lead, Follow Or Get Out Of the Way -The Art and Science of Deal Leadership or purchase our books at Amazon.com.
Not everyone is cut out to lead a deal. In our experience, it takes a certain temperament and set of people skills to lead a bunch of peer volunteers. There are many successful investors who cringe at the phrase, “managing the process.” Managing is the last thing they see themselves doing. The good news is that early stage investing seems to attract a lot of people who are motivated, take-charge people who are looking to help out and give back. So there are many early stage investors who love to “manage.” Maybe they were product managers or some form of group leader in their career. Or, maybe they just love being organized and leading group efforts.
Ham spent a good part of his early career as a product manager for a software company. So he’s one of those folks who is skilled at and enjoys managing a team process. In the early days at Launchpad, he pulled together the guidelines that evolved into the processes we use today in every one of our due diligence efforts.
Ham, assuming an individual is the type of person who enjoys managing a process, what does it actually take to “manage the process?”
It all comes down to the checklist. The first time you lead a deal, it can be a bit overwhelming. This is where strong organizational skills and an ability to work toward a goal come into play. Having a well-thought-out checklist and a well-coordinated team will make your job easier. A willingness and ability to delegate tasks across a good sized group of 6 to 12 individuals is crucial. Taking on many of the tasks by yourself is defeating the purpose… remember, diligence is a team sport!
What are the main tasks the deal lead is really doing in their leadership role?
There are a handful of major responsibilities that a deal lead must be willing to buy into to ensure a successful diligence process. They include:
Keeping the process moving - If diligence drags on, the likelihood of a successful deal diminishes rapidly. You don’t want speed for speed’s sake, but you do need to push the team to complete all the assigned tasks.
Communicating with the team on a regular basis - Without regular communications, it’s very common for diligence team members to slack off on their assignments. By communicating with the team on a weekly basis, you are applying subtle pressure to get all assignments completed.
Coordinating interactions with the company - Just as diligence team members need to be in the loop, so does the company CEO. You want to make sure they know what’s going on with your team. And, you will help coordinate any meetings your team might need with members of company management.
Maintaining a positive and supportive (but objective) tone - It’s easy to find all the “warts” with an early stage company. Helping your team members (especially the less optimistic ones) maintain a reasonable perspective on what an early stage company should and shouldn’t be able to achieve in its first years is critical. That said, you are not a cheerleader for the company. So make sure you maintain a proper balance when working with your team.
Creating a succinct but thorough and professional diligence report - Are you going to read a 40 page diligence report filled with lots and lots of details? I doubt it! So why would you want to write a 40 page report? Through lots of trial and error, and after reading a few 40 page reports produced by other investors, we came up with a succinct format for diligence reports. So, keep it short, thorough and professional, even if that means editing one of your team member’s 5 page “summary” on their assignment down to 2 or 3 paragraphs.
What are some traps for the unwary?
I can think of dozens of ways that the diligence process runs into real problems. Over the years, we’ve run into many situations that made us rethink how to best run our diligence teams. And, we’ve heard war stories from other early stage investors that helped to shape our approach to diligence. I won’t write an exhaustive list of traps, but here’s a list of some of the most common problems:
Too much 1:1 communication - As a deal lead, there will be times when you need to have a quick conversation with a team member. That’s okay as long as it’s not your standard operating procedure. You are better off having a weekly conference call to make sure that your entire team is in sync. And, it’s a more efficient use of your time, as well.
Too many long conference calls - This trap is pretty obvious. Your team members will become bored and burned out. Stick with, at most, a weekly call and make sure it lasts less than 1 hour… and shorter than that is even better.
Trying to force a consensus too early - Just because you are 100% positive on the company and are ready to write a check doesn’t mean that other team members are too. It’s best to let individual team members pull together their summaries and then move towards a consensus.
Arguing with findings and having a bias - It’s very rare for all findings during diligence to trend positive. And, there is nothing wrong with discovering some negative issues. In my personal view, any diligence report that doesn’t have any negatives is a bit suspect. Accept what your team uncovers, so that your final report is fair and balanced.
Allowing team members to let the team down - You have to stay on top of each team member and make sure they complete their assignments in a timely fashion. Hopefully, you won’t end up with any foot draggers, but there are times when life gets in the way. Whether it be vacation, work or personal issues, there will be team members who can’t complete their assignment. It’s your job to replace that team member so the overall process completes on time.
Not resolving personality conflicts - Sometimes people will get lumped together on a sub-team and they just don’t gel and cannot seem to work together. You need to be alert to these kinds of frictions and fix them before they impact deliverable quality or timeliness, or undermine team morale. You also don’t want to have the entrepreneur see investors fighting. Your job is to get in there and swap someone out for a replacement before frictions escalate.
Should you be looking for one particular style of leadership? Does a deal lead have to be a type A drill sergeant barking orders to be effective?
Over the years at Launchpad, we’ve worked with more than two dozen different deal leads. As you would expect, deal leadership styles differ. So, feel free to adapt our recommendations on process so it works for you. That said, some of the basic guidelines related to communications and coordination are critical. No matter the context, every leader has to motivate his/her team, has to be clear about expectations, has to be organized, and has to be diligent. So keep that in mind as you develop your style of team leadership.
How about a situation where diligence leadership can go off the rails?
One of the biggest challenges in doing diligence reviews is knowing when to stop and when to press ahead. As we noted in our eBook on Due Diligence, the diligence process is a fickle beast - there are times when it takes discipline to keep going in the face of mounting issues, and there are times when it takes discipline to call a time-out despite accelerating deal momentum.
It can be very discouraging to get into a diligence project and begin finding issues and realizing the story is not as complete and attractive as you first thought it was. The desire to quit the effort can be very seductive. Equally seductive is the desire to minimize or ignore late-breaking issues once you’ve already put a ton of time and work into a deal. In both cases, allowing yourself to be seduced in the moment can lead to big mistakes.
The deal lead’s role is crucial in this regard. Diligence is not only about identifying risks, it is about putting those risks in perspective and figuring out which ones matter and which ones don’t. You need a framework that builds in natural evaluation points or circuit breakers to give you the opportunity to reestablish your perspective and honestly review where you are relative to where you think you should be. And you need a deal lead who’s not mired in all the detail work but can step back and see the big picture.
Want to learn more about leading a deal efficiently? Download this free eBook today Lead, Follow Or Get Out Of the Way -The Art and Science of Deal Leadership or purchase our books at Amazon.com.