Sounds like a funny title or maybe something geared more towards a self discovery session with Anthony Robbins but it is something that is commonly overlooked by Private Equity, VC and angel investors alike. What does “personal limitations” really mean? Well this really needs to be looked at in context of a scenario. Let’s take for example a highly successful corporate achiever who understands the politics and the maneuvering within the corporate culture. The skill set for someone thriving in a corporate climate is vastly different than in an entrepreneurial setting. The thought processes are different; for example a corporate achiever knows that funding/budgeting is not really as relevant as to the end outcome of a situation. He knows the capital is there as needed for his project as well as the required personal that can be pulled in from the corporate infrastructure, if needed. Conversely, the entrepreneur obviously does not have this luxury and usually must think completely out of the box when finding solutions whether they are capital related or personnel related. Many investors both individual and institutional use assumptions when making an investment. The assumptions are based on the information given to them by the entrepreneur such as; market research information, prior experience of key management and personal experience. The real issue comes down to relevant management information. In almost all entrepreneurial ventures the main reason why a company is funded or not funded comes down to management and their ability to capitalize on the venture.
Because an entrepreneur may be able to take a venture or business to a certain level of success does not necessarily mean he/she can take it to the next level. There are certain attributes which are very difficult to vet out when going through the initial diligence with the entrepreneur and management. These attributes can be; fear of success, micro management, adversity to conflict, lack of thinking outside the box, poor leadership skills, poor communication and even emotional stability. These are very key points that must be, to the best of the investor’s ability, ferreted out prior to any capital being infused into a company. The results can be very subjective so a fairly rigorous interview process coupled with some hypothetical scenarios should be run by the entrepreneur to see how well he or she has really thought this through. A bad analogy but a potentially pertinent one are these reality inventors/entrepreneur shows. The investors on these shows, in a fairly rapid fire manner, grill the entrepreneurs with hard questions and basically see how they do under fire or pressure. This is a very good tactic that has only recently started to be utilized again.
In markets where capital is flowing there seems to be much more of a “use it or lose it” mentality when it comes to VC’s and private equity guys. Basically that means if they do not deploy the capital in a timely manner then their fund investors, as they usually do, seek a higher return elsewhere. In these times the diligence underlying these companies is a little more streamlined and if it fits into the parameters of the investment criteria and management has a decent resume and a pulse then they will typically get the capital. As we are seeing now when markets turn and liquidity dries up there is much more of a conservative approach to deploying capital. We saw this in the internet bubble of 2000 when capital could not be spent swiftly enough and real diligence, especially founder diligence, went through a highly streamlined process and thus investments suffered severely when the bubble popped.
By understanding a bit of human nature and putting in more effort to understanding the limitations of the entrepreneurs I believe that the ratio of PE and VC backed companies that survive will rise incrementally. To the entrepreneurs I would suggest taking a real hard honest look at your weaknesses and assess them relative to the ventures success. I would even go so far as asking friends, family, close business associates and even prior employers and truly find out what their perception of you, as the entrepreneur, is and gauge that against what needs to be filled in. The results may or may not surprise you but you will be that much more equipped for the ultimate success.
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