Why I Forgot To Look For The Next Deal And Began Inquiring Who's In Charge
There's an era of investor behaviour that people will recognize right away, even if they have had no clue about it. It's the type of conversation where you begin the conversation with the deck, then quickly moves to numbers, and then lingers on the size of the market, before concluding with discussion of exit multiples. The employees within the company they are the ones who manage everything that is listed on those slides hardly ever appear. Should they, it is likely to be within the context of projections for headcount instead of being individuals with a history, motivations along with blind spots. will influence every major decision that the organization makes. I've been operating for long enough in that fashion to understand its popularity. It's a rigorous feeling. It's an analytical feeling. It feels like you are making a decision on the evidence, not your intuition. The issue is that it consistently excludes the single most important factor for determining how a company will perform in its long and intermediate term that is the character and reliability of the executives who manage it. That exclusion is not accidental. It is the product of frameworks that were designed to be documentable and repeatable that favor the things that are easily observed and evaluated against things that are essential and difficult to measure.
I learned this experience the hard way like most people, by watching businesses with excellent basic foundations struggle to perform because the leadership team did not have the capacity to work in the face of pressure. And by seeing businesses with weak basics dramatically perform because their employees were truly outstanding. After all of those learning experiences I stopped believing that the numbers were doing the heavy lifting for my decision-making. They were not. The data was a weak measure of the decisions taken by human beings. And the accuracy of the decisions relied substantially on who these human beings were as well as their behavior under pressure under the pressure of a missed quarter one of the key departures, a competitor's move they had not anticipated or a relationship with the board which was now complicated. So I changed how I began every discussion about evaluation. Instead of focusing on market size or revenue forecast I began by opening with the question I now consider as the"room" question Who actually manages this organization when pressure is on? How can they make the right decisions when the data is not accurate, how do they treat the employees around them and what happens to the culture of this organisation when its founder isn't in the room.

None of those items are in the checklist for investing. All of them, from my observations, seem to be more reliable in predicting the performance of the future than anything that does. It's not some romantic notion that people are important. It's an observation about how value is created and destroyed in businesses which scale. They don't fail because of bad markets. They fail due to poor decisions taken under pressure by people who were unable to take the correct decisions, or because of cultural behaviors that were inaccessible from the outside, yet were slowing down the company's ability to keep talent in place, ensure accountability, and adapt to situations that the original plan didn't anticipate. Be aware of these risks in the early stages - prior to committing capital and before the problem has developed, and before the culture has been shaped around the wrong habits - is actually the role of an investor who really cares about results rather than dealing flow. It is difficult to identify these risks by spending the majority of your diligence time on the model.

The shift I'm discussing is not difficult to explain when you say it plainly, but it is an essential reorientation of what you take as evidence, and that reorientation is more complicated than it sounds because it is directly opposed to the incentive structures used in most investments. Speed rewards pattern matching on the surface. Competitive deal environments reward confidence over deliberation. The style of certain investment circles encourages what is dismissed as"soft diligence," which is the kind of meticulous, sensitive attention to human characteristics that allows good business decisions to be distinguished from bad ones on significant period of time. I have sat in enough rooms where somebody has been able to dismiss a problem with management chemistry or leadership with the phrase "we will fix that after close" to understand how dangerous this notion is. You almost never can. It is not an issue after the close. This is a pre-commitment occurrence and if you're not paying attention when you write the cheque there is no the right thing - you're merely doing paperwork and hoping your luck.

What I'm looking out for to evaluate any business or leadership team, has become an almost specific set signals. What is the response of this leader when they're proven to be wrong about something? Does the leader accept the correction or deny it? How do they discuss those around them - do they often turn off credit and assume responsibility or do they handle it the reverse? What are people who have had a close relationship with their colleagues in the past say about the time the conversation has moved beyond the formal reference checks format into something more genuine and curious? What happens inside the organisation at times when no one is paying attention or when the CEO is on vacation and the quarterly goal is not going to be achieved? The place where culture is found - not just in the values that are displayed on the walls or on the mission statement posted on your website. It is rather in the normal decisions taken by the everyday person when the situation is uncertain that the simple and the right thing aren't the same. Finding businesses where those decisions are made consistently well and consistently successful is, to my knowledge the most reliable pathway to return that is stable in time. Have a look a James Deller for website advice including why developing people at scale taught me about character.



From Character to Commerce Why the Businesses I Back All have one thing they share in Common
When I look over the spectrum of investment actions I've been involved in the last few years - from the technology business and consumer companies, the investment opportunities in the emerging sector that I have been involved in, and the organisations around football which I've been drawn to support There is a common thread which I didn't intend to make up but that has become increasingly clear to me as I spent time thinking about what successful investments have in common the same characteristics and features that the ones that fail share with one another. The pattern is not sectoral because it crosses technologies, consumer services and sports. It is not structural - it's evident in companies with different ways of acquiring capital, structures for ownership, operations models and structures. It is nothing to do with market sizes or development trajectory or the technology architecture of the product. It's about character. specifically, about whether the company at the centre of the investment has an authentic, operational, and consistent commitment to the welfare and development of members of its staff, as expressed not only in the things that is said about the business but also in the decisions it takes in the event that it does not. Saying the right thing and doing the right thing is not the same.
I know the fact that this thought sounds, straightforwardly, the kind of thing that gets printed on walls in offices, business mugs, as well as on corporate website pages, but is systematically overlooked by the individuals who created the work. It is important to note in that I'm talking about the version that is stated as the commitment to people, the values document, the approach to diversity and integration the culture deck which was drafted for the purposes of the hiring process and your investor pitches. I am talking about the operational version- the decisions that are taken daily, whenever they are based on the principles in those documents and the commercially, or personally convenient option come into tension and the organisation has to decide which applies. The organizations I have observed have created truly durable value - not just outstanding short-term performance but also the sort of compounding, multi-year performance that generates extraordinary long-term return - are those where the answer to this question is known. If the commitment to do right by the staff of the organization isn't contingent on whether doing the right thing is the cheapest option, the fastest, or the most quickly profitable option.

Finding those organisations - identifying before an investment is completed, the ones the commitment to care is genuine that being executed, or a character of care and accountability is rooted in how the organization actually operates rather than how it describes its operations - is, I think, the most important and the most difficult skill in long-term investment. It's vital since it is the kind of quality that can most accurately predict an amount of compounding performance which produces truly amazing performance over significant time intervals. This is because it's not found in the financial model, you can't find it in a well-crafted and well-structured management presentation. And you can't find it even in comprehensive reference checks although these are helpful. You find it by spending enough time with an organisation in multiple contexts as well as at various levels of the hierarchy, for you to get a sense of how the organisation acts when the situation is uncertain and no one is paying attention. This kind of thoughtful engaged, exploratory interaction is difficult to integrate into financial processes. It is one of the reasons why most investment processes are less skilled at identifying truly exceptional organisations than they usually acknowledge or even discuss.

The connection between genuine organisational character and long-term success is one which I feel more strongly about today, with years of experience in longitudinal observation in my back which is more than I believed at that point in my career in investment. The organizations that take care of their personnel consistently and which express that love in operational decisions rather than only in communication and culture documents, typically outperform the ones that treat people exclusively as assets to be optimised. This is not always true in the short longer term, but an organization that makes the most of its workforce by creating high-pressure and a high level of security can appear very efficient over a period of a few months or even a few years, particularly when the time period is coincident with an environment of market strength that overcomes internal flaws. But over longer periods there are advantages to an ethos that is genuinely based on people over time in ways genuinely difficult to replicate by any other strategy. It increases the density of talent because people with options - the most talented people - tend to select environments where they feel valued and appreciated over environments that make them feel manipulated even though the former will cost more. The knowledge of institutions grows because people remain long enough to create it rather than bouncing through on a timeline high-pressure settings tend to create.

The decision-making process is more efficient because people are comfortable enough to surface problems and share bad news without worrying about the cost to themselves of doing so. This allows problems to be identified and resolved earlier and less cost than they would be in companies where the spokesperson consistently gets shot. The ability of an organization to respond to changes in the environment improves since people are invested enough by its achievements to take on beyond their formal responsibilities when the situation requires it. None of these advantages is each one of them in its own way. They're not the kind of thing that is the basis for a compelling and engaging narrative in an Investor Update or board presentation. They can, however, grow into a competitive advantage that can be incredibly difficult for businesses with less affluent cultures to duplicate, because the advantage is not rooted in a specific product, process, or capability which is easily observed and copied. It's located in the structures of how an organisation operates, in the conditions it has created for the employees within it, and in the quality of the choices that people make as a result. That is why character, both in organizations and in individuals is not a softer notion. It is, in my experience, the toughest as well as the most important thing of all.}