MENLO PARK, CA – May 30, 2017 – Private company investors strive to empower their executive teams and enhance the performance of their portfolio companies. Good intentions, however, are poor substitutes for good deeds, so the question that founders and executives should ask is “what are the fundamental principles that enable an investor to convert those worthy goals into reality?” Below are a few points we believe are paramount in achieving an optimal outcome for all involved.
Objectivity. Investors expect thorough and correct analysis from portfolio companies, but sometimes fail to apply the same rigor when providing feedback to those same companies. A classic example is when investors use instincts and opinions, rather than facts, to “measure” executive performance. Judgments made without concrete data invite skepticism, and can be harmful and counterproductive. Conversely, establishing objective measures of executive performance and referencing factual evidence can empower individuals to solve problems and create value, and at the same time avoid the surprising amount of time that executives spend wondering if investors are truly supportive of their efforts. The message is simple: stick to the facts – it’s not a popularity contest!
Transparency. In similar fashion, investors appreciate visibility into the operations of their companies but are sometimes unwilling to reciprocate. One example is strategic misalignment: investors may guide companies to pursue growth at the expense of fiscal discipline without explaining the considerable downside risks of such a strategy or the priorities driving it. Without this visibility, company executives have difficulty making risk/reward tradeoffs in their businesses. Transparency with respect to the realities of the market for private capital and higher volatility outcomes helps executives to embrace both the rewards and the real risks involved for themselves, their employees and their investors. A person cannot be empowered to optimize outcomes without understanding the rules of engagement.
Consistent messaging. Investors typically are genuine when trying to provide guidance. Depending on the number of individuals in the board room, however, and their respective understanding of the business, guidance can be confusing and even contradictory. Executive teams can become paralyzed while attempting to satisfy differing directives and, in the process, dilute their efforts. The preferable option is to ensure concise and consistent messaging to the company. Clear communication empowers a team to deliver on the most critical undertakings.
Connectivity. If for no other reason than frequency of interaction, investors in private companies typically build the deepest relationships with the CEO. An investor’s ability to empower the entire executive team, however, absolutely requires a better understanding of each individual. Underinvesting time and energy in other executives is a mistake for many reasons, the most obvious of which is an executive team that is not inspired to succeed.
Engagement. For those investment firms designed to focus material time and attention on each portfolio company, there is another opportunity to inspire confidence in executive teams. Proving that you are an engaged investor willing to follow through on specific initiatives fosters trust and belief in the partnership. As a secondary effect, deep engagement and trust allows for more honest and open information exchange in real-time. Challenging times are inevitable along the journey of building a business, and helping teams feel that they are not alone is surprisingly effective.
Admittedly, it can be difficult to execute on the principles described. At HighBar, we endeavor to succeed in each of these areas as fundamental underpinnings of our interactions with our executive teams. We believe that executives that know they are treated in a fair and consistent manner can better focus on the work that drives value for all of us.
Chris Kitching is an Operating Partner of HighBar Partners, a private investment firm focused on enterprise and infrastructure software companies undergoing change or transition. HighBar provides patient, long-term capital and resources to fund growth and assist management teams with financial, strategic and operational execution.