Agility Update December 2023

The first article sounds a warning that the financial engineering lever is no longer effective on its own.

The second is a tip to pay close attention to team dynamics as startup success is a team game.

The word ‘team’ is one that is core to EIM. We believe in people, and we believe in solutions through our key interim executives.

To our team of valued and trusted clients and interim executives: thank you for all your support in 2023,

wishing you a Merry Christmas & Happy, Safe New Year from all of us here at EIM Australia.

Look forward to seeing you in 2024.

Dave, Ryan, Deb, Bec and Shiella.

Private Equity Success Requires a New Talent Strategy Lever

With today’s higher interest rates and increased competition for target companies, private equity (PE) firms can no longer just replace portfolio-company CEOs or CFOs and depend on financial engineering to unlock value.

A study by the Institute for Private Capital has found that value creation through operations (revenue growth and margin improvement) accounted for 47% of value creation since 2010, up from 18% in the 1980s, while the value created by financial engineering fell from 51% to 25%. In addition, AlixPartners’ eighth annual PE leadership survey conducted in late 2022, reported PE executives citing leadership effectiveness – 70% more often than they cite operational effectiveness – as the most important lever for creating value in their portfolio companies.

However, the 3 out of 4 CEOs leaving after a PE acquisition, confirm a widespread industry challenge. To turn this around, the authors of the Harvard Business Review article Private Equity Needs a New Talent Strategy advise PE firms to start by appointing a Human Capital Partner to the PE firm’s senior leadership team with a broad mandate and sufficient budget to upgrade talent at the firm and portfolio companies (portco). Second, develop a Leadership Playbook for the firm that spells out processes and systems to clarify expectations, timelines, and communication patterns plus resources, investments, and programs offered by the firm to empower and develop portco leaders. And third, institute a complementary Leadership Agenda at the portco.

Equally important are to embed leadership in the deal thesis and due diligence, in particular identifying the management capabilities needed to make the thesis work; and to start off an acquisition on the right foot by defining the key value-creating roles throughout the organisation and the vital leadership capabilities for those key roles.

Proved: Personalities Can Predict Startup Success

Canny venture capitalists who factor personality traits of startup founders into their investment deliberations now have data to back up their gut instincts. Researchers from the University of New South Wales, Oxford University, University of Melbourne, and University of Technology Sydney found that successful start-up founders’ core Big Five personality traits – the widely accepted model of human personality measuring openness to experience, conscientiousness, extraversion, agreeableness, and neuroticism – significantly differ from that of the population at large. Successful entrepreneurs were distinguished by a preference for variety, novelty and starting new things (openness to adventure), being the centre of attention (lower levels of modesty) and being exuberant (higher activity levels).

There is no single ideal ‘founder-type’ personality, though 6 particular personality types – Fighters, Operators, Accomplishers, Leaders, Engineers, and Developers, or collectively, “FOALED” – are allegedly 5 times more predictive of success than the industry the startup is in, and allegedly 2 times more predictive of success than the founder’s age. The researchers also found that startups with 3 or more founders exhibiting diverse combinations of founder types have an 8- to 10-times greater chance of success than companies with a sole founder a.k.a. Ensemble Theory of Success. This theory is reminiscent of The Dream Team: Hipster, Hacker, and Hustler or the ‘Three Hs’ coined in 2012 by AKQA chief creative officer Rei Inamoto.

Though founder personalities are crucial, it must be remembered that many other factors still play a role in the ultimate success of founder-led companies, including luck, timing, and connections.

Read more at: Computer scientists predict if startups will fail based on personality or download the study The impact of founder personalities on startup success.