Leadership due diligence: what investors are really looking for

This is the first article in a series exploring the people side of scaling. Sonia Allinson-Penny, founder of Human Factor Health Check, works with investors and portfolio companies to assess leadership effectiveness, team dynamics and organisational readiness during periods of growth. In this series, she shares insights from years of leadership and team assessment work, examining the human factors that can accelerate, or hinder, business success.

There is no perfect leadership profile, but there are clear signals worth paying attention to. In part one, Sonia explains what a people-focused due diligence process is actually looking for, and why transparency in that process benefits everyone involved.

There is no perfect entrepreneurial profile and no ideal personality mix of the leadership team of a scaling organisation that a due diligence provider can assess for when conducting leadership and team assessments.

However, we do know what great leadership looks like in given contexts, we do know what high performance teams need as conditions for success and we do know what individual employees value to help them perform at their best. So, these are places that we can start, in order to manage the risk if these elements aren’t yet in place. Or to give credit where it is due if they are.

The goal at the end of the day is to accelerate the readiness of a portfolio company to succeed, as they anticipate new funds arriving and get ready for a growth spurt. Any people challenges in the company that were there before funding are about to become magnified, once scale and pace start to pick up post funding. So, we are invested in quickly ironing out any gaps that are found during the due diligence phase, to position the company well to achieve shared goals and ambitions.

With AI removing prior barriers to entry, the spotlight shifts from product to people, as highlighted in our piece ‘In an AI World, Talent Matters More Than Ever’. So, what are the people elements that we look for in our due diligence process?

Leadership has a 70% impact on culture and culture has up to 35% impact of profitability, so naturally leadership calibre of the top team is a focus. However, more so than individual leadership calibre alone, what we explore is the degree of leadership cohesiveness, collective resilience and diversity of thought to be more precise. A leadership team that is in tune, has a ‘collective memory of the future’, a mature approach to healthy conflict (which is where creativity and better decisions lie), has strong dependability upon each other and can cope well with the pressures endemic in scaling organisations, brings more sustainable value than one ‘hero’ leader who relies upon compliant followers and presents a single point dependency risk, for example.

In particular, we are keen to probe if there is an awareness of the interdependency across the business value chain, which relies upon collaboration and teamwork from people at the end the day. Are tech, product, marketing and sales in synch, with clarity about targets and good communication and feedback habits in place? If not, silos can form, efficiency can suffer and productivity is impacted. Energies are focused on managing frustration and overcoming hurdles, rather than working effectively together towards shared goals. Better to do less and do it well, with clear prioritisation, than have available resources diffused in trying to manage too many competing priorities.

Oftentimes this comes down to different decision-making preferences across the leadership team, the Board and the investors and is a classic challenge that comes up regularly. With clear data through the due diligence to highlight where tensions are likely to arise, for instance with different preferences for setting ambitious goals, to work at a fast pace, to be cautious in managing risk etc., we can align on an approach that is more transparent and aligned. So that goal setting is sufficiently ambitious, yet realistic and achievable.

A common observation, for example, is that entrepreneurial leaders who are conceptual, visionary ‘ideas people’, with spontaneous decision making and oodles of enthusiasm, can inadvertently confuse those around them, who aren’t sure which is a critical priority to focus limited resources on, and which is a ‘nice to have’ idea that can be put on the back burner. Creating this self-awareness with a leader can assist them to adapt their approach and become more effective in how they lead others to achieve company goals.

The best measure of leadership effectiveness at the end of the day comes from those who are on the receiving end of the leadership team’s practices, i.e. employees. So, we equally want to explore what the reality is like on the ground, beyond great leadership intent. In particular, is there clarity of the strategic direction and employee’s roles in delivering on the strategic priorities, unity behind the purpose and the goals, the capability to adapt if the market shifts and dependability across the organisation. These are based on principals behind ‘Strategic Speed’, which looks at ways to remove barriers for high performing teams. In addition, we look at whether psychological safety is in place, where both leaders and employees feel safe to speak up, admit mistakes, ask for help or propose ideas without the fear of humiliation or reprisal.

The final element from the individual employee’s perspective, is that offering growth and continuous learning is a way to retain high performers that are critical to the company’s success. Yet, transparent career pathing and regular development is frequently not hard-wired into the priorities of a scale-up company. It doesn’t need to be over-engineered or distract from other components such as go-to-market focus or investing in new product features but the intent to invest in employee development does need to be clear and the learning opportunities do need to resonate at an individual level.

So, whilst there is no perfect entrepreneurial profile or leadership team mix that we set out to benchmark against, we can be fully transparent about what factors we set out to assess in the due diligence process. These are not elements that can be put in place overnight. They require an appreciation of how valuable they are as levers to accomplishing business success through people practices and a conscious, diligent approach to putting them into place. Which is where the partnership comes in between YFM and our portfolio companies, to decide openly together which priorities to invest in to accomplish joint success. The people factors are a priority.

This article is the first in a three-part series exploring the people side of scaling. Across the series, Sonia Allinson-Penny shares insights from working with investors and portfolio companies, examining the leadership, team and organisational factors that can accelerate, or hinder, business success.

More articles in the series coming soon.

Sonia Allinson-Penny is the founder of Human Factor Health Check, a specialist people consultancy focused on leadership and team assessment for scaling organisations. Sonia works with investors and portfolio companies to evaluate leadership effectiveness, team dynamics and organisational readiness ahead of and during growth phases. She is also the author of a recently published book exploring the human side of entrepreneurial effectiveness, The Human Factors Behind Start-Up Success.