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There are several truisms around what investors look for which have remained constant throughout the changing landscape of the last few years: the search for competitive or market insights; optionality around growth avenues; sustainable cash flows; and ‘backable’ management teams. Most of these are relatively easy to understand, but deceptively difficult to identify. What it means to be ‘backable’ though is almost entirely subjective and dependent on a range of other factors.
At YFM, we spend significant time revisiting previous investment decisions to continually calibrate our view on what a ‘backable’ team looks like. Our experience across 40 years of investing helps, but this is worthless without a process of self-review and reflection.
We can all think of situations where a suboptimal product or market opportunity has been transformed into a success because of the team behind it. And, because I can’t resist a business/sporting analogy, think of Leicester City winning the Premier League in 2016, or even Oldham Athletic avoiding relegation in 1993. Similarly, we can all think of seemingly obvious opportunities which have been wasted because of mismanagement or lack of cohesion in the team – see the Real Madrid ‘Galácticos’ squad during 2003-2005.
But what makes a team ‘backable’? Business success overall requires a team effort, with individual strengths combining to create a greater whole – working together as a team to consistently outperform the competition.
A common misconception about private equity that I have encountered is that we’re looking to invest behind raw entrepreneurs – innovators who have spotted an opportunity and created a new solution. In reality, these people are rare and, in any case, need support in monetising their ideas into successful businesses. As such, we’re much more likely to support a team which retains this initial entrepreneurial mindset, but supplements it with strategic vision, strong leadership, and conviction.
Being ‘backable’ will vary by stage of both business and market development, size of the opportunity and the breadth and depth of skillset required to execute it. However, looking back at the most successful teams we have backed over the last 40 years, there are common threads:
The best leaders we have backed set themselves strategic goals and have a clear vision on how to achieve them, inspiring the rest of the team to drive forwards in the same direction with sufficient energy to overcome the inevitable bumps in the road.
Whilst a track record of past success is helpful, we know that this is not necessarily a guide to the future and, therefore, is a not a prerequisite to being ‘backable’. We’ve previously discussed our views on failure – it’s not previous end results that matter, but how teams have reacted to these and utilised them in their current vision.
The most ‘backable’ teams we’ve encountered are those who have a strong handle on the key drivers in their business that they monitor via l KPIs and their board packs – which are regularly fed back into the key decision-making processes in a powerful virtuous cycle.
Finally, for YFM, there must be chemistry between ourselves and the management team. We are backers of teams, not acquirers of businesses and see ourselves as a supportive partner to the businesses in which we invest. It’s essential for us that management teams are people we can and want to work with, and who want to work with us.
