The Venture Capital Blind Spot
— August 12, 2019
The world of venture capital is strange. A few thousand individuals invest hundreds of billions of dollars into ventures large and small (Hampleton Partners report that in 2018, $ 185 billion was invested worldwide). These dollars provide entrepreneurs with the resources and runway they need to create companies that have the potential to change the world.
Venture Capital (VC) firms are powerful catalysts for the development, growth and scalability of new companies. They are increasingly an essential part of the economic infrastructure around the world. Getting investment, alongside sound business sense, can make the difference between becoming a household name like WhatsApp or AirBnB and fizzling out before you take off. In other words, the decisions investors make and the businesses they fund literally shape and impact the world we live in.
Yet there is something about the world of VC that I find disturbing: almost nobody is paying attention to culture. I am not exaggerating.
In the last few months I have asked dozens of founders and CEOs for introductions and referrals to culture-driven (or at the very least, culture-conscious) investors so that I could interview them, and most of the time the leaders I spoke with came up blank. There were a few exceptions as certain names came up–Sitar Teli, Nic Brisbourne, Fred Destin, Max Niederhofer and Alliott Cole. I went on to speak to these five culture-conscious investors, individuals who I think are leading the VC pack when it comes to applying the insights from the Culture-Driven movement to the cutthroat world of venture investing.
For the most part though, the entrepreneurs I spoke to could not think of any U.K. or European firms or even individual investors who prioritize or even think about the culture within their firm or in the companies they invest in.
This is despite the very clear warning signals about the danger of neglecting or overlooking culture that high-profile cases like Uber and Facebook have given in the last couple of years, and despite the extremely high emphasis that some of the world’s leading companies–AirBnB, Spotify, Netflix, Hubspot and Zappos, to name just a few—give to company culture.
The truth is, when it comes to thinking about and prioritizing culture, most VC firms have a blackhole sized blind spot.
Company culture is one of those things that is so vastly misunderstood that when people realise its importance, they cannot believe they overlooked it for so long. I firmly believe that culture is not only a genuine competitive advantage and a company’s greatest asset–it is also a critical business function, just as sales, marketing and finance are.
As David Cummings, an entrepreneur-turned-VC says: “Company culture is the one sustainable competitive advantage that a CEO has complete control over.”
This sentiment was echoed by Alliott Cole, CEO of Octopus Ventures, in our conversation, where he said: “In the venture business, there isn’t much that one can have complete control over, but the one thing that we can is our culture.”
Of course, it’s not just VCs who overlook (or simply do not comprehend) the importance of culture. Founders and CEOs who pay considerable and deliberate attention to culture are also few and far between. Over the last two years, I have interviewed over 60 culture-driven leaders for my upcoming book The Culture Gene: Leadership and Culture Development Lessons from Startup and High-Growth Companies–but to get those 60 interviews, I had to speak to hundreds of entrepreneurs.
It turns out, from my research, that just one in ten CEOs of high-growth companies is investing in developing their culture. This, of course, is a fundamental issue. If culture is seen as touchy-feely and irrelevant, rather than a non-negotiable business function to be leveraged in order to gain and sustain a competitive advantage, it is no wonder it is underappreciated, underestimated and under-invested in.
In my 18 years’ experience of working with high-growth companies, I can resolutely say this about culture: if appropriately developed it plays a critical role in creating and maintaining a distinct competitive advantage, and it is downright bizarre, strategically ignorant and not only stupid but dangerous, to ignore or overlook it.
The VC Outliers Who Are Doing Things Differently
Ahead of the curve is how I describe the five venture capitalists whose names I kept hearing when I was looking for VCs to interview. Over the last couple of months, I spent time with Sitar Teli of Connect Ventures, Alliott Cole of Octopus Ventures, Max Niederhofer of Heartcore Capital, Nic Brisbourne of Forward Partners and Fred Destin of Stride VC, talking about their approach to culture within their own firms and in the companies that they invest in.
This article looks at how these five investment firms use their values and culture as the lens through which they operate as a partnership. It looks at examples of how values were defined, how the firms embed them and how they use them to align the thinking and behavior of their teams.
Fred Destin and Harry Stebbings set up StrideVC in 2018. The young firm closed their £50m fund in October last year and when I spoke to Fred he said that the team is in the process of defining their culture. They are exploring values such as the team before the individual, radical candor, respecting the journey, transparency and empathy with the entrepreneur: “A value that we really believe in and live is, always give something of yourself.”
Destin explained: “We always try to delight the entrepreneur. The typical first meeting experience for the entrepreneur is that the VC leans back, asks the entrepreneur to tell them about their business, while taking notes, with the attitude of ‘I’ll tell you if I’m buying or not’.” The StrideVC approach is different in that they look to add value and give something back in that first meeting.
After the pitch, Destin will ask the entrepreneur: What keeps you up at night? What are the key strategic issues for you?
He adds: “Yes, I’ll learn more about the person and the business but, more importantly, it gives me an opportunity to give the entrepreneur some advice. We’re going to say no to a lot more people than we say yes to so, we should help them in their journey by giving them value.”
Max Niederhofer’s firm was originally called Sunstone and recently rebranded to Heartcore. A brand is the external face of a company’s culture, so I wanted to understand how much the rebrand discussions took into account the values and culture.
Niederhofer explained: “In terms of the re-brand we had multiple workshops where we explored questions like: what are our values? What is the purpose of what we’re doing here? What do we want to achieve individually and as a team? What do we believe is important to our customer and how do we want to go about providing that?”
For the Heartcore team, it came down to a realization that above all else they wanted to be authentic in the work that they did, and they wanted to back entrepreneurs that were, in a similar way, authentically committed, not just financially motivated to make their businesses work.
As early-stage investors, they are looking to invest in founders that have the potential to become authentic leaders. Niederhofer continued: “So it all centers around this authenticity of letting ourselves show up at work with our whole self, both internally at Heartcore but also in our relationship with our founders where we want to encourage a vulnerability and transparency.”
The Heartcore team came up with this triptych of “Truth, Love and Growth” as their values. As Niederhofer admitted, “It’s quite abstract but it works very well for us.”
I asked Sitar Teli from Connect Ventures to explain how the firm evaluates the culture of the companies they meet that are looking to raise a seed-stage investment. She explained that Connect invests in entrepreneurs who are building products and companies that people love.
“Sometimes you get a product founder who is great at building the product but isn’t really a company-builder. It’s important that the market loves the product, but to us, it’s equally important that the people who work there, love working there. We see a company builder as someone who has the potential to build a company with a strong functional culture,” Teli says.
It’s often not easy to figure that out at seed stage where the company may consist of two founders developing the product, so it’s up to the Connect partner who is championing the deal to talk to the founders about it. “We don’t shy away from talking about culture and we take it seriously,” Teli explained, adding: “We know that cultures that evolve organically tend to reflect the founder’s personalities, which in the early stages is fine, but at a certain stage you need to be deliberate about developing a culture that will help your business scale.”
To Teli, it doesn’t matter what type of culture you build as long as you are deliberate and open about it: “I don’t have a problem if you have a culture where you want people to work 18 hours a day, but be upfront about it. Make sure it’s part of the interview process, tell people that that’s what they’re going to be doing, because if you don’t do it people who don’t fit are going to leave. You need to remember that if you’re upfront about it you’re going to attract the people who want to work in that environment.”
A strong culture, as Nic Brisbourne of Forward Partners says, can create “a very powerful way of guiding thinking and aligning behaviors.”
I asked Brisbourne to describe a change or improvement in the way the firm operates, that could be directly attributed to the values? Forward Partners is a hybrid seed-stage VC company builder employing a team of experts to help develop and scale the companies they invest in.
Brisbourne explained: “Adopting ‘Skill and Pace’ as a value was immediately impactful. Prior to that we had intense arguments between people who wanted to ship stuff fast—entrepreneurs saying, ‘Let’s just release this thing’ and the people who were worried about quality on the other hand, saying ‘If we release it, it’s going to be buggy, or we haven’t written enough unit tests yet.’ The whole point of ‘Skill and Pace’ is that it’s a trade-off and we should be open to making trade-offs in order to move the business forward quickly. We started having a different type of discussion—debating versus arguing—as soon as we started looking at the situation through the lens of ‘Skill and Pace.’”
When Alliott Cole of Octopus Ventures meets an entrepreneur for the first time, he is looking to understand whether they can communicate the why of their company effectively or not.
He explains: “Our purpose, the reason we exist, is to help pioneers change the world. We have three values: be bold; be helpful; be straight forward.
“I’ve sat in pitches over the years, where founders who have been able to authentically describe their business and present their purpose in a very crisp and real way, and it really hits home. I’ve also been in pitches where founders didn’t have a well-articulated ‘why’ or fumbled, and said they had five values and could only remember three. It’s not a deal-breaker but I will want to get to the bottom of that.”
If a leader has an authentic purpose and can describe that purpose crisply and succinctly it is an indicator of whether they’re going to be able to sell that vision to investors, to customers, and critically, to team.
“If I think about the companies I work with, Alex Saint talks about the purpose of Secret Escapes, which is to inspire the world to escape. Peter Hames, at Big Health, describes their purpose to bring millions of people back to good mental health, without pills or potions. Josh March at Conversocial’s purpose is to make it as easy to communicate with the company or brand as is to communicate with a friend or family member. The pioneers that we look to work with have a clear purpose that they use to attract, retain, incentivize and align their people,” Cole explains.
Working with a partner who doesn’t understand why your company’s culture is a strategic business asset will, at the very least be frustrating and more likely be quite painful. The advantages to accepting investment from investors who not only understand the importance of strong company culture but are investing in building one themselves, are clear:
- You can have a deeper conversation early in the courtship process about how the VCs values drive their behaviors and how they operate, so you can get a better understanding if they are the right investor for you or not.
- You can have like-minded discussions about hiring and why a candidate is a good fit with the company’s values or not.
- You can ask them to evaluate and feedback on whether you and your team are living the values or not.
- You can expect them to understand that your decision-making process will include taking your values, mission and vision into account.
- You can have your investors support when the impact of taking your values into consideration for a decision could have a negative short-term impact on the business, but lead to a long-term gain.
- You can expect them to support your strategy to treat company culture as an asset that needs to be developed, protected and invested in.
Note: Just prior to publishing this post I heard that Ed Lascelles of Albion Capital is very much a culture-driven VC. I will follow up with him to understand his and the firm’s approach in more detail and include it in the next article in this series. If I have missed any other U.K. or Europe based VCs then do drop me a line.
Originally published here.