I’ve been teaching the class on Healthcare Venture Capital at UC Berkeley’s Haas School of Business for nearly 10 years. I co-teach this class with Dr. Jeff Rideout, a close friend and colleague, and we have a lot of fun doing it. It’s a bit of a busman’s holiday for me – playing at venture capitalist with a bunch of young would-be VCs instead of really doing it at the office.
Aside from the general lecture stuff on how venture capital works and what due diligence should include and how one does private company valuations (proprietary dartboard included), we have 10-12 different CEOs come in each year and pitch their deals to the students as if they were the investment committee of a venture fund. Most of the time the CEOs give their actual current fundraising pitch as if it were a real meeting to raise cash, and that’s what we encourage them to do. The task for the class is to identify the due diligence issues, evaluate the concept, and decide whether they think it’s a good investment opportunity or not based on, albeit, limited information.
And here’s what always happens: the class decides the deals they like based on the personality of the presenter. I have seen it time and again. Given any two CEOs, one with a big charming personality and a mediocre company and one with a boring or arrogant personality and a great company, and the “winner” is always the one you would rather attend a party with, not the one whose revenue model is proving out best.
For many this will not sound so surprising. Venture capitalists often say that it is the people that matter most and particularly the leader of the organization who is most correlated with deal success. And this can often be very true. A great leader can make a mediocre idea successful while a poor leader can make a great idea crumble into dust.
But personality and leadership are not exactly the same thing, and that is what interests me here. There are great leaders who are humble, shy, unflashy, and unfamiliar with the collected works of Monty Python or Fred Wilson. There are terrible leaders who should have their own talk show because everyone enjoys listening to them. But no one wants to work for them or actually see them in charge. Some might suggest that our current crop of front-running Presidential candidates fall into the category of personality, not leader. And some of them fall into the category of what the living hell is going on and where is my passport so I can move to Canada? But I digress.
One of my students asked how much CEO personality should be taken into account in investment decisions, as well as the company’s level of marketing flash (the specific question was whether it “matters” that the Powerpoint presentation was modern and colorful and cool vs. simple, boring, klieg-light free). What made the question interesting was the comparison of the two specific presentations underscoring the question (and the two CEOs). One presentation was given by a young startup CEO with a cool idea, lots of tech savvy, but no revenue, unclear revenue model and more limited healthcare operating credentials. The other was given by a longer-term enterprise with an older CEO, revenue, proven partnerships, tons of healthcare cred and a clear lack of commitment to modern digital marketing as evidenced by a total lack of round and scrolling objects in the presentation. And guess which one the class liked better?
Now let me add that the flashier presentation referenced above was given by the flashier guy, natch. He has charisma galore, is smart as a whip, is the kind of guy who makes you want to hear more from him and then go out for a beer. The other guy, the one with the vanilla presentation and lots of actual business, did not present as particularly charming. In fact he came off as arrogant and worryingly nonchalant about his competition. Thanks, but I didn’t really want a beer anyway. Flash, no. But cash, yes. He could point to serious business progress which the other company lacked.
I remember another instance where two companies of similar focus presented back to back in class. One CEO was surfer-cool, straight out of Silicon Valley central casting. The other was your standard issue middle aged white guy with a far less impressive display of hair. Surfer guy was sorely lacking in, shall we say, proof of business concept. Would-be father-in-law guy was killing it, business wise, but was comparatively a great substitute for Ambien on a Saturday night. I asked the class which deal they liked better, assuming valuations were the same. Everyone picked the Beach Boy understudy. No one was excited by the small piles of cash amassing around the boring gray suit. And yet, if it were me, I’d be doubling down on gray suit guy. He didn’t have the promise of success; he had actual success. His pitching problem was this: he lacked pizzazz and you might fall asleep on your way to cash your check.
Everyone likes entertainment, so no surprise that people are drawn to personality before products and progress. And yet it is essential in the investing world to separate flash from cash. Flash can be a good thing if it brings cash, but as we all should know, you can’t judge a book by its cover. And if you do, it might end up being a really crappy book that no one actually wants to read, even though it looks great on your coffee table while it doubles for an over-priced coaster.
You might be thinking: well, these are just inexperienced MBA students. What do they know? But the truth of the matter is this: lots of these students have a decent amount of real world experience and could be working at venture firms next year; and, more importantly, this phenomenon plays out in real world investment life all the time even with those who have been in the business for ages. I have sat in plenty of rooms where the conversation was all about how excited the CEO made the investors feel and not about how lacking the business model was. It is so easy for people to excuse the latter away saying, “Well, that person is a total Rockstar! They will figure it out and then for their next trick they will turn straw into gold.” Passion and packaging can hide a lot of sins.
Personality is definitely essential to making investment evaluations. For one thing, you, the investor, are going to be stuck with the portfolio company leadership for 10+ years, which is longer than many marriages. If investor and corporate leadership don’t have compatible personalities and complementary ways of engaging in the world, they are in for a long painful relationship. Flashy, big personalities can also be great at sales and that is always a plus, when it works. And big charismatic personalities can usually attract teams of followers more easily than can others. And that’s a really big deal, as long as personality and charisma are not the only attribute under consideration. People say Hitler had charisma and charm, if you know what I mean. He also had an unsustainable business model, thank God. So personality is not enough. I can point to plenty of successful CEOs that no one would consider as a font of charm or expect to liven up a party, but who have actually turned straw into gold.
So what’s the balance? How do you decide how much personality matters in any potential leadership team? How do you stop yourself from falling in love with a person, when you need to be falling in love with the entire business, including the person? And when you are comparing two raw start-ups, where neither has yet proven a value proposition in a measurable way, how do you choose between swipe left vs. swipe right person, gray suit vs. hoodie, experience vs. energy, assuming the leader is not all that rolled into one, Reeses Peanut Butter Cup style? When does a big personality move from an asset to a disorder?
The answer is not easy or obvious. Probably the best bet is to go ask customers their view of the business and employees what it’s like to work with them or work there. It’s worth looking at CEO prior experience of course, though that isn’t always the tell-tale sign of future success, especially in areas that are ripe for, pardon the obnoxiously overused expression, disruption. Getting clarity on progress vs. promises is a good way to go, especially from those previously involved in the business. Listening carefully for plans and operational precision (and especially a reality-based financial story) is really important. Vision is huge and is best displayed by Mr/s. Personality. But someone has to change the toilet paper rolls and know what to do when the server goes down or the revenues don’t show up as hoped. Some combination of great personality and great practicality is an ideal combination. When charismatic surfer dude can’t answer the second level questions or find the toilet paper, you should be a little worried. Personality definitely matters. It just can’t be everything.
A venture investor’s job description is as simple as can be: take some money and turn it into more money. We do that primarily by relying on other people to turn the little pile of money into a bigger one; in other words, we bet on people. The trick is knowing when to be seduced by personable people with big plans as opposed to big personalities with confidence they will have a plan when they need one. Sounds easy. It isn’t.