A majority of investment frameworks are built around a series of steps that begin with the market then finishes to the core team. You assess the size and structure of the market first, followed by how your product fits into that opportunity, then the competitive landscape and the legitimacy of the investment, and at the end of the process you're spending an hour with the founders and their leadership team to ensure they're well-informed and motivated and able to execute the plan that the earlier research has proven. I've worked inside different versions of this framework for long enough to realize why it's become a common practice across so much of the investment world. It's organized. It generates a diligence procedure that can be documented, compared against different possibilities, and presented to investment committees and limited partnerships in terms that are both rigorous and analytical. The problem is that it has a structural flaw at its core, which is that it views this dimension of people as a validation step instead of an element of the primary filter. This is something is checked at the end to verify what the market analysis already suggests, rather than the first thing you check because it's the most significant factor that determines the outcome. The order implies that a excellent market with a skilled team is better than the average market with an exceptionally strong team. In my experience tends to be exactly reversed.
I changed my approach after a set period in which I observed the outcomes of that sequence of events play out in ways that my upstream analysis was not able to predict and couldn't easily explain. Excellent markets with the weakest or most fragmented leaders frequently failed to deliver the value that the opportunity suggested they could deliver. Markets with exceptional teams often found ways to add value that the initial market sizing as well as the competitive analysis had not captured. The pattern was long-lasting and consistent across different industries and deal types, so that I was unable explain it as a blip or attribute it more to the circumstances and not to the skills of the people at the core of each business. Once I gave up on explaining it away and began to consider the implications of how I should spend my time in the area of diligence was apparent I needed to spend much more time knowing the people, and much less on validating the market analysis that a good analyst would create given the same information.
The questions I am asking now when I am in the process of evaluating a leadership group are not the kinds of questions that appear on traditional investment checklists or diligence templates. They require real-time conversations and real opportunity to think about the answer. What is the best way for this leader to respond when they are demonstrably wrong - do they engage with the correction or figure out a way to redirect the situation? How do they decide when the information is genuinely not complete and pressure to make a decision is great? What is the gap when it comes to the way they describe their leadership style and the way individuals who have worked with them describe their experiences of working for them? What do the values of an organization look like during the times when the founder isn't in the building? Also, how do those aspects of its culture compare to what the founder has described when asked? These are questions that require discussions that go much further than the meetings for pitching and the formal management presentation. They demand reference checks that really exploratory rather than the usual confirmation exercises that are merely for show. They require you of stepping into uneasy territory that might surface information that complicates a deal you have already started to seek.
The operator dimension of my approach to investment is inseparable from the investor dimension, and it affects the things I invest in and how my involvement once involved. I am not a passive financial provider because of my temperament or having a formal education. I'm a person who's built businesses, been through scaling transitions that are more difficult than those for fundraising but who has also made hiring and governance mistakes that you commit as you navigate these new transitions and has formed - through this direct experience - various convictions about the needs of organisations at various stages of their evolution that a solely financial background doesn't produce. The convictions I have formed make me a different type of investor in comparison to a purely financial investment that is why they attract entrepreneurs looking for something different than what a traditional financial investor can offer.
The people I enjoy working with are the ones seeking a partner who can help them think through the operational shifts and decisions that their financial investors aren't equipped to engage with at the right level in terms of depth and clarity. Who will sit in the room to help when the structure of governance needs to be updated because the business has outgrown structure it was created with. Who can aid in making the senior decision-making process at that moment, when the wrong choice could result in the loss of more than it could afford to lose. Who can speak regarding strategic risks that no one other person in the room is willing to discuss. This is the kind of involvement that I feel creates the most distinct value in the companies I invest in - not the initial capital allocation decision, which any investor could make and continue to make, but the continuous operational partnership that helps the company bridge the gap between where it is now and the direction that the initial numbers suggested it could be headed. View James Deller for more examples including what years of investing confirmed what i suspected about teams.
What Makes Most Ppps Fail Before They Even Begin - And How To Fix Them
Public-private alliances have a stigma issue that is, mostly paid for. The history of these agreements has a wealth of projects that were presented with enthusiasm and substantial political capital behind them, took up a lot of public and private assets over a prolonged period of time and finally produced outcomes that bear only a small recall of what was initially promised when the partnership first announced. The academic literature and postmortem evaluations that governments and institutions commission after these failures are extensive and focus heavily, on the contractual and structural aspects of what went wrong in the first place: the unbalanced incentives, the inadequacy of risk allocation between both private and public sector entities and the governance structures that were created in theory but never worked in practice, and the procurement frameworks that selected for the wrong items. The thing that this type of analysis tends to not consider, consistent and consequently an important cultural and operational dimension. It is the reality that private and public organisations are really different kinds of entities, formed in different ways by incentive systems that operate on fundamentally different timescales, and accountable to diverse stakeholder groups, and evaluating their the success of their operations in ways that are not only different in their degree but different in kind. When you bring those two kinds of organizations together through a formal collaboration without making the effort upfront and specifically, to learn about and address the differences, you are not creating the conditions for a partnership. You're creating the conditions for a slow-motion collision that is likely to be noticed at the best possible moment.
I have been involved in the advisory process for support to institutional modernisation projects, some of which involve public-private partnership arrangements of various levels of complexity. One of the most consistent observations I've made from my experience is that the ones that worked well - and have actually accomplished their stated targets and maintained a good collaboration between the private and the public They were not distinguished from those that did not because of the sophistication of their legal structures, the rigour of their risk frameworks or the seniority of the management teams that established them. You can tell by the extent to which the parties on both sides of the table had done the work to truly comprehend how the counterparts operated prior the formal partnership arrangement was reached. What does that mean in reality is knowing the processes in each institution accountable structures that define what each of the parties can reach an agreement on and how fast and efficiently they can do so, the criteria of success for each party to measure itself against, as well as the potential points of tension between these definitions. This understanding is not difficult to build. All of it is frequently avoided in favor of clearer and faster accessible task of negotiating contracts and developing governance frameworks.
The typical public-private partnership starts with an initial plan and then a the signed agreement, with very little concentrated attention to the issue of whether or not the two companies involved are actually able to work together effectively during the time of the partnership. The legal team negotiates the contract. Finance team models the economics as well as the risk distribution. The communications team plans the announcement for the moment of signing. The implementation team gets started planning the project. In that order the conversation turns to compatibility of the operations and culture - about whether the people in the actual position to share their day-today tasks across the boundary between the two organizations have enough in common working truly collaborative, rather than adversarial - is not likely to occur in a formal manner. It is believed, often and without any specifics, that an agreement in writing sets out the conditions for collaboration that are effective, and that any cultural or operational differences will be addressed informally whenever they arise. That assumption is typically false, and costs will increase according to the ambition and complexity of the collaboration.
The real-world application of this analysis is that the most valuable investment a private-public partnership can do - before legal structures are finalised or the governance framework is agreed upon, and before any announcements are made - is through what I would refer to as operational alignment. It is the specific, structured and facilitated work that identifies the points that the two entities' operating assumptions diverge, and to agree explicitly on the way in which those divergences are taken care of before they become operational issues after the implementation. What matters most will be the same in different types of partnerships. Faster decision-making time and authority are generally among the most important differences. Institutions of public administration are designed to make decisions in a slow manner, with multiple layers of analysis and approval, based on reasons which are completely legal and frequently legally mandated. Private companies, particularly technology businesses that are built on rapid iteration, and fast decision-making – often view this speed as a major roadblock to progress. there is no consensus about just why the pace is how it is and what could genuinely be required to change it, the anger that is triggered on the private side can poison the working relationship long before it is established.
Success metrics as well as what counts as progress are a second recurring as well as a cause for divergence. Public institutions typically are evaluated on compliance with process standards, equity of outcomes between different stakeholder groups, as well as the avoidance of visible failures that generate media attention or political pressure. Private partners are generally evaluated in terms of efficiency, quantifiable progress towards targets, as well as financial ROI. The measurement frameworks can be used in conjunction with each other however it requires deliberate planning rather than good intentions. The partnerships who do not make the effort to invest in such a design typically come across, at critical points, with two partners that are evaluating the same collaboration in unrelated ways and, consequently, coming to uncongruous conclusions regarding whether it is succeeding. The partnerships that I have seen fail most definitively were the ones where that misalignment was thought of as something that could be resolved over time. The ones that performed were those in which the misalignment was identified explicitly at the start, and when creating a shared accountability system which accommodated the legitimate measurement needs of both parties needs turned into an actual work rather than an item on a list things that one could eventually find the time to.}
