evaluating talent in private equity

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Evaluating Talent in Private Equity


Venture capitalists realize that they are often betting on people when they make investment decisions.


“Nearly every mistake I’ve made has been in picking the wrong people, not the wrong idea”

Legendary venture capitalist Arthur Rock

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• Why its Important to Evaluate Talent• 7 Assessment Methods• 7 Different Approaches• Studies Show• The Human Capital Formula• Human Capital Attributes vs. Dimensions• How can HR Consultants help?

Clique para editar o estilo do Why its Important to Evaluate Talent

“Evidence suggests that this (talent) is the most troublesome factor to assess accurately”.

(Harvey & Lusch, 1995; Dubini, 1989).

“Venture capitalists fail to achieve an accurate human capital valuation in 57% of the deals”.

Source: Management Assessment Methods in Venture Capital: Towards a Theory of Human Capital Valuation

Geoffrey H. Smart, Claremont Graduate University


Adequate Human Evaluation– minimizes probability of rejection due to undervaluation

of the human capital

– minimizes probability of over evaluating the human capital, therefore leading to false acceptance of a deal that should be rejected.

Why its Important to Evaluate Talent

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There are 7 major categories of assessment methods:

• job analysis,

• documentation analysis,

• past-oriented interviews,

• reference interviews,

• assessment centres,

• work samples, and

• psychological testing.

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Job Analysis

•Job analyses are typically conducted prior to an interaction with the candidate.

•The purpose of job analysis is to answer the question,

“What human capital is specifically needed for this venture to survive and grow?”

•Subsequent methods are used to collect data to evaluate whether target managers have the human capital attributes that result from the job analysis.


Documentation Analysis

•Documentation analysis refers to the collection and review of written documentation about the target managers.

•Includes resumes, legal records, tax information, and publications written by or about the managers.

Assessment Method # 2


Past-Oriented Interviews

•A past-oriented interview is a structured interview in which the interviewer discusses specific accomplishments and failures in the candidate’s career history.

•Structured interviews lead to mean validity coefficients over three times as high as unstructured interviews



Reference Interviews

•Reference interviews are discussions with those who have observed the behaviour of the target managers:

– personal references, – supervisors, – co-workers, – industry players, – current employees, – lawyers, – accountants, – bankers, or other investors.



Assessment Centres

•Assessment centres are multi-day sessions where candidates are tested on their skills relative to the job for which they are applying.

•This Method has never been used. It is possible to be used in seed capital operations, with the managers consent.



Work Samples

•Work samples provide insights into “hypothetical” behaviour. The venture capitalist “quizzes” the target managers on various aspects of the business:

– “What would you do if . . . ”– “How would you . . . ?”– “What do you know about this industry?”– “What are your plans for . . . ?”

•This format measures how target managers behave on their best behaviour, not how they typically act.



Psychological Testing

•Occasionally administered to candidates for lower-level or middle-level positions.

•For senior-level positions, the use of psychological testing is more problematic.


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Table 2

Summary of Time Allocated to Human Capital Evaluation Methods by Venture Capitalists (N = 86)

448.0 14.9 100.2 120.1 Total time allocated to human capital evaluation methods

0.0 0.0 0.0 0.0 7. Formal assessment centre

8.0 0.0 0.9 0.1 6. Psychological testing

100.0 0.0 15.8 3.6 5. Job analysis

22.0 0.0 4.4 3.7 4. Documentation analysis

100.0 0.0 19.9 16.8 3. Past-oriented interviewing

134.5 0.0 22.1 19.8 2. Reference interviewing

290.0 4.0 60.6 63.9 1. Work samples

HighLowSDMMethod (hours)

Note: Respondents performed written job analyses in 21.4% of the cases.Psychological tests were used in 3.0% of the cases.

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Table 4

Approaches to Human Capital Evaluation

1 Median IRR is provided for each typology. Since IRR data were available for only 46 cases, this statistic should be interpreted cautiously.2 The suitor does not intend to achieve an accurate human capital evaluation; he or she intends to “woo” management.

Low Low Low No 1% NA 7. Terminator

Low Low Low NA22% 0.0 6. Suitor

Medium Low Medium Yes 9% .10 5. Prosecutor

Medium Medium High Yes 6% NA 4. Infiltrator

Medium Medium Medium Yes 26% .20 3. Sponge

Low Low Low Yes 30% .25 2. Art Critic

High High Medium Yes 13% .80 1. AirlineCaptain

Degree of Systematic

DataAnalysis

Balanced use of Multiple Methods

Quantity of Data

Collected

Belief that Accuracy is

Possible

Usage Rate in SampleAverage IRR1

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Suitor - Suitors are more concerned with wooing management than assessing them, so they spend time trying to make a good impression rather than critically evaluate the management team.


Infiltrator - Infiltrators try to become a quasi-member of the management team. They spend many weeks or months participating in strategic planning meetings and even visiting potential customers together with the target managers prior to making an investment decision.

Infiltrator Approach


Prosecutor - Prosecutors aggressively question the target managers in a formal setting, the way a prosecuting attorney questions a witness.

Prosecutor Approach


Airline Captain - Airline Captains are systematic and thorough in their collection and data analysis, the way an Airline Captain conducts a pre-flight checklist. They base their analyses on data rather than just intuition.

Airline Captain Approach


Terminator - Terminators are convinced that it is impossible to achieve accurate human capital evaluations. Therefore, rather than allocate time to human capital evaluation, Terminators buy companies and simply terminate and replace managers that do not perform.

Terminator Approach

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Sponge - Sponges soak up data in a non-systematic way and then analyze it unsystematically. One sponge called his approach to human capital evaluation “due diligence by mucking around.”

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Art Critic - Art Critics make snap judgments based on intuition. They think that they can quickly assess a person, the way an Art Critic judges a painting

Clique para editar o estilo do 7 Approach belief matrix

Source: Management Assessment Methods In Venture Capital, Geoffrey H. Smart, Claremont Graduate University

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•VCs allocate 3 times more time to Work samples, than to Reference Interviews and Past-Oriented Interviews.

•Past Oriented Interviews are more accurate in human evaluation.

•An average of 120 hours are invested by VCs to assess talent in each deal.


Human capital is far from the “intangible” factor that it is portrayed to be by accountants and economists.

It is capital. Like all capital, it has properties that can be assessed and appraised.

A Venture Capitalist could achieve an accurate human capital evaluation if he studied someone in-depth for 6,000 hours.


This wide range suggests that different Venture Capitalists have different approaches to the process of human capital evaluation.

The relationships between methods and accuracy were different for early-stage deals v. later-stage deals.


Early-stage deals were defined as “seed” or “start-up”phase investments.

Allocating time to past-oriented interviews and work samples was significantly positively related to the accuracy of a Venture Capitalist’s human capital evaluation.


The study suggests that past-oriented interviewing is a robust method in both early-stage and later-stage cases.

Surprising work samples were negatively associated with accuracy in later-stage cases.

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• Technical Knowledge• Industry Knowledge• General Management• Sales Skills• Leadership• Strategic Thinking• Finance• Ability to build a team• Integrity• Openness• Strong working ethic• Works well with others• Charisma• Passion• Frugality• Analytics• Entrepreneurial Spirit• Personality Compatibility with VC• Listening Skills

Knowledge, skills, abilitiesKnowledge;Knowledge, skillsKnowledge, skills, abilities, motivations, values, networkAll DimensionsKnowledge, skills, abilitiesKnowledge, skillsAll DimensionsMotivation, valuesValuesMotivation, valuesSkills, abilities, motivations, values, organizational cultureSkills, abilities, valuesMotivationsValuesKnowledge, skills, abilitiesAll dimensionsMotivations, valuesSkills, motivation, values



Pre-Investment Due Diligence

With VC’s:•Interview Workshops•Building Job Analysis Proc.•Structuring Interviews•Evaluating Human Capital

Dimensions•Executive Search for CEOs/COOs

With Investment Targets:•Reference Interviews

Exit

With Investment Target (mostly seed capital):•Management Appraisal (Evaluate target company senior management to provide buyer with effective understanding of core capacities)

Post Investment Management

Appraise and Value

Acquisition Target

Validate:

Target Evaluation

(Financial and Human

Due-Diligence)

Define:

Post-Investment Priorities

Define: Strategic

Roadmap

Optimize:

Management Structure

and Effectiveness

With Investment Target:•Executive SearchConduct search for CEO, COO, CTO, Head of Marketing & Sales, etc.

•Management AppraisalAssess and benchmark top and middle management

•Board Consulting and Advisory SearchIdentify non-executive directors and fund advisors to ensure perspective and integrity in strategy oversight

How can HR Consultants help?

Clique para editar o estilo do Bibliography

• Management Assessment Methods In Venture Capital, Geoffrey H. Smart, Claremont Graduate University

• Management Appraisals in the Private Equity Industry-Joe Haim -Egon Zehnder International in The role of Egon Zehnder in due diligence for “bankable management”

• “Win With A Players” – GHSmart for Private Equity Investors

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Avenida da Liberdade nº 229 – 4º andar1250-142 Lisboa

Tel.: + 351 21 318 29 30 Fax: + 351 21 318 29 39

www.jasonassociates.com

evaluating talent in private equity

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purpose of job analysis

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pastoriented interviews