Session 2: Quality of management

1. Session 2:Quality of management Entrepreneurial Finance (FNCE-213) Tan Yinglan Lee Kong Chian School of Business Singapore Management University

2. Today’s session • Common drivers used to assess management quality • Indicators of management quality

3. Which one is more important for a startup? Technology Management

4. Does management matter? Ong Peng Tsin Niu Gen Sheng Jack Ma

5. Why is management the #1 element of most expert’s intuitive pattern? Best with the best “A players hire A players B players hire C players C players can’t hire anyone” Adaptive capacity What is certain? Uncertainty Adversity “A player” exernalities

6. 10% A B 25% C 65% • Successful topgraders have: • At least 75% A players • No C players

7. “Good ideas and good products are a dime a dozen. Good execution and good management - in a word, good people - are rare.”--Arthur Rock

8. Troy Tyler Generalist and ex-CEO Andrew Playford Finance and strategy David Kidder The techie smartRay

9. Paul Song Chairman of the Board Noetix

10. The entrepreneur’s journey Co-Op Student, USA Product Engineer, General Motors, USA Consultant, Oracle, Chicago, USA • Head of Consulting and Sales, Oracle , Seattle, US • Direct contact with mentor • CEO, Aris Corporation • Co-founded company with mentor • IPO (NASDAQ) in 1997 • Founder and Chairman of the Board, Noetix • Raised $17.25 million of venture financing (2001)

11. What is an “A-level” entrepreneurial executive? The best predictor of future behavior is past behavior. What really matters is predicted behavior when things go wrong. Why is “management risk” low with Paul Song?

12. Management 101:What makes a good executive? General Electric leadership competency model (“Four E’s”) Ability to Energize yourself Ability to Energize others Edge to make tough decisions Ability to Execute --Jack Welch, The GE Way

13. Integrity Adaptive capacity Dealbreakers Motivational basis Individual Experience Social capital Team What characterizes A playersin entrepreneurial ventures?

14. What is integrity? No surprises – in the strictest way Cheating in marriage [not when he says the dress size is 12 instead of 14]. Intellectual honesty No significant transgression or lie Intact goal posts • This matters because of • Ambiguous feedback inherent in ventures • Reliance on informal controls • Entrepreneurs’ built-in overconfidence and control biases

15. Why adaptive capacity matters Personal change is inevitable Hamm: Why Entrepreneurs don’t scale Loyalty to comrades Relieve underperformers Task orientation Prioritize and let go Single mindedness Multiple objectives Working in isolation Evangelizing

16. What is typical of adaptive capacity? Courage to stretch, take risks Challenging assignment Admits and learns from mistakes Seeks opportunities to learn Seeks feedback

17. The end state fallacy • Examine accomplished people • Make up a list of their competencies • Assess degree to which job candidates fit the ideal type What's wrong with this picture?

18. Where are you likely to find past adaptive behavior? • New type of boss • Staff problems • Working with new types of people • High stakes • Adverse business conditions • Job too big to manage personally • Unfamiliarity; something missing • Suddenly in charge via big changes Assignments with high development potential McCall, Morgan; Lombardo, Michael & Morrison, Ann. The Lessons of Experience. 1988. New York: Lexington

19. Motivational basis:the why of passion Alignment of interests Big enough ambitions Motivated by financial returns Feasible exit Sees the venture as meaningful and can communicate the vision Why would this be a significant accomplishment? People perform best when doing what they love

20. Your motivational track record You can’t manage your career if you don’t think through what you love to do If you are not doing what you love, you are digging a deeper hole as time passes It is worse than useless to start a venture that doesn’t match your passions (taken broadly) Do you need to be passionate about gems to open a jewelry store?

21. Social capital A team’s network is its organized collection of personal contacts and your personal contacts’ own networks Social capital is the resources available in and through personal and business networks Depth of tie I know this person She will return my call She will do me a favour Structure of ties Centrality Team

22. What creates high social capital? • Quality of ties • Interdependence vs. being liked • Depth of tie • I know this person • S/he will return my calls • S/he will do me a favor • Structure of ties • Centrality • Filling structural holes • Indirect ties to a diverse network

23. Where is the high ground in a social network? Which is the most central actor in the network?

24. Where is the high ground in a social network? B C Filling a structural hole None of A’s ties is redundant A D E B C F A G D E H C and D are not directly tied but their networks are equivalent The A-B and A-E ties are redundant

25. Where is the high ground in a social network? Novelty arises from indirect ties via diverse networks B C Completely closed network A D E B C F A G D E H A has indirect ties to F, G, and H

26. What experience matters? Industry Entrepreneurial apprenticeship Adversity Key tasks Communicating and selling Recruiting Building

27. How does management play a key role in startup growth? Management Integrity Brand Consumer and distribution channel Systems and Corporate culture Ability to scale

28. The dealbreaker • We think the core members of this team can go all the way (perhaps with some additions, help and experience) • The core members are willing to step aside or adopt other roles when necessary or (consensus with other investors as well)

29. Today’s session • Common drivers used to assess management quality • Indicators of management quality

30. Howdo you assess these drivers? The best predictor of future behavior is past behavior Bad question What factors would cause you to become committed to this job? Good question Tell me about a time when you were totally committed to a task

31. Combining behavioral and predictive questions Here is situation X. How would you approach it? What would you do? What does this remind you of from your past experience? Why are the two situations similar? What did you do in that situation?

32. Keys to more effective interviews • Use a chronological work history to detect patterns that emerge over time • Recent experience is best predictor of near future behavior • Focus on meanings and lessons learned from experience, not just experience • Go from the general to the specific

33. How VC Ask Questions to probe? VC look for depth in knowledge VC look for social capital – high number of people who will do entrepreneur a favor VC triangulate Be careful of deviations/exaggeration Devil in the details

34. Preparing for the mantle:Our advice to student’s Reputation for integrity Know your passions Build your experience Industry Apprenticeship Adversity Key tasks: selling, recruiting, building Accumulate social capital Shared experience

35. Key takeaways The gulf between having a majority of perceived “A players” on your team and anyone else is huge. A players are attracted by the challenge and the other people Four aspects of behavior seem to have predictive utility Reputation for integrity Ability to articulate a vision that gets others on board Four forms of experience Social capital Professionals look for patterns that predict what a venture team will do when things go wrong (adaptive potential)