QUESTION: I'm the president of a small software company looking to raise money to fund our product development. I often hear that investors "invest in the team and not the business plan." So how does a small company like mine go about recruiting — and paying — the kind of talent that will attract investors?
You're right: It pays to have talent. Venture capitalists, private-equity types and other investors care about your management team because their return on investment depends on the decisions — big and small — you and your people will make.
"High-quality people usually make high-quality decisions," says Jan Margolis of Metuchen, N.J.-based human resources firm Applied Research Corp.
So what makes a team worth investing in? Of course, there isn't one thing these investors are looking for. Several factors play into each decision, from your company's history to the strength of the overall economy.
Still, there are some universal management traits that most investors want to see from you. Here's a quick rundown:
Above all, investors value experience. That means loading up with managers who have deep industry experience — 15 years is ideal, local investors tell us.
"The No. 1 thing is 'been there, done that' experience," says Tom Bagley, managing director of Deerfield-based private-equity firm Pfingsten Partners.
These managers also need a good reputation across the industry, and should possess strong management chops.
"They have to prove they can do this in terms of operating in their relevant domain," says Adam Koopersmith of Evanston-based New World Ventures.
Show, don't tell, how good your management team is. In other words, you need people on your team who have already succeeded.
"Proven entrepreneurs are great to back because they've been through a lot and have seen a lot of the issues," Mr. Koopersmith says. It's easier to back someone who's done it before.
Beyond a proven track record, entrepreneurial spirit is another valued trait. "They have to be risk takers," Mr. Bagley says. "They have to put their money where their mouth is."
Make sure your management team is balanced. Industry experience is a given. But you also need strong people covering all the business basics — finance, marketing, sales and operations. And don't forget the importance of team chemistry.
"Before we invest we always do background checks and use an organizational psychologist to evaluate how the team works," says Joe Katcha of Chicago-based High Street Capital, which funds companies that have annual revenue of $10 million to $100 million.
To many outside investors, flexibility means maturity. So be willing to take advice from investors, and admit you're not good at everything. That means changing your mind when you need to — nobody likes to work with, or give money to, intractable, inflexible blowhards.
"You've got to populate your team with outside thinking," Mr. Bagley says. Mr. Katcha agrees: "For us the question is, 'Do these people know what they don't know?' "
So how do you go about building a "dream team" that has all these attractive elements? One way is to outsource the job to professionals: headhunters and staffing agencies. This route will cost you cash upfront — the average rate is 33% of that hired executive's first year's salary. But outsourcing can save you time and decrease your chances of a bad hire.
If you'd rather do this yourself, then start networking — now. Use all the professional resources you have, from industry association meetings to soliciting recommendations from others who know your industry. And if you can't find all the talented people you think you need, don't give up. Investors who like your business plan and market potential will use their connections to fill your remaining management holes.
As for what to pay your new management team, the pros we talked with suggest a base salary that covers day-to-day expenses, plus an equity stake in the firm. This accomplishes two things: It saves you money as a cash-strapped startup, and it aligns the incentives of your employees with the incentives of the firm. You make money — they make money.
And that's a situation that everyone can learn to love.
Adapted from Crain's Small Talk. Additional reporting by Christina Galoozis. ©2006 by Crain Communications Inc.