From Assessment to Action: How Investors Can Measure Leadership Competency

How Investors Can Measure Leadership Competency

Investors might want to consider including leadership assessment in the due diligence process. This approach makes conceptual sense. Incorporating leadership assessments into due diligence potentially holds immense value beyond merely being an opportunity to de-risk an investment further. Understanding the leadership competency of a founder leader and their founding team can provide investor businesses with a solid foundation to build a comprehensive leadership development plan. This plan would help fledgling leaders, or even very experienced leaders, grow and adapt essential skills and abilities as their business scales. It also makes sense from a de-risking perspective.

However, deal speed is one significant drawback to adding leadership assessments to the due diligence process. Introducing unnecessary hurdles could be the difference between winning a bid and losing the next Canva to a competitor VC firm in a highly competitive bid process. While it might sometimes be suitable to include an assessment at this stage, it may be best to maximise value while minimising the risk of leaving in any evaluation until after the post-investment phase.

What Might This Assessment Consist Of?

Leadership assessments play a crucial role in gaining a better understanding of an individual’s leadership capabilities. By evaluating leadership competencies, traits, self-awareness, and behavioural styles, organisations can make informed decisions about leadership selection, development, and impact. These assessments empower leaders to adapt, grow, and create positive change within their teams and companies. From an investor's perspective, building on these assessments with well-constructed leadership development plans and executive coaching, provided by qualified and experienced practitioners, can help de-risk an investment.

Anecdotally, a strong CEO recently joined a SaaS scale-up following an exceptional 20-year career as a sales leader in Big Tech. Known for his ability to close multi-million-dollar software deals, he had been with the business for around six months when we were engaged. While profits had held steady, retention and general happiness within the company were at an all-time low, based on the most recent engagement scores. His sales teams were highly engaged, but the software development, marketing, and data teams struggled to align with his style, which was dynamic and authoritarian but lacked authentic empathy. The CEO, in turn, hated attending meetings with these teams and often left them frustrated and annoyed.

Following a detailed analysis of this leader using a combination of a comprehensive 360 survey and psychological assessment, it was found that his communication style left many feeling excluded and misunderstood. He overlooked much of the cultural nuances of leading a diverse organisation, and his bias towards his sales and commercial teams left others feeling undervalued and adrift, resulting in many high-level resignations. Interestingly, his overdependence on his sales skills ultimately undermined his effectiveness as CEO. His natural and trained bias towards a particular type of communication and leadership style needed to change.

Over a six-month coaching period, this CEO worked closely with the team to develop a growth mindset, become a more self-aware leader, and improve his communication skills. This enabled him to articulate his message to a broader, more inclusive audience and embrace the CEO role with confidence, authenticity, and a commitment to the organisation's success and growth.

What’s Next After Assessing the Leaders?

Management consulting powerhouse McKinsey highlights six factors for successfully scaling a business. These factors resonate with many components that an executive coach might consider when working with a team coaching client at scale or individually with a founder leader:

1. Effective Ways of Working: Streamlined processes and efficient collaboration.
2. Talent Development Engine: Focused on nurturing talent.
3. Distinctive Culture: A strong organisational culture.
4. Leadership Capabilities at Scale: Developing leaders who can manage larger teams.
5. Aligned Structure for Growth: A structure designed for scalability.
6. Strong Communication and Empowerment: Transparent communication and trust-building.

In the context of these points, a talented executive coach can be a catalyst for growth and development. Considering each factor in turn:

1. Effective Ways of Working: A coach supports leaders in identifying and optimising work processes, encouraging self-awareness, reflection, and goal setting. A great coach can help leaders identify bottlenecks, streamline actions, enhance collaboration, and achieve desired business and career outcomes.
2. Talent Development Engine: After completing a leadership assessment, coaches work closely with leaders to develop their capabilities, supporting them as they mature leadership skills while scaling and growing their businesses. Framing talent development as a coaching conversation can create a supportive and collaborative environment focused on growth and success.
3. Distinctive Culture: Defining a unique culture can be challenging. Moving past the buzzwords and jargon, coaches work closely with leaders and investors to help define how they would like the world to perceive their business. A seasoned coach helps a leader recognise that true empowerment extends beyond hierarchical authority and resides in fostering a culture where every voice finds resonance.
4. Leadership Capabilities at Scale: Using assessment data and 360 feedback, coaches assist organisations in cultivating leadership capabilities by establishing trust, co-creating tailored development plans, promoting effective communication, fostering self-awareness, and helping leaders define actionable goals. They ensure accountability and continuous self-learning goals are met across the business.
5. Aligned Structure for Growth: Through active listening, powerful questioning, and creating a space for reflective practice, a coach provides valuable support to leaders as they build supportive frameworks and systems to aid in developing and expanding their business.
6. Strong Communication and Empowerment: In the ever-evolving landscape of a scale-up organisation, effective communication serves as a linchpin for success. An experienced coach can help a founder or CEO build effective strategies to improve individual and organisational communication. They help leaders embrace the wisdom of empathetic listening, mindful language, and a growth mindset.

VC and PE firms have different investment strategies and typically hold divergent views regarding their exit strategies. However, they converge on creating high-functioning, effective leadership teams within their portfolio companies. Whether turning around an established company or nurturing a start-up, capable leaders play an essential role.

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