Investing in Culture
A few weeks ago I was having dinner with a friend of mine, Kim Perell, CEO at Amobee. At one point the conversation turned to the importance of culture when assessing the merits of an acquisition. She noted how a successful post-transaction transition often hinges on the seamless meshing of two separate and unique cultures. Evaluating company culture is not always obvious and many times more art than science. Being able to read a company’s culture is an invaluable tool for CEOs like Kim who are active in the M&A space. It’s also a critical skill for VCs when evaluating potential investments.
Unfortunately, it’s also much harder in practice particularly when you’re looking at small startups and eccentric entrepreneurs. Culture can also evolve and look very different from Year 1 to Year 6. Yet, identifying the seeds of good culture (or bad) can pay huge dividends down the road especially by guiding you away from potentially disastrous investments.
We know VCs love to invest in people. But in today’s climate it’s not only about a founder’s brilliance or a tech team’s innovative track record. It’s also about the culture engendered inside and outside the company walls. Culture can contribute to great success or, in other cases, spectacular failure.
Rule #1 is getting a real handle of what’s driving a company from day to day. Trying to identify the ethos of a company goes well beyond simple mission statements. All companies want to make loads of money but the great ones are often driven by larger passions, usually to change something (culture, business sectors, ways of living, etc). Yet, the true motivators behind a company are not always clear so you have to be particularly mindful of signs or red flags that indicate underlying negative forces and trust your instincts when you root them out.
Looking at the recent Theranos scandal you can see the importance (and difficulty) of clearly identifying baseline motivators in a company. By all accounts Theranos’ CEO, Elizabeth Holmes, wanted to “change the world” by reinventing the technology behind blood testing. A noble mission, indeed, but the signs were there, as early as 2006, that an almost pathological desire to “fake it until you make it” was completely undermining the way the company did business. This “fake it until you make it” ideology is pervasive in the world of start-ups and Theranos took it too far. Many startups argue that it’s necessary to a certain extent, but when that belief takes precedence over all else, particularly in the world of tech startups where huge sums of private investment are at stake without the benefit of real scrutiny, the potential for a Theranos-like result is significant.
So how do company culture, the zeitgeist, and smart investing all come together? Often times it has nothing to do with the business but rather the atmosphere in which the company conducts its business. And for VCs that can play a major factor down the road because the difference between a good and bad acquisition almost always comes down to cultural fit. Good culture drives successful M&A activity.
I have seen the financial impact of cultural fit first hand across two-dozen exits over the past 20 years as both a VC and an entrepreneur. When I merged my first business, Klipmart, with DoubleClick, not only was I very much on the same page with CEO, David Rosenblatt, the cultures of the companies were strikingly similar. Everyone was on the same page from day one. They all had a “have fun and win” mindset and there were little to no politics in either organization. The fact that we earned-out in full only cements the point and, further, many of the original Klipmart employees who were part of the transition still work at Google 14 years later! In contrast, my second business, DBG, could not have been more different when it came to the question of cultural fit with Alloy Digital, to whom we sold. This misalignment certainly contributed to a poor financial outcome and the remaining employees from DBG at Defy, née Alloy Digital, are few and far between.
Does culture trump all? Obviously not. Underlying business fundamentals and financials remain paramount. But the extent to which VCs should value good business culture has never been higher. It’s just good business.
