Evaluating Talent in Private Equity

Clique para editar o estilo do

Evaluating Talent in Private Equity

Clique para editar o estilo do

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

Clique para editar o estilo do

“Nearly every mistake I’ve made has been in picking the wrong people, not the wrong idea” Legendary venture capitalist Arthur Rock

Clique Index para editar o estilo do • • • • • • •

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?

Why its Important to oEvaluate Talent Clique para editar estilo do “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

Clique Why itspara Important editar to o estilo Evaluate do Talent

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.

7 Assessment Methods Clique para editar o estilo do There are 7 major categories of assessment methods:

• • • • • • •

job analysis, documentation analysis, past-oriented interviews, reference interviews, assessment centres, work samples, and psychological testing.

Assessment Clique paraMethod editar#o1estilo do 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.

Clique para editar Assessment Methodo#estilo 2 do 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.

Clique para editar Assessment Methodo#estilo 3 do 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

Clique para editar Assessment Methodo#estilo 4 do 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.

Clique para editar Assessment Methodo#estilo 5 do 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.

Clique para editar Assessment Methodo#estilo 6 do 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.

Clique para editar Assessment Methodo#estilo 7 do 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.

Human Evaluation Methods CliqueCapital para editar o estilo do Table 2 Summary of Time Allocated to Human Capital Evaluation Methods by Venture Capitalists (N = 86) Method (hours)

M

SD

Low

High

1. Work samples

63.9

60.6

4.0

290.0

2. Reference interviewing

19.8

22.1

0.0

134.5

3. Past-oriented interviewing

16.8

19.9

0.0

100.0

4. Documentation analysis

3.7

4.4

0.0

22.0

5. Job analysis

3.6

15.8

0.0

100.0

6. Psychological testing

0.1

0.9

0.0

8.0

7. Formal assessment centre

0.0

0.0

0.0

0.0

Total time allocated to human capital evaluation methods

120.1

100.2

14.9

448.0

Note: Respondents performed written job analyses in 21.4% of the cases.

Psychological tests were used in 3.0% of the cases.

7 Different Clique paraApproaches editar o estilo do Table 4 Approaches to Human Capital Evaluation

Average IRR1

Usage Rate in Sample

Belief that Accuracy is Possible

Quantity of Data Collected

Balanced use of Multiple Methods

Degree of Systematic Data Analysis

1. Airline Captain

.80

13%

Yes

Medium

High

High

2. Art Critic

.25

30%

Yes

Low

Low

Low

3. Sponge

.20

26%

Yes

Medium

Medium

Medium

4. Infiltrator

NA

6%

Yes

High

Medium

Medium

5. Prosecutor

.10

9%

Yes

Medium

Low

Medium

6. Suitor

0.0

2%

NA2

Low

Low

Low

7. Terminator

NA

1%

No

Low

Low

Low

1 Median 2 The

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

Clique Approach Suitor para editar o estilo do

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.

Clique para Approach Infiltrator editar o estilo do

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.

Clique para editar Prosecutor Approach o estilo do

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

Clique para Airline Captain editar Approach o estilo do

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.

Clique para Approach Terminator editar o estilo do

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.

Clique para Sponge Approach editar o estilo do

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.�

Clique Art Critic para Approach editar o estilo do

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

7 Approach Clique para belief editar matrix o estilo do

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

Studies Showeditar o estilo do Clique para •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.

Studies Showeditar o estilo do Clique para 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.

Studies Showeditar o estilo do Clique para 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.

Studies Showeditar o estilo do Clique para 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.

Studies Showeditar o estilo do Clique para

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.

Clique para Human Capital editar Formula o estilo do

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

Clique para Human Dimensions editar oCapital estilo do

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

Clique para Human Capital editar Attributes o estilovs. doDimensions • • • • • • • • • • • • • • • • • • •

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, abilities Knowledge; Knowledge, skills Knowledge, skills, abilities, motivations, values, network All Dimensions Knowledge, skills, abilities Knowledge, skills All Dimensions Motivation, values Values Motivation, values Skills, abilities, motivations, values, organizational culture Skills, abilities, values Motivations Values Knowledge, skills, abilities All dimensions Motivations, values Skills, motivation, values

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

Clique How canpara HR Consultants editar o estilo help? do Pre-Investment Appraise and Value Acquisition Target

Due Diligence Validate: Target Evaluation (Financial and Human Due-Diligence) Define: Post-Investment Priorities

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

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

Exit

Define: Strategic Roadmap Optimize: Management Structure and Effectiveness

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

•Management Appraisal Assess and benchmark top and middle management •Board Consulting and Advisory Search Identify non-executive directors and fund advisors to ensure perspective and integrity in strategy oversight

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

Clique para editar o estilo do Contacts

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