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Tech culture checklist for VCs and CVCs

Investors are beginning to recognise the importance of culture in identifying potential growth ventures, but which traits should they look for?

By Roderic Yapp, Leadership Consultant, and Sabine VanderLinden, InsurTech and Venturing expert and Sheffield Haworth Special Advisor to the Insurance Practice

While the pace of venture capital (VC) investment in new tech ventures has rapidly increased due to increasing demand for digitisation, the nature of those investments is becoming more selective.

Since the beginning of 2021 InsurTech startups have received over $9bn in investment, and we estimate this could reach over $12bn by the end of the year. Yet VCs are gradually realigning their approach to identify growth ventures with the best chance of becoming a unicorn and being valued at over 20x revenue. To be able to achieve this, it’s not just about the technology, it’s about people.

However great the business model or concept of a tech startup or scale-up, if the founders or leadership team can’t deliver due to infighting, a toxic culture – or even one toxic individual – then that VC investment is at much greater risk.

Where VCs have been excellent traditionally at focusing on the market potential of an idea, the technology, and the fundamentals of the business, they have tended to focus less on culture. Now more and more VCs and corporate VCs (CVCs) are recognising the importance of people and teams, we decided to pool our collective experience to come up with the following ‘culture checklist’.

This is our take on the main points that investors should check within their existing portfolio companies as well as any new ventures they’re considering investing in.

  1. Personal disagreement between the founders/leadership team

Disagreements happen within any good leadership team. However, they should happen in private, and the founders should resolve them constructively and be able to present a unified face to investors and clients. How do they talk to each other in the presence of VCs? How do they talk about each other to investors and clients when their colleagues are not around?

Former US Secretary of State (and four-star general) Colin Powell put it well when he said: “When we are debating an issue, loyalty means giving me your honest opinion, whether you think I’ll like it or not. Disagreement, at this stage, stimulates me. But once a decision is made, the debate ends. From that point on, loyalty means executing the decision as if it were your own.”

A strong leadership team values healthy debate but also displays mutual loyalty, respect, and leadership. Frequent or obvious personal disagreement, on the other hand, can be a sign of a toxic culture, poor communication, or a founding team that simply cannot get along.

In our experience, it is not uncommon for founders to decide to work together without taking the time to validate whether they are a good fit. This is a mistake, and one we have witnessed at first hand more than once. A strong business relationship should be treated with the same care and diligence as a strong marriage. This also means that, like marriages, everyone needs to pull their weight seamlessly to deliver on the desired results.

This is also a good way to view the relationship between VCs and scale up leadership teams. Investors should ask themselves if they would be prepared to “marry” this team. If not, they may want to tread warily.

2. Employee turnover

High employee turnover is a clear warning sign. Of course, in some cases, there may be legitimate reasons for this. It could be that the technology being developed is so ground-breaking or complex that long hours and other sacrifices come with the territory, or that certain team members are a poor fit when a product or service pivots. However, no company can sustain this for the long term, especially not when under pressure to deliver high returns on investment.

The highly ambitious and competitive nature of the scale up world can end up creating an aggressive, toxic work environment. This is often because that is the example the founders set, or because this culture has evolved accidentally without any good reason.

Yet even the most visionary founders in the world need the support of reliable and talented individuals to help them execute. They need designers, developers, and coders, perhaps also marketers and salespeople. A constantly revolving door means that skills are not embedded in the business as talent doesn’t want to stay, which jeopardises the company’s ability to execute.

Investors should check the staff turnover against industry averages. If it seems high, working out why is a good next step. If the high turnover is for legitimate reasons, investors need to know what they are. If there are no legitimate reasons, investors may want to start asking more questions about the viability of that investment.

3. Clearly defined roles and responsibilities

In the early days of a startup, it is common for a core, small team to take on multiple responsibilities. It’s almost a cliché that company founders will end up executing on marketing, sales, and operations.

Once a company reaches the point of requiring venture capital, however, clarifying and separating roles becomes vital. There are two reasons for this. Firstly, a founder cannot manage their business if they are in the business. The tendency to get involved in the minutiae of execution can lead to lack of focus on strategy and the bigger picture. Secondly, a leadership team operates more effectively when their roles are clearly defined.

Roles and responsibilities must be mutually exclusive if the leadership team wants to be able to grow the business effectively without stepping on each other’s toes. They need to be able to defer to each other seamlessly with the trust that clear outcomes will be achieved with no supervision.

4. Awareness of major potential risks

When planning a mission or an operation, the Royal Marines ask themselves the following questions:

– What’s the most likely course of action an enemy will take in response to us doing something?

– What’s the most dangerous thing they could do?

– How would we recognise when this dangerous course of action was playing out?

These questions are designed to guard against an optimism bias, and to anticipate problems before they happen. This ‘thinking’ increased the chances of the plan being successful because ‘likely’ and ‘most dangerous’ risks are talked about. Risk is not something that can or should be avoided, but it can be managed with the right approach.

This attitude is equally valuable in a scale up’s leadership team. What assumptions have they made about their business plan? Are they too optimistic? Have they weighed up the potential threats?

In both our careers – whether in coaching business teams or when validating a venture’s viability – there are times when we have needed to ask tough questions of individuals and teams. Doing so helps to discover how they think. Are they able to anticipate challenges or solve problems creatively? Are they able to be ruthless and cut their losses at the right time or will they fall victim to the sunk cost fallacy?

5. Workforce diversity

Only 4% of VCs are women, and the sector remains dominated by men. This need not be inherently bad, but traditionally it has led to the tendency for VCs to invest in people that look like them – white male founders, and to overlook questions of diversity, equity, and inclusion (DEI) within the workforces of the startups and scale ups in which they invest.

Yet, for the corporates with which startups often wish to partner – as well as the corporate VCs who may be considering investing – DEI is becoming a major priority. Many of a large organisation’s customers and employees cite diversity as important to them, as do governments and regulators. In early July, for example, the FCA, PRA, and the Bank of England published a joint discussion paper which proposes regulatory reporting of DEI data and policies, as well as policies covering board representation targets, senior accountability, and remuneration.

These proposals would cover all financial services firms operating in the UK, regardless of size – including scale ups. VCs will need to think very carefully about diversity as part of their investment criteria, or at least consider supporting or coaching leadership teams on how to deal with these requirements to avoid significant and recoverable reputational risk.

6. Employee health and wellbeing

In the wake of Covid, mental and physical health questions have both risen in prominence. How leadership teams look after their people – and themselves – is naturally becoming a major topic in the media and in business circles. Not only is supporting employee health and wellbeing the right thing to do, it also improves productivity.

While it may be too much to expect a scale up to have an official health and wellbeing policy in place, there are other signs that they’re taking these responsibilities seriously. They may have partnered with a gym company to offer reduced memberships, for example, or offer yoga or pilates classes to their employees. When it comes to mental health, perhaps they have partnered with a digital wellbeing app to offer counselling or coaching. 

7. Who are their role models – and why?

Imagine the following conversation:

Q: “Who do you aspire to be and why?”

A: “Steve Jobs.”

Q: “Why?”

A: “Because of his dedication to his vision and changing the world for the better.”

Q; “OK, but what about some of his negative qualities?”

A: “What negative qualities?”

Q: “His reputation for impatience, being domineering towards others, and being a perfectionist, to the point where Apple fired him in 1985?”

A: “Er…”

We’re using this hypothetical Q&A not to explore the character of Steve Jobs, but to make a point about role models. Both of us have used a question like the first one above with individuals and teams because it helps to work out what motivates those people to succeed. Who they choose can be interesting, but the real interest lies in their reasoning for why they choose that person.

Say someone answers this question and names Jack Welch at GE because he engendered trust within his organisation, motivated his teams around a clear sense of purpose, and empowered his people, that speaks volumes about how that person sees themselves.

What attributes are they modelling? What kind of leader do they see themselves as? Is this the kind of leader that investors want to work with?

Helping VCs focus on culture

Right now, investors are more focused on the leadership team shaping the business they are investing in more than ever. They recognise the importance of the right people modelling the right behaviours and able to execute on what must get done. We hope this checklist proves a helpful guide for investors as they realign their approach and re-examine their portfolio companies in the months ahead.

About Roderic Yapp

Roderic is an accredited coach and a specialist in developing leadership skills. A former Royal Marines Officer, he led marines on operations around the world including Afghanistan in 2007 and the evacuation of civilians from Libya during the Arab Spring.

Today Roderic brings his significant coaching experience to supporting leaders and delivering leadership development and resilience workshops across a multitude of sectors including Professional Services, Asset Management, Banking, Retail, Rating Agencies, large complex UK plc and the NHS. Rod works with clients across the world helping them to establish a more resilient human system as a driver to individual and organisational performance. He has also delivered a TEDx Talk on Adaptive Leadership Techniques from his experiences on military operations in Afghanistan.

About Sabine VanderLinden

Sabine VanderLinden

An InsurTech Top 50 Influencer with 23 years’ experience in the industry, Sabine is the co-founder and Managing Partner of Alchemy Crew. She is a co-creation lab expert who specialises in venture partnerships and ecosystem building. Sabine is the co-editor and author of The INSURTECH Book and has received four UK awards for her work.

In 2015 she launched Startupbootcamp InsurTech and grew it to Europe’s largest InsurTech accelerator, later launching InsurTech Hub in Hartford, Connecticut. She is now working with a rich group of insurers and InsurTechs to bridge the venturing execution gaps in insurance.