In 2019, when the author passed the defense of his doctoral thesis, the investment industry was at its peak and investors were extremely busy. After three years of the COVID-19 epidemic, the investment community seems to have hit a low point. Some people are lamenting the bad luck, while others have begun to reflect deeply: If there had been no epidemic, would equity investment not have experienced this decline? The COVID-19 pandemic has only accelerated the fall and made it worse.
Over the past 30 years, China’s investment field has been developing at a rapid pace. Although there have been periodic ups and downs, the total investment volume has shown an obvious growth trend. Behind the investment boom, the data on failure are shocking. According to statistics, the failure rate of angel investment is as high as 90%, the failure rate of venture capital investment is as high as 70% to 80%, and the failure rate of private equity investment is also as high as 40% to 50%. The majority of investment failures (81%) can be attributed to investors’ shortcomings in selecting investment objects.
William Draper, the earliest venture capitalist in the United States, put forward the concept that “venture capital is investing in people” very early. In investment forums and investors’ speeches, we often hear “investing is investing in people.” However, in most investment activities, investors tend to pay more attention to industry, technology and other factors, and usually attribute the reasons for investment failure to mistakes in industry and technology selection.
In the author’s opinion, “investing means investing in people” is still at the conceptual stage in the investment community. There are two fundamental reasons why this concept cannot truly become investor behavior: first, insufficient attention, and second, lack of specific standards.
If there is a lack of precise selection of company founders and management teams, in 5, 10, or 20 years, will we evaluate the waste of resources caused by extensive GDP growth in the past, and evaluate the waste of talents and funds caused by blind investment and extensive investment? And a huge waste of time?
-01-Investors are often “fooled” by appearances
Based on the research summary and refinement of entrepreneurship, entrepreneur quality and leader quality, we have built a quality portrait of investment targets, that is, investors should pay attention to eight qualities of founders – achievement motivation, humility and altruism, risk-taking spirit, and resistance. Resisting frustration, business acumen, precise operations, resource integration and team leadership.
According to Drucker’s four dimensions of management, these eight qualities can be divided into four groups: management goals—achievement motivation and humility and altruism; management of self—risk-taking and resistance to stress and frustration; management tasks—business acumen and refined operations; Managing others – resource integration and team leadership.
The two qualities in each group are binary complements to each other. The first type of qualities – achievement motivation, risk-taking spirit, business acumen, and resource integration. We classify them as “apparent qualities”. It is very easy for entrepreneurs with these qualities to Attracting the attention and favor of investors; the second type of qualities – humility and altruism, resistance to pressure and frustration, meticulous operation and team leadership, which we classify as “intrinsic qualities”. When “appearance quality” is highlighted, the latter characteristics of entrepreneurs are easily overlooked, but these characteristics are the key to determining the success of investment. Paying too much attention to superficial qualities and ignoring intrinsic qualities is a real investment trap.
Investment Trap 1: Value achievement motivation and ignore humility
and altruism. Han Yong’s first impression on investment institutions is that he has a strong sense of goal and ambition. Although he has low academic qualifications, with more than 20 years of extraordinary diligence and hard work, he has established himself in a consumer goods segment. He carved out his own world. Investment institutions also made Series A investments in Han Yong’s company because of these advantages of Han Yong.
After more than a year of in-depth understanding, the investment institution discovered that humility is just Han Yong’s appearance, and that arrogance and self-centeredness are the real Han Yong.
His internal management style is very strong, and if he is not satisfied with his subordinates at all, he will directly make cold remarks and scold them. At a training meeting, the head of the department gave the opening speech. When he came up, he did not say “Hello, Mr. Han” first, so he scolded him and asked him to start the meeting again. The senior executives around him were all obedient to him, and no one dared to make suggestions. Employees with ability and backbone also chose to leave one after another.
Treating suppliers, he also exploited them aggressively with some brand advantages, and some partners had no choice but to terminate cooperation.
The rapid development of the company from the beginning has gradually slowed down, and some areas have been surpassed by competitors. Han Yong’s company’s leading edge in the industry is not as obvious as before, and investment institutions are also considering whether to continue investing in it…
If the entrepreneur’s “achievement motivation” is low, no matter he is a loser with low “humility and altruism”, Or mediocre people with high “modest altruism” usually have difficulty in winning the interest of investors, so investors will not make wrong investments. However, in the actual investment process, investors often pay more attention to the founder’s achievement motivation and ignore the quality of humility and altruism, falling into the investment trap of “high achievement motivation – low humility and altruism”. Usually, such founders are more likely to be favored by investors at the beginning. They will set a grand and challenging goal for themselves and their team, and demonstrate strong internal drive and courage to move forward. Confidence and determination, but due to lack of With modest and altruistic qualities, they usually have a high opinion of themselves and cannot help but show off their achievements to others. At the same time, they deliberately exaggerate their own efforts and influence. They rarely solicit and respect the opinions of others and rarely consider other people’s feelings and opinions. Demand will eventually fall into an isolated and helpless situation, leading to a greatly increased probability of entrepreneurial failure.
In terms of this pair of traits, only successful people who are high in “achievement motivation” and “humility and altruism” are the right choices for investors.
Investment Trap 2: Valuing risk-taking spirit and ignoring pressure and frustration.
Investors will not be interested in founders who do not show “adventurous spirit”. Regardless of whether the founder is a loser with low “Resistance to Pressure and Frustration” or a mediocre person with high “Resistance to Pressure and Frustration”, investors rarely invest, so investors will not make the wrong investment here.
The “high risk-taking spirit – low resistance to stress and frustration” quadrant is another trap that investors can easily fall into. Founders with a strong sense of risk-taking are prone to rapid growth and rise at the budding stage of market opportunities or in the early stages of entrepreneurship. In order to obtain higher returns, they are willing to take greater risks and the resulting huge pressure, and enter new markets with courage. Subdivided areas are sought after by the capital market. However, if their ability to withstand pressure and setbacks is weak, they lack the ability to prevent risks, and rarely find reasons for themselves when encountering setbacks and find it difficult to recover quickly, once they face challenges from various aspects such as market environment, capital and internal operations, etc. , it is easy to produce anxiety, withdrawal thoughts and avoidance behaviors, causing the company to fail in the crisis.
People with successful careers are often those who have experienced many failures, withstood the hardships of failure, and rose again from failure. In terms of this pair of characteristics, only successful people who have both “adventurous spirit” and “resistance to pressure and setbacks” should become the right choice for investors.
Investment Trap 3: Valuing business acumen and ignoring fine operations.
Chen Yonghua, the founder of Juhai Company, is a military-to-civilian cadre with deep research in the field of artificial intelligence. At the forefront of the industry, he is keenly aware that the military technology he studied will have a huge impact on civilian applications. With broad market prospects, several investment institutions rushed to invest in him. But three years have passed, Juhai Company’s profits and human efficiency have not been increasing, the operating situation is not very optimistic, and it is still unknown whether it can be listed on the market.
The reason is that the management of Juhai Company is very extensive. Many employees play games and sleep during work, claiming that the company advocates a free culture. The reason why employees have time to play games is because the overall product R&D management mechanism is imperfect, the R&D process is inefficient, and the four links of design, R&D, testing, and review submission are loosely coordinated. R&D personnel are often waiting for product requirements documents from the product design manager. , testing is often waiting for R&D personnel to submit functional tests, and the time for submission for review is very uncontrollable… The product launch cycle is infinitely lengthened. This directly resulted in the company’s per capita output value being only over 300,000 yuan, far lower than the industry average of 700,000 yuan.
Chen Yonghua had no experience or ability in fine corporate management in the past. At first, he felt that the above problems did not matter. In the past year, he felt that this was a serious problem, but he was helpless. It is said that Chen Yonghua also hired a management consulting company, but the change plan of the management consulting company was too different from Chen Yonghua’s philosophy to be effective. Seeing that the investment has been spent, Juhai Company is still far away from self-generation.
Chen Yonghua in this case has extremely high business acumen, but his fine operation ability is extremely low. Those investors who are willing to chase the trend and bet on the track are often attracted by founders with high “business acumen” when investing, and the ability of “fine operations” requires very in-depth investigation to understand. Many founders are the first to pick peaches and try out the early adopters in the industry. They can always enter the market first by virtue of their sensitivity. However, the success of a company cannot be sustained by relying on business acumen. Over time, operational capabilities will shorten. The board began to be exposed, and it was difficult to overcome the nature of extensive operations, eventually leading to a situation where “the feast cannot be continued”.
If only “business acumen” is examined without “precision operations”, investors will fall into the failure trap of “high business acumen – low precision operations”.
Investment Trap 4: Emphasis on resource integration and neglect of team leadership.
Some entrepreneurs have glorious titles but no good generals around them. In the 1990s, with the country vigorously promoting the establishment of township and village enterprises, Cao Yong (pseudonym) resigned from his position as deputy director of a state-owned chemical enterprise and started his own business with his relatives and friends. He started with the sale of chemical materials. After 20 years, he After years of development, it has grown into a leading local enterprise integrating research, production and sales. With the improvement of R&D capabilities and the consolidation of industry status, Cao Yong came up with the idea of going public, and investment institutions intervened. Thanks to his background in state-owned enterprises, Cao Yong has always been handy in resource integration. In terms of industry and government, he has more than ten social titles that can hardly be printed on his business card: Vice President of the Provincial Entrepreneur Association, Chairman of the Industry Association, President of XX Alumni Association… so many titles and such good resource integration capabilities make investors happy.
But when investors began to go deep into the company and inspect the management team, they discovered a big problem – the overall management team had low academic qualifications and weak abilities. The marketing vice president Cao Yong was the original driver, the production vice president Cao Yong was a colleague of the company, and the financial vice president Cao Yong was a former colleague of the company. Most of the heads of functional departments such as , HR and other functional departments are relatives of Cao Yong… The investment institution held a business analysis meeting and was deeply concerned about Cao Yong’s team leadership ability, and the investment decision was temporarily shelved.
In investment decisions, entrepreneurs’ resource integration capabilities are usually paid attention to, but internal team leadership capabilities are easily overlooked, causing investors to fall into the investment trap of “high resource integration – low team leadership”. Some founders have good external cooperation resources, but they have not built a core management team with high combat effectiveness within the company, and have not created a highly collaborative organization. No matter how good the resources are, if they are unable to take over internally, the success rate of starting a business will be high. discount.
-02-Accurate investment in six passes
How can investors use scientific methods to conduct a systematic and comprehensive inspection of investment objects to determine whether the founder possesses the above eight characteristics? In the book “Accurate Talent Selection”, based on many years of human resources management consulting experience, we constructed a “six-pass” system for accurate talent selection.
The integration of precise questioning and in-depth questioning is reflected in the combination of investors’ quality in the questioning and questioning stages. Of course, the questions should not be too abrupt and need to be skillfully integrated into the communication with the founder and guided using technical skills.
For example, in order to judge the founder’s achievement motivation, when the founder talks about past experiences, you can guide the founder to introduce an experience in which he set the highest goal in the past and successfully achieved it. In the process of the founder’s description, use the STAR questioning method to start from S (Situation-background), T (Task-task), A (Action-behavior), and R (Result-result) are used to guide and describe, and finally determine whether the founder possesses the above eight qualities. Table 2 shows the reference questioning techniques for eight quality items. Investors can flexibly use them in communicating with founders according to the situation.
In order to facilitate investors’ understanding of the STAR interview method, we take the quality item of “resistance to pressure and frustration” as an example to show readers a complete dialogue between investors and founders.
Investor: Mr. Wang, have you faced many difficult moments in your past entrepreneurial experience? (Question)
Founder Wang: Definitely, no one’s entrepreneurial journey is smooth sailing!
Investor: Looking back now, what was the most difficult moment? (Question)
Founder Wang: When I founded my first company, a senior executive who I was very optimistic about took away and poached a large number of people from the company. During that time, I was nervous and had a headache for nearly half a year.
Founder Mr. Wang: He joined the company not long after I founded the company. He is considered a veteran of the company. You also know that I come from a technical background, so R&D is my strong point. Later, I gradually came into contact with management and became very interested in these, but sales This has always been my shortcoming. By chance, a friend recommended him to me. He had sales experience in a large enterprise. Although he was only a regional sales manager at the time, he was willing to endure hardships and was smart. After chatting with him once, I felt that he would be very successful in the future. . Later it turned out that I had a good vision. In more than 3 years, he built the company’s sales team and brought the company’s sales from hundreds of thousands to millions to tens of millions. In 2008, our sales nearly exceeded 100 million yuan, and he became the company’s vice president of sales.
Investor: It sounds like everything is going in a good direction. Why would he leave? (S)
Founder Wang: Yes, I also think the company is developing in a better and better direction, but we have big differences on the company’s development philosophy. I want to increase investment in R&D and make better products. products, he feels that there is a market for the current products, and the investment in R&D is too high, sacrificing a lot of profits. In the final analysis, what I want is the long term, and he is more concerned about the short term. After many unsuccessful communications, it was February 2017. I remember he chose to leave shortly after the New Year.
Investor: What is the biggest trouble his departure brings to you? (S)
Founder Mr. Wang: If he alone leaves, I may lose a capable right-hand man. But what I didn’t expect was that one month after he left, almost half of the people in core R&D, sales, and management positions were poached with high salaries. At that time, the company only had more than 100 people, and more than 20 people left, which caused a big shock. At that time, I was most afraid of receiving a call from the head of the department, and I was most afraid of them saying to me in a serious tone: Mr. Wang, I have something to report to you. Someone in our department… proposed to resign… I suffered from insomnia continuously and woke up in the middle of the night. It’s hard to fall asleep again.
Investor: How long did this state last, and how did you get through that difficult moment? (T)
Founder Wang: After about a month or two, I told myself that I couldn’t go on like this anymore and I had to cheer up quickly.
Investor: Only changes in thinking can lead to changes in actions. Can you share what you did in the company later? (A)
Founder Mr. Wang: I first gathered the remaining backbone and management staff. I remember it was a Tuesday. We talked about the company’s current difficulties, everyone’s concerns, and my original intention to start the business to the company’s future vision. , from adjusting everyone’s salary to talking about future growth plans… I talked to them heart-to-heart from 8 a.m. to around 10 p.m….
Investor: Have there been any changes since that communication? (R)
Founder Mr. Wang: That communication should have stabilized people’s hearts to a great extent, and the number of people who proposed to resign slowly began to decrease… Then for the key positions that were lost, we mobilized all employees to recruit and reward internal recommendations. The maximum limit was increased from 10,000 yuan to 20,000 yuan, and everyone from vice presidents to directors to managers to employees were mobilized to strongly recommend talents to the company. We have also increased the number of headhunting companies we cooperate with from 2 to 6, and we will no longer bargain on candidate treatment. In April and May, we made the stabilization and replenishment of personnel our top priority… Investors: What’s inside these combinations
? What made the biggest difference? (R)
Founder Mr. Wang: It’s better to recommend internally. Especially the sales and R&D departments recommended many friends around them to join the company, and some employees who resigned also returned home. Around mid-May, the staff gradually stabilized. The staff is basically in place…
Investor: Now let me recall, what is the most difficult thing for you in doing these things? (A)
Founder Mr. Wang: The most difficult thing is to adjust your mentality. How to quickly get out of the mentality of panic and self-blame, and how to make people around you believe that you are strong enough to be worthy of following. At that time I just collapse at night and have insomnia… During the day, I have to encourage everyone like a warrior, call on everyone to refer, and find ways to quickly integrate a large number of new people… Investor: How were the operating results
that year? (R)
Founder Mr. Wang: Yes, the operating results of the year were indeed affected and the goals set at the beginning of the year were not achieved. However, after this incident, the quality of our internal personnel has actually been greatly upgraded. Our cohesion has also become stronger. Starting from 2018, we have entered the fast track of development…
Investment decisions are sometimes a balance between rationality and intuition. As the number of interviews between investors and different founders increases, the number of intuitive decisions increases. Trustworthiness will gradually increase. In order to minimize the whitewashing of investment targets, background checks have always been indispensable in the investment decision-making process, building a firewall for investment selection and reducing the risk of wrong selection.
In addition, the investor’s first investment in an investment target is not a sign of success in selecting an investment target. Being able to go through the running-in period and lead the company to continue to create value is the end point of the successful selection of the investment target. If after the first investment, it is found that the investment object does not show relevant characteristics in actual company operations and management, the loss should be stopped promptly and decisively.