Valuing a business based on assets and financial performance is a well-understood process, but every investor knows the real value goes well beyond these parameters, either higher or lower. The key elements of leadership in a company, both individual and organizational, are less tangible, but very critical in setting a market value for investment, acquisition, or going public.
In the investment community, these leadership elements are often called “goodwill.” For early-stage startups, the goodwill component can easily exceed the size of all the financial elements together, or can just as easily mark a company with good financials as not investable.
In his classic book, “The Leadership Capital Index,” Dave Ulrich, a best-selling author, business consultant, and business school professor, provides some real insights and metrics on what makes up the elements of goodwill in the minds of top valuation experts. I have paraphrased his key points here as follows:
- Leader personal impact. For startups, the entrepreneur and founder is almost always the face of the company. Investors, partners, team members, and customers implicitly value or devalue a startup based on the leader’s physical presence, emotional identity, social skills, intellectual agility, moral values, and past performance in the domain.
- Strategic proficiency. These same constituents are looking for leaders who can create the future – focus forward rather than backward, seem to see around corners, can turn their vision into committed actions, and are able to engage all the right people into bringing the future into the present.
- Execution leadership. Everyone wants leaders who get things done and meet commitments. Leaders are judged on key elements of execution, including a focus on priorities, ensuring clear accountability, managing decision making, mobilizing others, adapting quickly, and communicating execution urgency.
- People relationship focus. No leader can do the job alone, so investors assign great value to leaders who take care of their people. Positive people management elements include good communication skills, building strong teams, finding time for coaching, strong people relationships, and facilitating growth and succession.
- Leadership brand development. Every business and brand has unique requirements to fit into their market environment. Leaders are assessed for their ability to fit into the brand community, embody the values required, maintain the right strategic priorities, and deal with the current organization stage.
In addition to goodwill justified by a great leader and an outstanding team, investors will use their due diligence process to assess the organizational structure and effectiveness as well. The key parameters of this evaluation will always include:
- Strength of the business culture. Research has confirmed that culture is a primary driver for financial performance, customer experience, and team productivity. Companies are valued based on their ability to create and align their people with the desired culture, and their ability to communicate that culture to customers, suppliers, and partners.
- Focus on talent and people growth. Investors want organizations that manage people talent and growth, through good hiring, performance feedback, development on the job, and building commitment. They look for the use of talent analytics, such as productivity per employee, as well as the practices and attitude toward employee satisfaction.
- Performance accountability processes. Good performance management is more about rewarding desirable behavior than penalizing bad performance. Processes must be in place to clearly define standards, differentiate performance, link to consequences, provide rewards for accountability, and provide regular follow-up.
- Modern information management tools. Power, and the ability to influence others, comes from knowledge. Having information is more than access to data; it requires knowing how to synthesize, interpret, and act it. Organizations are assigned value by how well they take advantage of the best technology, and turn information into action.
- Stable and friendly work environment. The most valuable organizations are able to govern their work environment through innovation, to cope with the increasing pace of change in culture and the marketplace. This means adapting to social trends, new technologies, economic conditions, regulatory requirements, and worker demographics.
