By David Steakley
Our guest insight this week comes from David Steakley, a past President of the Houston Angel Network, and a reformed management consultant. He is an active angel investor, and he manages several angel funds in Texas. Hang on, David tells it like he sees it! – DB
Business plans are interesting. But, as a famous field marshal (1) said, no battle plan survives contact with the enemy. I have found it more important to assess the capabilities of the founding team to react, revise and pivot (quickly change direction), than it is important to assess the business plan. How do you know whether your founder team and your added executives have the right stuff to survive contact with the enemy?
In addition to the ability to pivot, character matters, too. As my kids have commenced driving, I’ve harped incessantly, hopefully to the point of their nausea, on the notion that they should always have in mind that everyone driving on the road is in a massive conspiracy to collide with them, and make it appear that the collision was an accident. “Just assume everyone is trying to kill you,” I say.
I take this approach to angel investing. I begin by assuming that the founders of the company are incompetent, psychopathic, lying con-men and thieves; and I try to convict them of these charges. I ask them innocuous questions, and try to check as many seemingly inconsequential details of their story 
as I can. Where did you go to school? When did you graduate? In what field was your degree? What was your first job? Why did you leave that job? Where did you grow up? Did you play sports in high school? What are your hobbies?
[ Email readers, continue here…] Faithful in little; faithful in much. If someone will deceive about a small matter, he will deceive about anything and everything. I don’t do business with liars. If I am unsuccessful in proving these charges, then, perhaps the company is a candidate for investment.
I was a partner at a large global consulting firm. We hired literally hundreds of thousands of graduates every year. They had no meaningful experience. The only way to evaluate them was to look for a kind of raw, athletic talent. To help us in this, we adopted a technique which I believe is now universally used, but which was unusual at the time. We called it behavioral interviewing. This technique relies on identifying specific traits and characteristics which one wishes to find, either negatively or positively, and then asking the candidate to tell specific true stories about situations in which s/he would have had an opportunity to demonstrate the traits in question. A lot of the value of this technique relies on the interviewer being extremely aggressive with the candidate about the minutest of details within the story offered.
For the founders of companies in which I am considering investing, I have concluded that flexibility, intellectual nimbleness, and a relentless focus on dispassionate examination of factual evidence of results, are some relatively rare traits with which I cannot ignore. “Tell me about a time when you changed your mind about something important,” I will ask. “Tell me about a time when what you were doing wasn’t working. How did you know it wasn’t working? What was the problem? What did you do?” “Tell me about a time when you screwed up big time. What happened? What did you do?” I will ask questions about the tiniest details of their stories. What were you wearing? What time of day was that?
I have actually had people respond along the lines of “I don’t recall a time when I screwed up.” Or “Sometimes I have been let down by my subordinates and my partners, though.” Check, please!
But, a more common problem is that you find out by detailed questioning that the story presented is not really a true specific story, but a theoretical composite story, which reflects theoretical behavior the interviewee assumes you want to hear about. I don’t want to work with these people. They are trying to tell me what I want to hear, and they do not want to admit the possibility of fault.
I want to work with people who are pleased to discover mistakes, errors, and opportunities for improvement. I will not work with people who hide mistakes, who ignore errors, and who pretend that everything is wonderful. I want to work with people who face the truth.
One of my very
favorite entrepreneurs is the shining example of taking himself to task over errors and missteps, and of a constant vigilant search for how things are going wrong in his businesses. Recently he launched a unit which developed a casual browser-based online game, monetized through micro-transactions for virtual in-game goods. One of the beautiful things about this kind of business is the depth and immediacy of information available about performance and results. So, when something is changed, you find out immediately how the change affects results. This company has been through so many iterations of its model that I have lost track. I love the willingness to experiment, and the perpetual dissatisfaction with how things are going, and the relentless quest for improvement. This guy is going to make me a lot of money, or die trying.
So, focus on the personal traits and characteristics of your team. Things will definitely go wrong. You want to have some idea of how your team will react when that inevitably happens.
(1) Helmuth Von Moltke the Elder, 1871
I have written too many business plans. I have tired of creating them, even of creating the executive summaries. I dislike GUST because it’s just a bunch of stuff repeated again and again.
Look, my business has survived the great recession. It has survived a nosedive in revenues a year ago and now will have more revenues than ever before. With enough effort, we can reach 7-figure revenues next year.
Every single business plan I’ve written turned to dust within a year. That is, all of the projections and marketing plans and staffing plans became nonsense very fast. No one has a crystal ball that works.
We know that we have a service that sells. We know that we’ve done a poor job of selling it. We know that strategic relationships of all sorts now make our future rosy. We know that the technological landscape is changing fast. We know that we can only deal with a limited amount of that change and must choose wisely and/or adapt quickly — preferably both.
The most interesting phenomenon, which I predicted intellectually and now experience emotionally, is that the more successful you become, the more you become concerned about making the right decisions. Success also means more work, lots of it, and more time thinking about strategies and tactics. Too many would-be entrepreneurs just do not understand this. They think that the hard work is getting to success, and that it all becomes easy afterward.
I agree completely that you must seek employees and partners with character. Character to me means honesty and a strong work ethic. It also means being able to absorb the shocks of starting a business, not complaining or finding excuses, rather looking forward and accepting challenges as a part of the good life. You cannot change the past; you can only learn from it.
My third job was with DEC. My boss was considered by many to be a hard-ass. I screwed up early on — don’t recall the details. He called me on the carpet. I merely apologized and said that I learned never to do that again. Conversation over. We worked well together ever since then. The thing is that I truly meant it. I love learning and applying what I learn. I hope that, as a boss, I can emulate that boss.
How do you convince people to take these lessons to heart, to be real?
BTW, how do I get to meet David Steakley? Sounds like my kind of person.
Seriously, good article!
Execution. I would like to meet Mr Steakley. Great post Dave.
“Just assume everyone is trying to kill you”. So true, it is so true to assume.
John