The venture capital industry competes in a volatile marketplace typified by high risk and high reward. Venture firms invest millions of dollars on seasoned executives and entrepreneurs who present great promise of creating significant shareholder value with the identification of the next big idea or innovation that will revolutionize an industry. Whether an investment yields financial rewards depends on the delicate balance of innovation, market conditions, leadership strategy and countless other uncertainties. In making the complex calculation of whether to invest in a promising new venture, many venture capitalists often overlook one critical factor ? the human capital component. After an investor invests capital behind a concept, it takes the right management team to get a company off the ground and execute the company's strategy.
Raj Pai, a principal at CID Capital, a 26 year old Midwest based venture investment firm that manages over $300 million of investment capital and specializes in life sciences, information technology and business services, says he has seen human capital "make or break" investment deals. Pai remembers an investment his firm made in a technology company that fell apart because the right management team wasn't in place. Pai says the company's founder had problems with communication and delegation that didn't come to the surface until after CID Capital made the investment. Even though the technology was innovative and the market was ready to receive it, Pai says the company couldn't survive without the right leadership.
"You can go from everything's okay, to all hell is breaking loose in one month, and that's what happened with this company. We had to shut the whole company down, and lay everyone off." Pai says that identifying the best management talent takes more than just sifting through stacks of resumes.
Innovative leadership ? the kind it takes to turn a bright idea into a profitable company ? depends on all kinds of intangible factors, such as how an executive copes with stress or how she or he interacts with the board of directors. Many of the most successful venture capital and private equity firms partner with a top executive search firm to help ensure the success of their portfolio companies. In addition to recruiting senior executives to serve as management team and board members, an executive search firm can play a critical role in vetting a prospective investment.
"We know our strengths and weaknesses," Pai says. "Sometimes venture firms know it's best to look for outside help." A top executive search firm can also play a critical role in helping investors source attractive investment opportunities.
"Due to the many privileged relationships that we share with leaders of industry and sources of private equity and venture capital, we find ourselves at the intersection of human capital and investment capital. Because of the limited number of quality deals that are truly worthy of investment backing, venture capital and private equity firms rely on being introduced to titans of industry with the next big idea," says Donald Law, Managing Director of nationally recognized executive search firm Venerable Partners. Pai says CID Capital recognizes the critical value of human capital, so now the firm hires an executive search firm like Venerable Partners to assist with nearly 70 percent of its investment deals. One of those successful investments was in Red Sky Technologies, a Chicago-based company that provides emergency response telecommunications services. Pai says his firm hired executive search firm Venerable Partners to make sure Red Sky had the human capital to thrive.
Pai says executive search firm Venerable Partners was able to identify several seasoned industry leaders who might be interested in contributing to Red Sky. In the end, executive search firm Venerable Partners recruited a high-ranking Fortune 50 executive to serve as a board member to advise the company's management team. "What we need to hear from them is the big macro shifts that are occurring in the industry, and you can't buy that talent," Pai says.
Pai says CID Capital would not have been able to recruit an executive with such a high level of expertise on its own had it not been for partnering with a top executive search firm like Venerable Partners. "I don't think we would have been able to tap a person like this to help. But somebody's got to bring the horse to the water. This particular executive got involved because he bought into the idea, but it was executive search firm Venerable Partners who brought this industry veteran to the water" says Pai.
Mark Kupryjanczuk writes articles about executive search process. He is an executive search firm professional with unorthodox views on investment introduction, executive recruiting and the role of executive recruitment firms.