The Critical Role of Human Capital in Assessing Founding and Leadership Teams
November 7, 2024 – Evaluating founding and leadership teams of portfolio companies and acquisition targets has become crucial for investment and operating partners. As businesses grow and adapt to shifting market demands, the strength of the leadership team often dictates a company’s ability to scale and succeed, according to a recent report from N2Growth, a Philadelphia-based management consulting and executive search firm.
“Assessing factors such as vision, resiliency, leadership style, adaptability, and alignment with the company’s vision is now seen as fundamental to driving long-term growth,” the study said. “These evaluations provide valuable insights into how well a team can steer their organization through challenges, making it an essential part of investment strategies.”
Historically, past successes were used as benchmarks for evaluating founding and leadership teams of portfolio companies, the N2Growth explains. “However, in today’s dynamic markets, past performance alone is no longer a reliable predictor of future success,” the firm said. “Teams must now demonstrate the ability to grow, adapt, and cultivate a culture aligned with their company’s vision and strategy.” As Clément Michel, founding partner of Archiipel, highlights: “A company’s ability to scale and evolve more quickly depends on the leadership’s willingness to open up to new investors, share power, and embrace new directions. This is especially crucial in early-stage companies, where human capital often plays a pivotal role in determining the trajectory of growth.”
The Evolving Focus on Human Capital
“As geopolitical and economic uncertainties rise, investors are shifting their focus on businesses with a long-term perspective, placing increased emphasis on resilient, sustainable business models supported by strong leadership,” the N2Growth report said. “Leadership teams are now evaluated not only on qualities like passion and teamwork but also on traits like resilience, learning agility, and adaptability. These qualities are essential for steering companies through complex environments.”
Related: Urgent Action Needed to Attract Talent in a Rapidly Changing World
According to Invest Europe’s annual report, diversity, equity, and inclusion (DEI) have also become critical components of venture capital assessments. Diverse teams are shown to be more innovative and resilient, and this shift underscores diversity as a strategic business advantage, particularly in fostering long-term growth, the N2Growth report says.
The Human Element in Due Diligence
Due diligence in the venture capital ecosystem is no longer solely focused on financial metrics or product-market fit, according to the N2Growth report. “Investors are increasingly assessing the personal traits and leadership capabilities of the individuals behind the business by leveraging the expertise of leadership advisory firms that utilize scientific, AI-driven assessment models,” it said. “This approach allows for the collection of objective data points to predict leaders’ predispositions to manage stress, pivot when necessary, and drive innovation under pressure.” The PitchBook Venture Monitor reveals that European firms are increasingly embracing data-driven assessments to evaluate leadership potential. These assessments help predict whether a team can endure the complexities of scaling, especially in volatile markets.
Using Leadership Assessment to Win the PE Talent Wars
Talent has become an increasingly acknowledged driver of value creation in private equity firms as pressure to deliver outsized returns increases. With this, PE funds have invested in executive recruiting services and built out their own internal functions to find the best talent in an increasingly competitive landscape. Nevertheless, the evaluation process for talent hasn’t evolved enough since the industry’s start. “I’ve watched throughout my entire career in executive search the way decisions are made on the selection and evaluation of human capital – statistical results haven’t improved much, and we can do better,” explained Elan Pratzer, CEO and founder of System-3. “Executive search and private equity often overly rely on experience, assuming if ‘you’ve done it before you can do it again.’ But that does not take circumstances into account. Consequently, a person who has been very successful in one set of circumstances may not be able to repeat the same success in a separate set of circumstances.”
Diversity VC reports that traits such as empathy, emotional intelligence, and communication are now considered critical to leadership success. N2Growth notes that what previously was referred to as soft skills are becoming core skills and are increasingly seen as necessary in navigating uncertain markets and leading teams through periods of intense growth.
Key Traits Investors Value in Founding Teams
Through N2Growth’s work and regular exchanges with investment teams and operating partners worldwide, several key traits consistently emerge as critical in founding teams:
- Strategic Agility: The ability to balance high-level strategic thinking with practical, day-to-day operations. This allows founders to stay visionary while adjusting flexibly when needed.
- Resilience and Ability to Pivot: Demonstrating resilience in the face of setbacks and showing an ability to pivot as needed are increasingly valued. Investors rely on predictive analytics and behavioral assessments to gauge these traits.
- Leadership and Integrity: Strong leadership and integrity set the cultural tone for an organization and build trust with stakeholders. Founders who lead with ethical decision-making are more likely to foster sustainable growth.
- Vision and Communication: A clear, compelling vision, paired with excellent communication skills, helps unite both internal teams and external partners toward shared objectives.
“Assessing a founding team’s human capital in a rapidly changing market has become essential—not just a nice-to-have,” N2Growth said. “Financial metrics alone rarely reveal the qualities that drive lasting success, such as resilience, adaptability, and a unified vision. Numerous research studies show that up to 65 percent of venture-backed startups fail due to team-related issues, such as misaligned vision, poor leadership, and interpersonal conflicts—often far more influential than product or market challenges.”
McKinsey reports that companies investing in leadership development see improved long-term performance, illustrating how human capital investments can help mitigate leadership risks. “Investors who prioritize these human elements in due diligence are better equipped to identify leaders capable of enduring market disruptions and thriving through them,” the N2Growth report said. “So, the question remains: as an investor, will you put human capital at the heart of your evaluation scorecard, recognizing that the ultimate strength of any investment lies in the people driving it forward?”
N2Growth is a global leadership consultancy with practice areas in executive search, culture shaping, leadership development, strategy, organizational design, risk, digital transformation, and executive coaching. The firm has more than 40 locations across the Americas, Europe, MENA, and APAC.
Related: How Job Seekers Can Assess Company Culture
Contributed by Scott A. Scanlon, Editor-in-Chief and Dale M. Zupsansky, Executive Editor – Hunt Scanlon Media
