As our portfolio of companies slowly grows, we are increasingly focused on recruiting managers to lead these businesses post-acquisition. We’ve learned that the performance of a business is almost a direct function of the quality of the CEO who is leading it. Good CEOs sometimes fail. Bad CEOs usually fail. Of course, it’s hard to know from an interview how someone will perform on the job. But there are a few key attributes that we think set someone up for success in a TDV portfolio company:
Startup / Entrepreneur Experience
The excruciating journey of starting a business is an incomparable business education. CEOs who have traveled this road - successfully or not - have had to touch every aspect of a business. Most importantly they have had to learn how to build, sell and hire. They’ve dealt with rejection and failure, and developed the resilience that can only come from enduring these experiences first hand. Beyond this, because startups are usually highly resource constrained, entrepreneurs learn to do more with less.
On a more practical level, entrepreneurs learn to be agile operators who have the skills and the mindset to quickly pivot a business. This is an essential skill for many of the businesses TDV acquires. Usually we end up having to build and launch a new product, tweak the go-to-market or make significant changes to the makeup of the team. Agility - and the willingness to make hard decisions quickly and with limited information - are critical to success.
Domain Experience
Markets are idiosyncratic. Nuances of functionality, marketing positioning, and buying behaviors exist in every customer exchange, even for products that you’d expect are category agnostic. Having this market context is a huge advantage for any operator. Which is why we like to work with managers who have experience working within a business’s category. We know first hand how long it takes to attain deep market knowledge. Maybe it’s not 10,000 hours, like Malcolm Gladwell argues, but it’s at least one year. Probably two. Given the speed and dynamism of business today, it’s hard to partner with a CEO who will require 1-2 years of on-the-job training. Better to work with someone who has a running start, or at least some experience that is tangential to the market.
Now, this isn’t always realistic. The right people may not be available or we may not be able to afford them. Indeed, when we acquired Peterson’s neither of us had any experience in the test prep and data space. But we both had significant experience in software and media. So, close enough. Smart people can figure stuff out. But for reasons that are obvious, the less domain experience a CEO has the longer it will take him/her to ramp up.
P&L Experience
Managing to an EBITDA target is a hard learned skill that comes only with time in a given business. Over time, a CEO gets to know which revenue projections are soft and which are firm. Some lines of business have more risk than others. Some are cyclical. A CEO also gets a handle on where the weaknesses are on the expense side. Being able to see around a corner (or just knowing that there’s a blind spot up ahead) with respect to budgeting - and knowing how to weigh this information - helps guide spending decisions on a rolling basis. Other than the CEO and CFO, few people in any organization have good visibility into both sides of the ledger; functions tend to break out on either the cost side or the revenue side. So it’s up to the CEO, who hopefully has a strong CFO partner, to actively manage resource allocation. No one else in the company has the information, nor do they probably care.
That’s the CEO’s job.