Shifting Perspectives: The Importance of Human Capital

Historically, past successes were used as benchmarks for evaluating founding and leadership teams of portfolio companies. However, in today’s dynamic markets, past performance alone is no longer a reliable predictor of future success. 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. 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.

According to Invest Europe’s annual report 2023, 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 Human Element in Due Diligence

Due diligence in the venture capital ecosystem is no longer solely focused on financial metrics or product-market fit. 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. 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.

Diversity VC reports that traits such as empathy, emotional intelligence, and communication are now considered critical to leadership success. 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 our 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. 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% 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. 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?

Written by Vera Sharova & Ludovic Amblard

The post Beyond Metrics – Why Human Capital is Key in Founding and Leadership Team Assessments appeared first on N2Growth.

Diversification is not a trend; it is essential for companies to become and remain competitive. With technology reshaping the global business landscape, many companies will be pushed to fundamentally reconsider their ways of doing international business, diversifying into new product categories and adopting a “borderless” expansion model. Undoubtedly, this is putting added pressure on FinTech executives.

Although digitization has a significant catalytic effect on these processes, a successful diversification strategy would still need a solid basis and a set of scalable growth patterns that could apply to target markets. The FinTech industry is not an exception and is yet to strike the right balance between timing and scope. The fast-paced expansion of FinTech companies into long-distance geographies has increased the Penrose effect, thus escalating the managerial constraints affecting organizational growth and development. It is not a result of a faulty strategy but rather a predictive outcome of high growth that can rapidly exhaust internal resources, including managerial ones. This resource-intensive and time-consuming process put additional pressure on FinTech executives while leading highly diverse and remote teams.

One of the main challenges of international expansion is the culture, or to be more precise, the cultural distance between the newly opened markets and the ones where an organization has originated. The diversity across markets results in a mixture of backgrounds of different belief systems, habits, and perceptions that govern the behavior of local team members. Understanding and embracing these differences and nuances has proven to be of utmost importance in creating a unified culture across all organizational levels. Moreover, the strength and flexibility of internal company culture are needed to adapt effectively to different contexts while staying faithful to fundamental organizational values.

A company with a robust value system that resonates with all employees and customers will draw more people to its product. It will most likely overcome cross-cultural barriers as it expands into new markets. We have shifted from a volume-driven to a value-driven economy, emphasizing the human perspective of economic and organizational processes. 

The logic behind our decision-making is the same when selecting products, services, or potential employers; we put our trust in the common cause. Two questions remain: What problem(s) am I solving? What good can I do as a person, an organization, and a society? Shared values between colleagues, clients, or customers create long-lasting professional relationships based on trust and integrity. Those are all prerequisites of successful business growth, especially when dealing with international expansion to distant markets.

Alex Lhéritier, Global Head of Working Capital Solutions at Kyriba, says: “Ensuring a two-way transparency and trust can prove essential to a leader in a constantly changing environment. For that reason, having regular team catchups that cover “check-ins’ that are both personal and professional can be highly efficient. Jumping directly and only on purely professional aspects (e.g., project status, sales numbers) could affect loyalty by giving the impression that you do not care about the person. 

Communication styles vary across cultures, and one has to respect them, but it remains that the ‘I care’ style works universally. Spending time to reassure people is also an opportunity to collect and address concerns and receive precious/honest feedback to fine-tune strategy and messaging. Because we often run short of time, it is easy to prioritize more immediate issues, but ultimately such choices are bound to backfire. Finally, ensuring strong adhesion by your team to your strategy and its delivery should ensure optimal delivery to customers, and further support your growth.

Another aspect of the challenges faced by FinTech leaders is managing teams through a series of transformations successfully. To do so, successful management of their expectations is essential. In marketing, satisfaction is defined by the alignment between expectations and delivery. In the corporate transformation field, achieving employee satisfaction through uncertain times and regular changes requires 1) correct identification of their expectations and 2) ensuring that delivery matches the former. Exceeding expectations may be costly.

Conversely, failing to do so would increase dissatisfaction, even if the delivery is right per se. The trick may consist of moderating expectations to match a delivery level that is hard to change. Key benefits involve higher staff motivation and retention, and a more robust organizational culture to overcome daily challenges.”

Value-driven organizations thrive in this new economy because they promote trust, open communication, diversity and inclusion, thus making fertile ground for innovation. We can see many of these examples on the market; some even developed with Chief Innovation, Chief Impact, and Chief Sustainability Officer roles on their executive boards. All these roles are designed to help companies extend their missions far beyond the core business and effectively incorporate the impact element into their value chain. This is particularly relevant in high-growth environments, where the speed of growth itself poses risks to the ability to create impact at scale and cultivate customer and people-centric organizational cultures.

Even though FinTech companies heavily disrupted the traditional financial industry, simultaneously, they have deepened the financial market by making it more inclusive. FinTech managed to do that by making financial services accessible and affordable globally. It enhanced cross-border payments and supported broadening the payment options available to individuals and the payment methods businesses can accept.

During their annual meetings in October 2018, the International Monetary Fund (IMF) and the World Bank (WB) released a paper called the Bali Agenda that was launched to guide global policymakers while drafting policies and regulations to maximize the benefits of FinTech and keep the financial system stable. 

The majority of elements included in the paper aimed at using FinTech to promote financial inclusion because it can reach 1.7 billion adults worldwide that do not have access to financial services. In the same year (2018), the EBRD’s Legal Transition Team published two studies to assist lawmakers and regulators in their active regions in regulating crowdfunding, innovative payment systems, and blockchain solutions. 

Ana Drašković, Global Business Development Director at EBRD, highlighted the importance of the framework that international financial institutions provide to the FinTech sector: “There is a role for international development organizations in the FinTech space – be it in facilitation, capacity building, peer learning, legal reforms or investing. EBRD has always been one of the leading innovators in the space of sustainable investing and also FinTech. While investment in the FinTech sector will require a slight shift in the risk appetite, the combination of policy advice and investment is what development organizations like EBRD are well placed to do. We recognized the challenge maturing FinTech companies are facing, as they might not be creditworthy to borrow, and addressed it by creating a small EUR30mn sandbox for granular loans to FinTechs. The most important feature of our new approach is that the weight of the risk analysis shifts from reliance on historical financial performance to the assessment of the business model and expected future performance as detailed in the business plan of eligible FinTechs. Providing senior debt to eligible FinTech companies will enable us to respond to the fast-changing FinTech industry and to strengthen our impact across 38 countries where EBRD operates.”

FinTech companies were able to drive innovation by being leaner and more agile in comparison with traditional banking institutions and therefore make more impact in terms of outreach. According to Crunchbase data, financial services was the leading sector for venture investment in 2021, with $134 bn invested, marking a staggering 177 percent year-over-year growth. That compares with overall global venture capital investment, which grew by 92 percent.

Financial sector incumbents responded to market disruptions by embracing FinTech companies instead of competing against them. The leading example, a 150-year-old American investment bank, Goldman Sachs, has diversified its business through a proactive M&A strategy. According to a Crunchbase report, it acquired 29 companies over the recent years, being heavily focused on the FinTech sector. Its pace of investing in financial services venture-backed companies has skyrocketed since 2017. To further strengthen its consumer finance business, towards the end of 2021, Goldman Sachs announced it was acquiring the largest FinTech platform for home improvement consumer loan originations, GreenSky, for $2.24bn in an all-stock deal. With this latest acquisition, it aims to create the consumer banking platform of the future and help tens of millions of customers take control of their financial transactions and drive higher returns.

The Monetary Authority of Singapore (MAS) started the first Defi trade pilot project with DBS Bank, JPMorgan Chase & Co., and SBI Digital Asset Holdings that conducted foreign exchange and government bond transactions against liquidity pools comprising tokenized Singapore Government Securities Bonds, Japanese Government Bonds, Japanese Yen (JPY) and Singapore Dollar (SGD). Beginning of November 2022, JPMorgan Chase & Co. used the Polygon blockchain to trade tokenized cash deposits.

Organizations in the financial industry are under continuous pressure to align their growth and cultural perspectives. We often hear from our clients that they are afraid of “losing part of their culture” as the business grows and scales. The core challenge here is to stay loyal to the vision and values of the company while developing a capacity to adapt continuously to changes. 

Will culture get transformed in this context? Probably, yes. Should it be seen as a negative outcome? Of course not, as anything in a growth organization has a dynamic nature: organizational chart, processes, day-to-day priorities, and culture. Inclusive and diverse organizations are the most resilient ones in this context; they help keep teams aligned and engaged and are fundamental for building employer brands. This is especially relevant when the talent competition has never been as intense as it is now.

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Operational value creation models in Private Equity have been historically focusing on the following levers: sales and margins’ improvement, cost efficiency and capital reduction, capital efficiency, shared services, and, most recently, – geographical diversification and digitalization. In this context, the importance of the human lever has been underestimated for a long time and is nowadays gaining more and more weight in portfolio management.

Yet, according to the Harvard Business Review, between 70% and 90% of acquisitions fail to meet their financial expectations. One of the key factors that lead to these dynamics is attributed to the misalignment of talent strategies, capabilities, and cultures of portfolio companies with those of acquiring entities.

Your employees are your greatest ASSET

This phrase sounds like a “cliché” unless we give it a deep reflection from the accounting and financial planning perspective. ISO has recently introduced ISO 30414, the first International Standard of Human Capital Reporting allowing organizations of all sizes to get a clear view of the actual contribution of its human capital. Yet, many traditional and financial engineering and reporting models used by PE firms still look at the human capital from a purely cost perspective.

Making direct links between human capital and portfolio returns of a company is complicated, at times controversial, and a very sensitive topic. Nevertheless, there is definitely a benefit of using quantitative frameworks for human capital evaluation and its alignment with other organizational areas so as to support pre and post-deal decision making. One possible way to do so is through the use of scorecards, where skills and competencies are weighted against the firm’s strategic objectives, which, in turn, would result in economic benefits.

Likewise, HR Due Diligence should go far beyond evaluating HR risks and costs associated with a deal. It should involve a thorough quantitative analysis of the skills and capabilities of key employees as well as their overall alignment with the future organizational structure, culture, and financial objectives. Effective assessment models would allow a firm to better forecast financial returns of HR-related decisions, as well as to quantify expected economic benefits arising from aligning teams, competencies, and cultures of the entities with the organizational strategy post-closure. PE firms would also benefit from putting more emphasis on developing cross-portfolio capabilities post-closure, as well as on creating flexible organizational structures that encourage growth and innovation.

The Power of Early Engagement

Resistance to change is part of our human nature. Today, in the era of transformation, change and uncertainty, early engagement of employees in organizational transformation processes is directly linked with their willingness to embrace change and better understand its positive impact on their future career and the organization as a whole. Employees are much more likely to support and adopt change when they feel invested in the process and outcome.

Yet, this is another delicate aspect of an acquisition process, as a lot of information must remain confidential until the deal is secured. Engaging employees after the deal is formally announced can bear risks of creating unnecessary tensions within the staff, making them feel insecure, misinformed, and even undervalued. Yet, many of them will have to form part of an organizational muscle during the first 100 days and beyond.

In this context, how would a PE firm keep employees engaged throughout the deal lifecycle? Here are some thoughts:

• Working closely with the management and the deal team to identify and assess key talent in the target company.
• Creating focus groups that, together with the top management, would work on specific post-closure integration and transformation tasks, aligned with their profile and professional growth objectives.
• Performing an early assessment of a target company culture and work on preventing its potential misalignment post-closure.
• Making sure operating partners are engaged early in the deal process and are working closely with management teams to effectively align expectations at all levels of organizational stakeholders.

Leadership Challenge

According to the Global Private Equity Industry Report published by Bain & Company back in 2015, the primary reason why PE firms were failing to achieve target returns was due to the appointment of wrong leaders to run portfolio companies. Five years later, despite PE  getting stronger and mature as an industry, Bain & Company still emphasize that individual lead managers matter more than the PE firm in deal returns. Getting back to the monetary aspect of human capital in Private Equity firms, we might be talking about multi-million pound/euro losses when it comes to appointing a wrong portfolio company CEO.

We always say businesses, products/services, and solutions do not fail – people fail! If you want your business, your products/services, or your solutions to succeed, invest in finding the best people. Nowadays, more and more PE firms realize the importance of diversifying their technical expertise to effectively implement transformation processes. Many focus on building strong networks of operating partners with specific functional orientations to quickly fix technical gaps in portfolio companies. Yet, the role of a CEO remains pivotal in effectively implementing the new culture within a team and effectively driving it through the path to growth.

Having worked on many strategic CEO placements in PE-backed companies, we have identified a few key characteristics and leadership traits a good portfolio company CEO needs to hold:

• Strategic thinking and agility of an entrepreneur.
• Ability to create an agile performance-driven culture, while at the same time not losing the sight of long-term growth objectives.
• Integrity: broadly speaking, this is true of any CEO in any business but where there are business acquisitions, mergers, etc, there can be a certain level of skepticism within the ranks. Not every, PE firm will want to change all the talent in their newly acquired company and so identifying the right leader with integrity – someone who doesn’t compromise on their core values and the core values of the business – tends to be a good starting point for bringing along the rest of the team on the journey.
• An ability to focus: if you cannot focus you cannot perform at the level necessary to remain in the C-Suite for very long. Understanding and locking on to priorities are crucial components of long-term success for turnaround and growth companies.
• We all know great CEOs do not make their businesses tick on their own. Like many of us who watched the Netflix document, ‘The Last Dance’, which centered around the great Michael Jordan and a dominant 90s Chicago Bulls, we saw that Michael Jordan needed to leverage the experience, skills, and competencies of the likes of Pippins, Rodman, and others to achieve success. As a CEO, being parachuted into a newly acquired company you are expected to hit the ground running, therefore it is imperative to know your weakness and your blind-spots beforehand and identify the gaps as quickly as possible replacing them with the best possible talent.
• All CEOs need to have a strong bias toward action. Resting upon past successes is a recipe for disaster – times change, people, and technology evolve and at an unbelievably rapid rate these days. For portfolio company CEOs, a track record of embracing change is a must.
• CEOs need a great marketing skew – with social media platforms being the dominant area for any brand to grow, CEOs in portfolio companies need to maximize the various channels to gain attention and attract the appropriate audience. The same goes for a CEO’s personal brand – people buy from people – CEOs marketing their businesses well will weave their personal brand into their marketing initiatives.
• It goes without saying, CEOs without energy cannot motivate their workforce, they are not convincing nor are they credible. CEOs of portfolio companies need to be hands-on requiring more energy than your average CEO. The starting point for these CEOs is their positive outlook and attitude – the best ones can inspire others to find that extra 10% – it is contagious.
• We always look for resilience in our leaders no matter whether they are leading our countries or our favorite sports teams. There is something incredibly powerful about being beside someone who just refuses to give up and has an insatiable appetite for results and success. CEOs who can omit this characteristic in everything they do tend to reach their destinations. It is not a journey everyone will want to go on with the leader, having resilience can often mean going into some of the deepest, darkest places to achieve the required results.

Of course, each company presents unique challenges at any given time within their business lifecycle; they have their idiosyncratic environment, values, and visions which require a unique approach to their leadership selection criteria and an extensive critique of the levels of leadership competency required to achieve the critical results needed. Our EMEAA CEO calls this ‘situational leadership’ and I quite like that description because it challenges the selection committee on many levels, but most importantly, to think beyond replacing like for like using the previous role description to determine the search parameters of the new leader – we know this to be committing to a life stuck in the past ultimately ceding the future to your competitors. For partners and deal teams responsible for operational Due Diligence, it is worth mentioning again that sourcing of a great CEO should start long before the completion of acquisition so that she/he is in the full capacity from day 1 of the 100-days plan.

More deal teams are finding value in human-capital due diligence processes which are shown to deliver significant improvements post-closure and enable the ability of a  PE firm to move with speed and agility in the instance the unexpected happens with other key value drivers in the newly acquired businesses, bringing long-term value and resilience into portfolio companies.

This article was co-authored by Gordon Berridge

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