$223 billion. That’s what culturally-motivated turnover cost organizations over the previous five years, according to a 2019 SHRM report
As one embarks on the pursuit of investing in a company, the due diligence process is key for all parties. Depending on the stage, you might be looking for different aspects as the key drivers, which can vary from traction, market potential, market size, team; to product- market fit, annual recurring revenue, and their plan for growth.
However, one area that impacts everything from productivity, engagement, customer loyalty, talent retention, speed of innovation, growth, and, of course, profitability, is culture. Culture is a way to align people with shared values to support each other in overcoming challenges and achieving ambitious goals in an efficient and meaningful way.
Why does it matter for you as an investor, and how do you assess it?
Let’s start with the why.
With multiple ways of achieving outstanding goals, the key factor here is efficiency: how much collective willpower is it taking the company to reach their goals? Especially in a start-up environment this ratio is directly related to the burn rate at which the company is spending investor money.
Some of the most successful teams are built with multi-talented individuals with complementary skills. They are often interdisciplinary teams that host talent from varied backgrounds, all aligned on solving a hard problem and realizing an ambitious vision.
However, continued alignment on how to achieve the vision and goals is hard to attain, especially in a high-stress, high-growth environment. Here is an example to demonstrate one aspect of the challenge.
Imagine a cup. What do you see? Is it a clear glass? A paper cup? A white mug? A crystal glass? Whatever your answer is, two things are for sure: what you pictured is influenced by your environment, and not everyone pictures the same glass. This is a strength when it comes to innovation, but a significant challenge when it comes to how to bring an idea to life and how to communicate around it.
Now, imagine a group of individuals coming from different industries, with diverse skillsets and unique perspectives, trying to show up as a team and achieve ambitious goals in a fast-paced environment. How could they possibly fulfill this aspiration when they don’t have a common frame of reference to begin with? Striving for greatness when there isn’t a shared north star for the entire team can turn into a draining, grueling task.
Realizing a vision and achieving goals consistently requires a crystal-clear, common definition of what success looks like in every level of the company: for each team member, for each department, and collectively. In short, it requires a thriving and value-aligned culture.
The Cultural Due Diligence
So, how do you avoid a culture becoming a liability where goals are never met, conflict and chaos are constantly present, and where you ultimately lose your investment?
How do you approach a cultural due diligence?
There are established frameworks that can help companies start their cultural journeys off with a thorough understanding of where they are standing. Such a process starts with a Cultural Audit, which is the ideal first step for any investor looking to evaluate your next investment.
The Foundation: How strong is the company as a unit?
The first phase of a Cultural Audit consists of a thorough assessment of the different dimensions of a company’s structure and how they interact with their cultural foundation. In particular, the ownership structure has a significant impact on the culture, and this goes both ways: just like strong misalignments can be a threat to the success of the venture, being able to count on a supportive Board with shared beliefs has the potential to fuel outstanding achievements for startups.
In this first step, the Management, the Board, and the Founders are mapped out in detail to explore their individual roles, their visions, their values, their goals, their levels of alignment with their culture, and how they all function as a unit.
The Cultural Strength: How thriving is their current culture?
The next step of a Cultural Audit involves evaluating the state of the culture itself. From cultural assets and rituals to an analysis of goals and KPIs, one of the objectives of this phase is discovering where a culture is on a scale from Toxic to Brilliant.
A significant part of evaluating a culture’s strength is assessing the performance alignment in the team members and how they are interacting with the culture, as well as the alignment in leadership style for every leader within the company.
This process will allow you to discover how the company’s culture is aligned with their values and purpose. But most importantly, it will allow you to identify what major roadblocks or challenges are having an outsized negative impact, potentially turning the culture into a liability.
The Cultural Scalability: How scalable is their culture?
Once you have assessed the cultural alignment in the company’s key structure and the state of the culture itself, it’s time to look into the future. The third phase consists of an in- depth look at how the company will effectively lead on, recruit, and measure culture as they scale. This will allow you to understand where they are with their scalability initiatives in connection to culture, and help you ensure that the company continues to have a thriving culture by welcoming value-aligned top talent and investing in their development. In addition, people and purpose-centric cultures tend to attract and keep high-performing individuals long-term as the company grows from one stage to another.
The Power of the Cultural Audit
As an Investor, conducting a Cultural Audit will help you evaluate aspects like how far a company has come in building a thriving culture, and how effectively they are engaging and leading their top talent. But, most importantly, through a Cultural Audit you will uncover where the culture has challenges and potential liabilities that could be jeopardizing the future of the company, both in the short and long term. Getting a comprehensive analysis of these challenges allows you, as an investor, to assess the cultural state of the company you’re considering investing in, and act wisely in maximizing your chance of success.
As a Founder, performing a Cultural Audit can be your competitive advantage in striving for a brilliant culture, as it is the necessary first step to kickstart a transformation process towards your dream company and culture. A culture where excellence is the standard, where your talent is highly engaged and excited about collaborating and contributing to your vision, and that naturally attracts the people you want in your team. A thriving culture is possible, because culture can be designed. But it takes the decision and the courage to design it, and to design it well.
Next time you are evaluating a company to invest in before deciding to move forward with the Cultural Due Diligence, imagine their culture on a scale from toxic to brilliant. This framework is the Infinity Culture Scale by Reimaginez. Ask yourself the following questions:
How would you assess their culture today? Toxic, Mediocre, Aspiring, Thriving or Brilliant? Why do you believe this is the starting point? What is the cultural growth potential for the next 12 months, and what would be the impact on the teams, customers, and investors if it’s realized?
The Hidden Potential of Culture
We meet many investors who highlight the significance of investing in the right people, the right founders, and the right management team.
However, when we ask how they assess if they have identified the “right people,” some mentioned gut feeling or visiting the company to get a feel for the dynamic in person. Using your experience and intuition is a good start, but to truly assess the strength, potential, and quality of a team, we need to look beyond that. It’s a flawed system that leaves room for deception among bad individuals and room to miss out on a brilliant team if they do not showcase traditional success factors. To truly identify a company that can change things, looking for the teams with untapped potential and vision can be where your next huge win will come from.
By assessing the team and culture of your next investment, you might be surprised by how the state and potential of the culture will impact the return on your investment. So, what’s possible to achieve with a thriving or brilliant culture? A thriving culture gives you an outsized impact in many regards – better customers, better talent, better business, and better investments. Based on our two decades of experience impacting 30,000 cultures, we have seen results with 3x ARR year after year, 10x deal sizes, and a loyal, committed, and hard-working team achieving remarkable results.
Now, ask yourself this question: How are you accessing and championing a thriving culture in your next portfolio company?
Do you have a high performance thriving culture? Find out with our complimentary cultural assessment
Culturally-Driven Companies Achieve 18% More Revenue Per Employee than the Average
Imagine if you could unveil the untapped potential, the strengths, and the risks present at your company with just one quick assessment.
What if today, you could understand the starting point of your culture before setting any goals, creating a strategy to reach them, and determining what to invest in to achieve greatness in the long run?
Introducing The Reimaginez Flash Assessment — The Cultural Edition.
This piece was originally published in collaboration with the European American Chamber of Commerce, New York.
Reimaginez | Minimizing Liability & Maximizing Growth: The Investor Value in Assessing Company Culture
