Find a tenacious team with affordable products and invest in 'need' versus 'want', says Pender Ventures managing partner
Do your clients want to invest in a company that can make a socially responsible difference? How can you identify which ones can grow big enough to make a difference? How can you find the one that can become a billion dollar business that can impact the climate change, or other market, that it enters?
“When we look at opportunities, we put them in three buckets – people, product, and market,” Maria Pacella, managing partner of Pender Ventures, venture capitalists in Vancouver, told Wealth Professional.
First, for people, she said, you need to ensure the company you’re looking at has a tenacious, resilient, team.
“If the management team has stepped up over the last couple of years during a pandemic and maybe turned a setback into an opportunity, that’s a good sign that you have a tenacious, dedicated, and compassionate management team,” she said. “That’s a really good indication, which is particularly important in this current environment, that they can attract, retain, and motivate other great talent, and that’s very key.
“In my opinion, the number one quality in a CEO is their ability to recruit, retain, and motivate their team because these successes are rarely due to one person. It takes a team, and that ties to the culture of the organization.”
As for product, Pacella said, you need to understand the company’s value proposition and ensure that customers receive a quantifiable value.
“We certainly feel a lot more comfortable if it’s a ‘need’ as opposed to a ‘nice to have’,” she said. “Sometimes the value proposition can be down to a return on investment, such as ‘we’ve paid X dollars for this portion, and it paid back in a year’. You can actually do that kind of calculation.”
She also said it’s nice when a company has such a customer pull that they refer other customers to it, so it doesn’t need a large sales force. Then, the product needs to be affordable – as it’s a problem if it’s too expensive.
Finally, the company’s market should be large enough for the business to grow and make a difference.
“You can have great businesses that are very local, but then they have to be very capital efficient,” said Pacella. “They probably wouldn’t take venture capital, so they should look at other ways to finance or just use the good old-fashioned revenue way.
“For us, we look at companies that have huge market potential, not just in Canada, but global market potential, and they could have more than one potential market down the road,” she said. “If you want to help to grow a billion dollar business, it needs to have more than a billion dollar potential market that it can address with its product.”
Finding out that information can be difficult if the company is private. Pender talks to the company’s existing and potential customers and has a network of experts to help it assess the people skills. It also uses third party management assessment organizations, which she admitted that most investors cannot do. Once the company becomes public, however, there’s much more information with which to do your due diligence.
Pender may look at a company for a couple of years before investing in it, so it can get to know its people. It may even get involved in its board, so the company can get to know it, too. Even then, it can still take up to six months to close a deal.
“You want to see that the team does what it says it’s going to do,” Pacella said.
“It’s really about due diligence, really taking the time to understand something, particularly if you’re responsibly investing and people want to put their money where it’s really counting these days.”
Given the average investor’s limitations to completely look under a company’s hood, Pacella suggested that you should “look beyond the headlines” – especially if you’re trying to filter out any greenwashing in the environmental area. “Look for the business basics. Who are their customers? What is their value proposition? What are these customers buying? What are their fundamental reasons? Is there some humility in the management team? That’s a good indication of what they know and what they don’t know.
“Is there a good explanation of what they’re doing with their capital? Are they being capital efficient? That’s a good indication, too, of whether they are good capital allocators and good stewards of your money.”