Monday, February 23, 2015

Due Diligence: The 7 Deadly Sins and 7 Bountiful Gifts

The first step in a person's salvation is knowledge of their sin. - Lucius Annaeus Seneca

Over the years, I have done a lot of due diligence of “stuff”, whether it be of individuals, teams, merger and acquisition targets, start-ups seeking investment, “fact or fiction” assessments and the like and in the process of conducting so many (and having some conducted on me), I have come up with a process that many have found intriguing and infuriating.

Due diligence in itself is pretty straight forward and pretty much any type is well documented ad nauseum.  For this reason, whenever I conduct due diligence, I am often disappointed when the basic “stuff” is not presented for review, since in absence of a business degree or vast Life experience, a simple Google search can prepare just about anybody for a positive due diligence experience.

So while I look for all the classic stuff such as cash flow, competitive analysis, business plans, sales and marketing plans, investment to-date, principal backgrounds / bios, partnerships, channels, market opportunity, blah blah blah, I ask two questions that either fascinate or infuriate.

The two questions are Why? and How do you know?

The questions matter to me.  How people respond to them provides deep insight into the deadly sins that threaten to derail them or the gifts that they have that provide the potential to create unlimited success.

Here are the 7 deadly sins I am exploring when asking my two questions:

Pride – does the entity being evaluated feel that they are just so awesome that they believe that the laws of business, ethics and morals simply don’t apply to them or applies to them in a fashion that suits them?  Do they feel that their understanding of risk and reward is so perfect that they can ignore the classic warning signs that have doomed many before them?  Do they invite people in to help them and then promptly ignore the help offered because “they know better” or tell the person whom they asked for help how the help will be provided (setting the terms when they are in no position to do so)?

Covetousness – does the entity focus more on the end result (particularly wealth or market dominance) and in doing so forget that there is much discipline, rigor, focus, intelligence and hard work necessary before “the harvest” appears?  Nothing drives me crazier than when questions for data are responded to with things like “I don’t have data but can’t you see how big this opportunity is?”.

Lust does the entity talk incessantly about power or money as they try to sway customers, investors or team members, forgetting that there are other equally important things being created?  If power and money are the lone sources of inspiration and motivation, success will often become more elusive, especially during times of struggle.

Anger – is the entity quick to anger, especially when things don’t go as planned or when someone points out that they are doing something incorrectly?  Do they insist on “my way or the highway” even when they have gone to someone for help and then walk away in disgust when the other side doesn’t comply, only to realize later that their anger was a major reason for their demise?  Do they often blame others for their own mistakes?

Gluttony – is the entity able to share credit, success, equity, etc. in a fair and appropriate fashion when approaching customers, team members, investors and the like or do they insist on harvesting the majority of the harvest while allowing others to obtain a reward far too small for the risk they assumed or for the contribution they made?

Envy – is the entity so caught up in establishing envy in competitors that they become all form and no function, forgetting that results speak far more loudly than glitzy commercials, dazzling convention booths, slick taglines, sexy mission statements and cool swag?  Does it matter that they believe they have the coolest place to work if they go out of business prematurely because they didn’t focus on what mattered while bragging about stuff that is “neat and cool” but is not the sole reason they existed?

Sloth – is the entity so caught up in the previous sins that they feel that effort is not required where it matters in the areas of strong strategic planning, tactical execution, obstacle anticipation / resolution, communication, team building / execution, knowledge acquisition / application or any other appropriate business rigor?

Oh the pain that comes when I am conducting due diligence and see a phenomenal opportunity that will never see the light of day because of these sins in the form of ego as it empowers the sins that destroy instead of the gifts that enable.

Meanwhile … the gifts ….

While I am researching whether an entity is guilty of these sins, I also seek examples of brilliance in the following areas:

Wisdom – does the entity have the Life / business experience to accomplish what they need to accomplish?  If so, how do they leverage / share it to create breadth and depth in their team?  If not, are they able to put pride and ego aside to acquire wisdom from others and to allow others to be compensated appropriately for sharing their wisdom?

Understanding – is the entity able to process new information in a way that can be applied to make their result better?  Can they work with others (listening more than talking) in order to obtain and apply this information?  Do they show understanding when someone else makes a mistake, not forgetting that they make mistakes also?

Counsel – does the entity proactively seek / accept counsel from those who have more experience or the right data / connections, can they apply it when it is appropriate to do so and can they reject it when it is inappropriate / incorrect?  Saying yes or no to counsel for the right reasons requires courage and humility.  Does the entity have both?

Fortitude – does the entity demonstrate that they can persevere through the difficult times in a positive way that builds relationships / opportunities instead of destroying them?  Do they panic at the first sign of challenge or can they methodically, measurably, strategically, tactically, ethically and morally navigate through difficult times?  Do they keep their eye focused on what matters when weaker people would have collapsed or are they easily distracted / retasked based on the emergency / opportunity du jour?  Most people who tell you that success came quickly and easily with little or no struggle (read: terrifying moments) is either a liar or psychotic.

Knowledge – does the entity believe that knowledge is power and that one must always be attaining and applying knowledge, whether it be in the technology they use, the market they exist in, the customers they target, the competitors that exist, the regulatory changes that occur, the sales and marketing tools / channels that exist, the nature of building strong teams, the state of the investment market, the nature of how information is captured and expressed or any other aspect that can empower or destroy an opportunity?  Do they accept knowledge offered by others and more importantly, do they apply it effectively?

Piety – does the entity demonstrate appropriate levels of humility and servant leadership?  Victory cannot be achieved by being a doormat but is short-lived when one’s hubris is so strong that they run over everyone with the belief that they know / have everything they need and can succeed without the collaboration of others.

Fear – does the entity demonstrate a healthy amount of fear and respect for what they are attempting to accomplish?  I’m not referring to fear that paralyzes and makes one paranoid but rather, the right amount of fear and respect that keeps them grounded in the importance of doing the right things ethically, morally and with proper business rigor.

While none of us are sin-free, it is important that our gifts more than compensate for our sins otherwise the greatest sin is yet to be experienced – the experience of failure in the face of unlimited potential and success and when defeat was snatched from the jaws of victory because our pride or ego made it so.

Bottom Line

As a measurable outcomes guy, data is everything to me and if it can’t be created, provided and rationalized, the due diligence process is pretty much over.  If the entity being evaluated can’t explain to me what they are doing, why they are doing it, how they are getting there, who they are partnering with / targeting and when they plan to get there, they are done and the conversation ends.

But when the data aligns perfectly and the “next big thing” is clearly in front of me, I or the people I represent are still ultimately investing in people and their ability to get stuff done and that’s where understanding the sins and the gifts matter.  On a side note, I measure the sins and gifts mathematically – that’s a long story for another post. Smile

Success doesn’t happen by accident.

The art and science of due diligence, both conducting it and surviving it, is in finding the balance between reality versus fiction and passion versus madness.

Due diligence regarding the financials and other measurables is critical.  Due diligence of the human element is equally important.

Do you live more by your sins or your gifts?

The answer is often revealed if failure comes and if it does, whether you have mastered the art illustrated below instead of the ones you should have mastered?

Blame - The secret to success is knowing who to blame for your failures.

Blame - The secret to success is knowing who to blame for your failures.

Are you sure you live by your gifts rather than your sins?

How do you know?

To your success, in service and servanthood.

Harry

PS The sins and gifts are adapted from the 1962 edition of the Roman Catholic Daily Missal for those who wish to explore further.


Addendum – The Double Standard – February 24, 2015

In an interesting conversation with a colleague, we both laughed when we remembered cases of people undergoing due diligence who expected (or insisted upon) little process to be applied against them and yet expected to perform maximum process and oversight against entities that they were reviewing.

We also shared some funny stories about playing clich├ę bingo with some due diligence targets who were lacking in the areas of facts, knowledge and a basis in reality but they compensated with a superb repertoire of clich├ęs intent on convincing someone to take action in lieu of data.

Ego has the interesting ability to fuel someone to success or to cause them to ignore the essential elements required for success.

Which way does your ego carry you?

How do you know?


Addendum 2 – Leadership – February 25, 2015

I have always found it important, whether on the execution or receiving end of due diligence, to make sure that the leading partners / principals reach out to the person conducting the due diligence.  Even if the partners / principals are not participating directly (which is unlikely), meeting the person conducting the due diligence, committing any resources necessary, etc., are important elements of relationship building and a successful due diligence experience.

When I or others conduct due diligence and the significant stakeholders don’t care enough to reach out to establish a relationship, when they negotiate only through their minions or when they protest results through their minions knowing that the deal may be “going south”, it tells me that those stakeholders are either aloof, lazy, incompetent, insufficient leadership material, too busy to understand appropriate prioritization or are hiding something.

I wouldn’t want to be accused of any of these things.

Would you?

4 comments:

  1. This post will seem to some as more of a discussion of the Art of Due Diligence and less about the Science. Yet, you provide a thought-provoking taxonomy of potential qualitative findings that implies significant rigor. Some will doubt that these qualitative categories can be examined quantitatively.If we rely on a single vector, they might be right. However, applying the Aristotelian Golden Mean, it's easy to conceptualize a quantitative perspective based on boundary value problems. An organizational gift might be found in the sweet spot between inattention and excess, for example. If you do choose to write about quantitative methods for surfacing sins and gifts, and estimating their impact on value, I will be here, as always, eagerly anticipating your musings.

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    1. Ohhhhh Doug - thank you for this comment. I'll let you know when the follow-up article is posted. :-)

      Create a great day!

      Harry

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  2. Reminds me of Tim Collins "Good to Great" and "Built to Last." Level 5 leadership is necessary, and only wise leaders know and apply this.

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    1. Thanks for your kind comment, Kevin!

      Create a great day!

      Harry

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