Even with a clear valuation case, the reality of implementing change involves significant interpersonal wrangling and complexities not visible on a balance sheet. The 'brain pain' of execution far exceeds the initial analytical work, highlighting the difficulty of turning a thesis into reality.
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Many late-stage investors focus heavily on data and metrics, forgetting that the quality of the leadership team remains as critical as in the seed stage. A new CEO, for example, can completely pivot a large company and reignite growth, a factor that quantitative analysis often misses.
It is significantly more difficult to step in as a non-founder CEO than to build a business from scratch. The new leader must contend with inherited business inertia, a pre-existing culture shaped by the founder, and constant comparisons, making transformative change much harder.
Activists can be effective even in companies with dual-class shares or founder control. The mechanism for influence is not the threat of a proxy fight but the power of good ideas and relationships to achieve strategic alignment with the controlling party.
PE investors often fail to unlock a portfolio company's full potential by only interacting at the board level. Engaging deeper with operational leadership is crucial to understand the team's true quality and identify opportunities to transform the value proposition, which are often missed from the boardroom.
Successful activism requires more than just getting a board seat and driving change. The fundamental quality of the target company's business is paramount. Even with influence, a campaign will likely fail if the business is too fragile or lacks a competitive advantage, as it cannot withstand operational headwinds.
Deciding whether to invest more capital into a struggling portfolio company is a major point of conflict. The management team advocates strongly for the infusion, believing it can turn things around. However, investor experience shows that such 'bridge' rounds are rarely successful, making it a difficult decision.
A common activist trap is 'ambulance chasing'—looking for problems to fix. ValueAct argues the correct sequence is to first identify a great company with a differentiated investment thesis. The need for influence is secondary, preventing adverse selection.
A common investor mistake is underwriting a deal that requires 15-20 different initiatives to go perfectly. A superior approach concentrates on 3-5 key value drivers, recognizing that the probability of many independent events all succeeding is mathematically negligible, thus providing a more realistic path to a strong return.
Managing VCs is harder than managing corporate execs. VCs are high-IQ, disagreeable idea generators who dislike rules. The burden is on leadership to design an organization that minimizes conflict, as VCs can easily 'wreck each other's businesses' through competing investments, making interpersonal issues far more destructive.
The romanticized idea of a dramatic "investment committee" meeting is a myth. The most effective investment process is collaborative and iterative, where an idea is pitched early and gains momentum across the firm over time. The formal meeting becomes a rubber stamp for a decision that has already been organically reached.
