How Woodside Fund Vets a CEO
July 01, 2005
By Vincent M. Occhipinti

How much time did you spend getting to know the last CEO candidate you hired for one of your portfolio companies? And how much time have you spent dealing with the challenges of firing a CEO?

Too often, the time spent on firing an executive greatly outweighs the time spent on the assessment process. As we all know, one of the most important roles of the VC board member is to help make the right hiring decisions for the CEO and other senior executives of a company. This is especially important in an environment of increased regulatory scrutiny at the board level and growing global competition. Assessing management is also a critical part of the process in evaluating potential investment opportunities.

Over 22 years, Woodside Fund has developed and refined an approach to hiring and evaluating talent that we call the "Org Chart Process." It helps us:

• Establish a long-term working relationship built on candor and trust.
• Secure an investment opportunity.
• Secure top executive talent early.
• Convince an entrepreneur to bring in complementary skills.
• Share best practices with portfolio companies.

Org Chart Process

The interview process is an in-depth interview session with an executive that can take anywhere from three to six hours. We preface the session with an invitation to make the conversation a two-way dialogue in which the candidate may ask us any questions he or she would like answered. One or two partners typically participate in the session with the candidate.

The session begins with the typical perfunctory questions about a candidate's work history. After reviewing the basics, we launch into a process of identifying the organization around a candidate at various points in his or her professional career, covering major roles in the most recent 10 to 15 years of the candidate's work history. We have the candidate give us multiple organization charts that list superiors, peers and subordinates by name.

We then select key individuals, asking the candidate to briefly profile these individuals' leadership styles and the nature of their relationship with the candidate. This helps provide context for the next set of questions:

• If we were to talk to this person (with your permission, of course), how would he or she describe your strengths?
• How would this person describe where you are less than perfect?
• How would this person say you were perceived in the organization?
• Who might your supervisor or board say you had the most difficult time with?
• If you were rank-ordered by your superiors, peers and subordinates, which group would rank you 1, which would rank you 2 and which would rank you 3?

How do we get the candidate to answer these potentially threatening questions openly and honestly? The key is a nonjudgmental attitude both in words and body language. From time to time we mention some of the mistakes we may have made when we, as entrepreneurs, were running our own companies. In almost every case, we gain candor.

Early on in this process, the candidate must determine just how candid to be with us. If a candidate defers on listing weaknesses ("Oh, you would have to ask him/her. I don't know what he/she would say") or simply lists weaknesses that are actually strengths ("I can be impatient when people don't perform. I am very demanding"), a red flag goes up. However, when candidates are brutally honest and see how we react they learn that they can trust us and can come to us in the future with problems even before they have solutions.

Some other benefits that come out of the Org Chart Process include the following:

• We obtain instant reference checks on the candidate.
• We build a list of names to call that are off the candidate's pre-screened reference list.
• We share a best practice with our portfolio companies that they often employ when they are filling out other mid-level and senior management positions.

An important follow-up to the Org Chart Process is a rigorous process for calling references. The process helps us prioritize which references to call and ensures that we get a balanced view of the candidate. We select a mix of individuals to call, including both those who would give positive references and those who would give potentially less-than-perfect references.

With the board, recruiter and company we then allocate who is going to make the calls. When we call a candidate's references we describe the Org Chart Process without divulging the perceptions shared. The result is far more candid feedback. At the same time, we do not overweigh negative comments, since the process almost always brings those to the surface.

Due Diligence Process

We also use the Org Chart Process as one of the critical steps in our due diligence process with companies before we invest. If a company appears to have significant potential we will conduct the Org Chart Process with key founders and the senior management team. The trust built is a perfect launch pad for eliciting candid insights about a company, helping us both in making investment decisions and in working effectively with founders and executives after making an investment.

In the due diligence process, the Org Chart Process provides an "unfair advantage" in a competitive investment opportunity. By spending significant time with the company founders and building a relationship based on trust, we establish an inside track on getting into a round and become a preferred investment partner. The time we take to get to know a company clearly indicates both how highly we have prioritized that opportunity and how thorough we are in Woodside's business practices.

The trust that develops from the Org Chart Process also permits a candid discussion of sensitive issues surrounding whether an entrepreneurial founder and CEO can scale. We emphasize the importance of relationships in our interactions with founders. This attitude, along with the quality time spent together helps convince technical founders of the value of partnering to bring in complementary skills early into the company.

We have found Woodside's success directly correlates with the effectiveness of our Org Chart Process. Woodside has retained approximately 90% of the original entrepreneurs in our portfolio, while strengthening management teams early.

Companies In Transition

One of the most difficult challenges in the venture business is how to affect change in senior management at a portfolio company without causing major disruption in the company's business or morale. With the support of the board and the company's cooperation, Woodside Fund periodically conducts a comprehensive review of its portfolio companies. The Org Chart Process plays a valuable role in understanding the strengths and weaknesses of a company and its management team. Again, a critical element is to be nonjudgmental and respect the confidentiality of the discussions.

When conducting a company review, a couple of investment partners spend one to two full days at a company meeting with all of the mid-level and senior managers. With each individual we discuss the core competencies of the business and where the company is "less than perfect." We ask if the person were king or queen for the day, how he or she would restructure the company and make changes. We then have the individual go through each member of the management team and discuss leadership style, strengths and areas where managers are less than perfect.

After this on-site process is completed we compile a report that summarizes the impressions of the management team, without attribution, which we share with the other board members as well as the CEO. This report provides invaluable insight into the true state of the business. It also provides a basis to discuss potential changes in the organization. With the help of this organizational review process, Woodside Fund has successfully worked with portfolio companies to affect change with minimum disruption.

Importance of Relationships

As venture capitalists we set out to identify opportunities where we can invest for superior returns. Success is based on our ability to find the best companies and make the most impact in helping those companies succeed. While every venture capitalist will tell you that the key criteria in evaluating a company are markets, people and technology, at Woodside Fund we feel that relationships are at the heart of good investing. In addition to assessing strengths and weaknesses, the Org Chart Process is a vital means by which to establish and promote relationships between the investor and the executive or founder. We feel that the strength of these relationships is a critical component of our strategy for success.

Vincent M. Occhipinti is co-founder and Managing Director of Woodside Fund, an early stage venture capital firm formed in 1983. Woodside Fund attributes its ongoing success to the value it places on building productive partnerships with entrepreneurs and other investors. Occhipinti chairs the Early Stage Venture Capital Alliance (ESVCA), a federation of more than 150 seed and early stage funds. For more information, go to www.woodsidefund.com.

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