Value of exploring start-up leaders’ psyches

Leadership is key to start-ups, and psychological testing of prospective CEOs could raise success, some say. It’s a tough sell.

Posted: August 12, 2007

Terry Williams, who operates both an executive-search firm and a venture capital company, says most venture capitalists tell him they make their investments by gut.

He describes their thinking process like this: "I think he's a good person. I've met him at the Roundtable three times. . . . Here's a check for $17 million."

Williams, whose bachelor's degree is in psychology and criminology, said he thought there was a better way. It involves delving a lot more deeply into the psyches of people who want investors' money.

He is partnering with the Foster Group, a psychiatrist-psychologist team from Pennsylvania Hospital, to help venture capital firms learn more about the management teams of start-up companies.

Through a battery of tests and personal interviews, Jody Foster, the psychiatrist, and Reed Goldstein, the psychologist, say they can tell investors whether managers have what it takes to work well together, lead the company well as it grows, and take good care of the money. Who better than a behavioral expert when you need to cut through that interview veneer?

"When they're coming to ask you for $10 million, they're on their best behavior," Williams pointed out.

It's not cheap - $10,000 to $15,000 - but Williams said he thought it was a small price to pay when millions were on the line. Firms are already spending thousands on due diligence, he added.

Such evaluations of venture capital prospects are still rare, but psychologists and human resources experts said psych work-ups of upper and middle managers within corporations have been growing in recent years as companies have put more effort into hiring and grooming the right people for the top. Enron Corp. and other corporate scandals have also made companies more interested in the moral bearings of potential leaders, though psychologists say it is much harder to predict who will steal than it is to say who will work well with the chief financial officer.

"The business environment . . . is more and more and more complex," said Ted Hayes, an organizational psychologist with the Gallup Organization. "The margin of error is lower than it used to be."

In a day when even minor social gaffes can be an embarrassing hit on YouTube, people who do the hiring do not want surprises. "There is a lot less wiggle room, and the opportunities to screw up are tremendous," Hayes said.

Glenn Rieger, general partner with NewSpring Capital, of Radnor, said the quality of leadership was such a key part of any venture capital investment that it was worth extra evaluation. "If you invest in real estate, it's location, location, location," he said. "If you invest in venture capital, it's all about management, management, management."

In a previous job, he used the Foster Group to analyze a company run by twin brothers. The psychological work-up helped decide which brother should be CEO and which should be chief operating officer, he said.

Hiring experts say there is still nothing better than interviewing other people about a candidate, if you want to know his foibles. But a psychological evaluation can be helpful, said Judith M. von Seldeneck, chairwoman of Diversified Search Inc. "If there are some red flags that pop up," she said, "that's what you use in your reference calls."

It makes sense that interest in vetting management prospects would spread to venture capital, but psychologists say their work can be a tough sell because of the confidence in gut feelings.

"I cannot tell you the number of times I've sat with someone who said, 'I can pick 'em,' " said James Finn, an organizational psychologist in central Illinois, who has worked for a handful of venture capital companies. They're wrong, he added. He sees his work as raising the odds of success that an investment will pay off, but not all venture capitalists are savvy enough about psychology to see his point. "If they have never been exposed to people who do this kind of work, it's harder to see the application," he said.

Ross DeSimone, a psychologist and managing director of Corporate Psychological Resource Center, Royersford, also said he thought venture capital firms had been slow to see that psychological evaluations could help them.

"The reality is it's not done that often," DeSimone said. "It's really been an interesting challenge for firms like ours to help venture capitalists and other investing firms understand the role we can play for them."

Williams tried this a few years ago, but venture capital funding went through a dry spell after 9/11, and so did the need for his "executive diagnostic" service. He and the Foster Group recently relaunched. Foster Group also can help companies with mergers and with management teams that are struggling after the infusion of investment money.

Williams said he thought venture capital firms now realized that successful investing required more than a good business plan. The quality of leadership is key.

Given how much money is on the line, you would think anyone with a brain would resist baring his personal weaknesses to a psychiatrist who reports back to investors. But, Foster and Goldstein say, the people they evaluate want the money badly enough that they cooperate, and they realize investors have a right to know more about them. "People don't typically come to strangers and ask for millions of dollars," Foster said.

Jim Preuninger, CEO of Management Dynamics Inc., of East Rutherford, N.J., and one of the twins the Foster Group evaluated, said the evaluation process was awful. "I was furious at the end of it," he said. While he could see the value of the interviews and some of the tests, one long test seemed designed to weed out seriously mentally ill people who were unlikely to be CEO material, he said. It asked whether he agreed with statements like: "People are watching me" or "No one cares about me."

Goldstein said the test Preuninger disliked was a standard personality inventory.

Preuninger thought the process should have been shorter, with tests that focused more on the skills executives need to run companies.

Foster, who is chairwoman of psychiatry at Pennsylvania Hospital and also has an M.B.A., said she thought she and Goldstein could see through most people. "We're street-smart," she said. "We're a little bit better at not being kidded by a kidder."

While they are on the lookout for personal qualities that can derail a company - manipulativeness, dishonesty, intense self-absorption, unwillingness to accept feedback - they see this as primarily a positive experience. "We're not hunting for negatives," Foster said.

They did find negatives in one manager, ironically one who seemed too positive. "He presented in a very positive, gregarious, virtuous manner, but so much so that we raised the possibility that he might overreport positive findings," Goldstein said.

"We felt he was someone who gilded the lily," Foster added. She suggested keeping a close eye on him.

Goldstein said the team might just as easily find strengths: ambition, resilience, creativity, flexibility.

Elaine V. Jones, general partner of EuclidSR Partners, said her venture-capital firm had not felt the need to hire psychologists. "We believe that we can rely on our instincts about what makes a good manager," she said.

Nonetheless, her group has talked about using this kind of evaluation the next time they invest. She said she thought it might help a team function optimally after the investment or when it was time to make a new hire. "In venture capital, management is a key asset to your investment," she said. "To have a high-functioning management team really is worth investment."


Contact staff writer Stacey Burling at 215-854-4944 or sburling@phillynews.com.

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