There are many factors to look at when considering any investment. I have seen investors “pore over” research reports, income statements, and balance sheets. While these are important, the most important indicator of any investment’s future success is the management team. I have seen quality management make the most skeptical investments succeed, while witnessing poor management turn the most promising of companies into a total loss. It is important to evaluate any management team’s history, incentive, and reputation before committing any capital to an investment.
It is said that “history repeats itself”. This phrase carries a lot of truth when dealing with management of companies. If the CEO of the company you are considering an investment in has bankrupted the last four companies he has ran, you should probably consider another investment. This type of information will obviously not be offered in any literature promoting the investment, so you will have to do some research on your own to obtain it. A bachelor’s or master’s degree from an expensive university looks good on a resume, but as an investor you should be more interested in his or her performance at a previous employer. If he or she was on the executive team of a publicly traded company, you should definitely look at the revenue growth and stock performance during this time. There is also nothing wrong with calling a private company that he or she previously worked for and talking to some of the employees there.
Making sure that management has an incentive to perform well and “skin in the game” is crucial. As an investor, you need management to have an equity stake and to feel the same emotions you do when the company performs well or struggles. I have seen instances where management has almost no equity position and takes very high salaries. They show little concern when the company needs money and raises it through a private placement or secondary offering, which greatly dilutes all current shareholders. I have also seen where management collects these high salaries while spending most of their time job searching for their next opportunity. They jump off the “sinking ship” just before the company goes under and the ability to pay their large salary runs out, leaving the shareholders “holding the bag”. If the company you are investing in is not yet profitable, you should make sure that the majority of management compensation comes in the form of equity or consider another investment.
Finally, what is the reputation of the management team of your prospective investment? Spending a few dollars for a background check now could save you a lot of money in the future. Do they have criminal records? Have they been named as defendants in civil litigation numerous times? What do their competitors or independent analysts think about them? These are all questions that you should have answers to before making an investment in any company or fund.