Why Venture Capital Should Use a Strengths-Based Approach

Around two-thirds of venture capital-backed startups fail to exit or raise follow-on funding. And the odds of becoming a unicorn are about 1%. Yet, venture capital activity peaked in Europe in 2020, reaching €42.8 billion from almost 2,000 more deals than in 2019.

Venture arms from large organisations like Salesforce Ventures and traditional VC firms invest billions of dollars every year, hoping to realize a substantial return by helping incubate and accelerate the next big thing.

Even though investors routinely evaluate people-related assets such as managerial capability or team cohesiveness to rationalise investments, there is another key element of success they shouldn't disregard: individual strengths.

Through the years, Gallup has proven the link between strengths-based organisations and performance outcomes like sales, turnover and profitability. In fact, more than 90% of Fortune 500 companies have used CliftonStrengths. To beat the odds and succeed, venture capitalists can benefit from using CliftonStrengths in three ways:

1. Identify Existing Talent Gaps

Profit and loss statements or churn rates are intuitive and provide a clear snapshot of a venture, but less salient gaps are often equally important. After all, every successful venture is nurtured by the complementary skills of its founders and teams.

Consider Elon Musk and Gwynne Shotwell or Steve Jobs and Tim Cook. While Jobs built his legacy on the creativity of his right brain, Tim Cook's analytical left brain was equally important for Apple's success.

In new ventures -- where teams are small -- unbalanced talents decimate success. The quintessential examples are ventures with a founding team that is particularly strong technologically but lacks business acumen, and vice versa. Understanding each team member's strengths gives venture capitalists one additional insight to predict success and assess risk. Moreover, employees are 20%-73% less likely to quit when working for a strengths-based company, making it slightly easier for investors to predict the longevity of a team in addition to its potential to overcome the myriad challenges startups face.

2. Substantiate Investments

Gallup's science-backed approach to reading individuals' strengths can help venture capitalists provide evidence to explain their "gut instincts" by looking at a team's complementary strengths. Venture capitalists face far more uncertainty than do private equity and other types of investment -- where quantitative and other empirical methods are widespread and more predictive of potential returns. By identifying existing talent gaps, venture capitalists foresee the complementarities within the team and rationalise their sense of the investment.

That additional insight helps VCs adjust their valuation and investment strategy. Over time, viewing teams in terms of their strengths can help investors identify patterns. Most importantly, it can help investors steer young companies toward success.

3. Elevate Startup Mentoring

Aside from funding their operations, venture capital firms often mentor and advise young entrepreneurs to increase the likelihood they'll succeed in the marketplace. Understanding the individual strengths of founders and their nascent teams provides venture capitalists advantages that lead to superior outcomes.

First, it can help match mentors and teams. By understanding what makes founders and early joiners unique, venture capital firms can identify investors and partners who are best positioned to help the new venture grow, either by tapping into common strengths or complementing the existing gaps.

Likewise, a more detailed understanding of a founder's strengths makes it easier to pair startups with other entrepreneurs and institutions, which is critical in today's increasingly common ecosystem- and platform-based business models.

Additionally, CliftonStrengths provides stability amid growth. One of the most common challenges startups face is preserving their initial essence and culture during rapid growth. Conceiving growth through the lens of individuals' strengths helps entrepreneurs and investors design aggressive growth strategies while hiring and onboarding talent that doesn't jeopardise the founding mentality that gave the venture a competitive advantage in the first place.

Every year, incumbent organisations and venture capitalists are introduced to tens of thousands of new ventures that pose new investment opportunities to secure continuous growth. Many of them will fail.

Machine learning and AI may de-risk investments, secure returns and increase the already marginal odds of success. But viewing companies through a lens of strengths gives even deeper predictive insight.

Unicorn startups get their name because they're unique -- and identifying more of them begins with understanding the uniqueness of their people.