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Hi {{first_name}},
There’s a slide I’ve kept in my talks for years, and it comes from Bain’s 2021 Global Private Equity Report. Bain and Hunt Scanlon surveyed 122 private equity professionals, people who get paid on outcomes, and asked two blunt questions.
First: what were the main sources of deal success in your recent exits?
The runaway winner, cited by 71%: caliber of the management team. The differentiated value-creation plan, the thing every deck leads with, came second at 50%. Solid market growth: 39%. And meaningful cost reduction, the stereotype of the entire industry, landed near the bottom at 16%.
Second question: when exits were less successful, what went wrong?
Top answer was an unfavorable shift in industry dynamics (65%), which is a polite way of saying the world changed and nobody controls the world. But right behind it, at 64%: the management team lacked the requisite skills.
Put the two charts side by side and something jumps out. Among the factors an owner can actually influence, management quality is the number one reason deals succeed and the number one reason they fail. The same lever, both directions. The people writing the largest checks in the economy, when asked what actually happened, don’t talk about the model. They talk about the team.
Which raises the obvious question: why does diligence rarely look like that? On most deals, the hours pour into quality of earnings, the model, the customer analysis, the market map. All necessary. But the factor that decides the outcome, the humans who will run the thing, often gets a couple of dinners and a gut feel. If management drives 71% of success, it deserves more than 5% of the attention. (Two books that upgraded my own people-diligence more than anything else: Who and Topgrading. Both are essentially playbooks for taking the gut feel out of talent evaluation.)
If you’ve been reading this letter for a while, you can see why this slide is one of my favorites. It’s the empirical backbone for everything else: the resignation test only matters because the people you’d panic about losing are the deal. Paying operators like owners only matters because their caliber is the multiple. The Bain data is what turns those from nice ideas into math.
And if you’re a founder who might sell someday, here’s the reframe. When a buyer asks a lot of careful questions about your team, that’s not a threat. That’s the signal you want. The buyer who only diligences the spreadsheet is the one who’ll be surprised after closing, and surprised buyers make difficult partners.
Strategy is what gets discussed in the boardroom. Management is what actually happens in the building.
Talk soon,
Matt
P.S. When I’m not writing this, I’m buying and operating founder-led businesses for the long term at Eidolon Capital. If you’re a founder thinking about your next chapter, or you advise one who is, just hit reply. I read every note.