Only Invest in Character

Whether it's your time or money, this is where to do most due diligence

Welcome to the latest entry in The Workaround. You’re in good company with thousands of fellow entrepreneurs and innovators!

I’m Bob, your host. My mission here is to share personal, behind-the-scenes stories of the ups and downs of my career leading tech startups and corporate innovation.

I write to make you think, smile, and discover a shortcut to success or a trap to avoid.

Here we go…

Mr. Clean is a quality character and brand I used to lead in the early 2000s. In searching my files for an image, I found this completely random photo of our model with car company exec Bob Lutz.

As a startup founder, advisor, mentor, and investor, I’ve seen thousands of early-stage pitch decks. They almost always have dozens of the usual slides about customer needs, market size, and financial projections. Sometimes, there is a slide listing the team members, usually at the end.

But any decent investor knows that the quality of the founding team is what you’re betting on with the first few checks. Ideas are easy, projections are fantasies, and no product survives first contact with the customer. We need confidence that the team can survive and thrive through this.

So, more advanced pitch decks put the team slide upfront—usually with a few bullet points about their skills or places they’ve worked. This covers the first part of assessing a business partner—their capabilities. But what’s missing is, by far, the more important: character.

Character represents the moral qualities of a person, including “the presence or lack of virtues such as empathy, courage, fortitude, honesty, and loyalty, or of good behaviors or habits.”

I can’t imagine a better list of the attributes you’d want in someone you give money to. But I guess it’s hard to distill this into a pitch deck slide.

That’s why we’ve got to think outside of the PowerPoint box when deciding who we invest time and money with. It’s a secret hiding in plain sight that even the top investors in the world miss…

The Character Secret Pays Off

Over the summer, I spent a weekend sequestered in a mountain retreat with an eclectic group of business professionals. Many made public stock investments for a living on behalf of pension funds and family offices. Being a curious guy, I listened closely to how their world worked.

Their job is surprisingly tricky because finding an edge to deliver above-market returns is almost impossible. These companies have millions of investors, and most of the information they trade on is public. So, they constantly need to prove to their clients that it’s worth paying their fees rather than just parking the money in an index fund.

Some investors develop exotic algorithms with cutting-edge AI. Others use complicated financial models, such as Discounted Cash Flow. A certain number break the law with insider assistance and hope not to get caught.

However, the people I was with got an edge by using their judgment to uncover insights others miss. Two specific stories got my attention:

• Investor 1: “When I meet with CEOs, I look for signs that they are exaggerating or lying. I got burned on this a couple of times, so now it’s the main thing I look for.”

• Investor 2: “My whole team gets together regularly, and votes on their favorite management teams—the ones that have the strongest character—and their picks consistently end up in the group of top stock performers.”

Many investors have access to meet with public company CEOs, so that’s not special. The edge these two investors have is that they assess the character of leaders and place bets on their companies accordingly.

You can run as many Excel models as you want and never come up with Character as a key to success. And it will be a long time before AI can evaluate what’s inside a human like this.

Their edge—an uncommon insight hiding in plain sight—is understanding the importance of a leader’s character and doing the diligence to uncover it.

Other Investors Weigh In

We lost the legendary investor, Charlie Munger, recently. But his wisdom is still invaluable and free for the taking. Here’s what he said about character and its returns on investment:

“We've bought business after business because we admire the founders and what they've done with their lives. In almost all cases, they've stayed on, and our expectations have not been disappointed. By and large, we've chosen people we admire enormously to have the power beneath us. It's easy for us to get along with them on average because we love and admire them. And they create the culture for whatever invention and reality recognition is going on in their businesses.”

Or, if Charlie’s not good enough for you, take my advice!

I’ve done a handful of angel investments over the years, and I don’t have to open my tracking spreadsheet to tell you that character is the difference maker.

On the negative side, I invested in a company whose investors had no problem manipulating current and prospective portfolio companies for maximum personal gain—while violating their fiduciary responsibility to all shareholders. Then there’s the fund I invested in, whose leader consistently lied and used his position to bolster his ego.

Twice, founders have promised to award me company shares in return for my advice, yet they never followed through. Founders have used my investment dollars to pay for their personal wardrobe—and for…ahem…an escort service. Oh, and I almost forgot the founder who got arrested for fighting with a customer in a bar. All of these failed to provide an outcome that returned my initial investment, much less the above-market return.

My positive experiences prove the point, too. They don’t come with many funny stories for me to share, though. Their leaders keep their heads down and continue building incredible businesses. These are the founders with impeccable character.

5 Simple Character Checks

We do not do enough due diligence on people’s character before investing money and time with them. I think it’s because most people are good most of the time, and we prefer to live in a trusting world. We like the person, the company, or the job offer, so we are biased and tend to think positively.

I’ll bet we’ve all been burned by jumping into the business bed with someone who turns out to be a psycho. And it’s our own damn fault for not doing a tiny bit more work to check for disasters. I’ve developed five personal rules to force myself to improve on this. Keep it handy for your next character test:

1. Backchannel. Backchannel. Backchannel—Always check references and never bother much with the ones people supply. Find people close to you who have worked with them and discretely text, “Hey, what’s your take on (Person)?” Usually, you’ll receive a neutral or positive reply. Sometimes, you get an immediate call back with a horror story. That’s what you’re looking for.

2. Expect a Relapse—If someone violates trust or commits some other significant ethical lapse, they will almost always do it again. This is just human nature. Sometimes, they will reveal something sketchy in a conversation, so ask direct questions and listen. For example, “Why did your previous investors not join this round?” and “Why don’t you speak with your former co-founder anymore?” (Note: these are two questions you should ask me when we work together!)

3. Watch the Money—Money is like plutonium. It’s incredibly powerful and useful, but it can do bad things to people who don’t handle it well. Do they seem to grab every nickel for themselves? Or do they tend to share the wealth with others?

4. Default is No—If your spidey senses are negative, back away. We don’t know how our unconscious social brain works, but it works! Those feelings of doubt have hidden substance behind them. Plenty of other people and opportunities are out there, so hold out for something better.

5. Warn Others—Later today, I’ll catch up with my friend, Jose. The last time we spoke, he warned me about a former client who refused to pay 5-figures in bills. Jose randomly noticed that I had recently connected with that guy and wanted to warn me not to fall into the same trap. Thank God he did. We owe it to our brothers and sisters in business to warn them of the bears that lurk in the woods. You don’t have to broadcast people’s names, but the world becomes better when we work together to cast out the bad actors.

Develop Our Character

“Invest in character” doesn’t just refer to checking out the people you might work with. It means we should invest time and energy into improving our character. Our parents and schools taught us this early in life, but we’ve got to do this work on our own once we grow up.

Of course, character feels very personal, so it’s hard to discuss with others. But historical models can help. Benjamin Franklin’s autobiography is a great resource. He wrote a list of the virtues he wished to uphold. Go back in further time for another, the autobiography of Marcus Aurelius. While ruling the Roman Empire, he frequently wrote about showing more patience for others in his journal. You can open one of a dozen note apps and start a list for yourself today.

Benjamin, Marcus, you and I are not perfect. But we can aim to improve. By starting with a list of what makes us at our best, we’ll be more likely to practice this in our daily interactions with others.

Good things come automatically to people with strong character and ethics. They attract opportunities, and people want to work with them. The positive word-of-mouth within our tightly wired networks further scales the return on character. They are more relaxed, more open, and happier. Maybe that’s because our true human nature is to be good to each other.

And—thankfully—the high-character people rub off on the rest of us.

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How we might work together…

• Are you interested in launching your own consulting or service business or need help taking your current services business to the next level? Fleet is our holding company for services, and we’re actively looking to build business partnerships with winning leaders. Let’s talk!

• Need guidance with revenue alignment or revenue growth management? We built Revelin to serve organizations through fractional and projected-based execution, specializing in GTM alignment, CRM optimization, territory design, annual planning, M&A integration, and building your RevOps function to support growth. Schedule your revenue assessment.

• My team and I lead Hearty, a boutique recruiting service that helps tech-forward companies hire proven talent. Our senior team of operators sources and screens, saving you time and money. When you need help, let’s chat.

• Need help with a software project? Perhaps a product MVP, a project that requires outside help, or a fractional CTO for key strategic decisions? Our team at Shipwright Studio has worked together to build multiple successful startups, and we love helping leaders turn their dreams into reality. We're the team our clients trust for software built to last.

• Looking for Influencer Marketing and Content Creation? The team from our previous company is back by popular demand with A2 Influence. We’re ramping up now and would love to share more.

• Feel free to schedule a time during my Office Hours to discuss questions, feedback, networking, or any other topic! You can also find me on LinkedIn or email.

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BONUS: Cool Content of the Week

A little something I found meaningful. You might agree…

Howard Marks Memos

Speaking of investing…some time ago, I discovered Howard Marks and his periodic memos about the stock market. Marks is Co-Chair at Oaktree Investments, a firm that manages $200 billion in assets.

An outstanding recent example of his work is a memo titled: “The Folly of Certainty.” It’s a takedown of just about any forecast of the future. He walks through one of many ways rational investors do supremely irrational things at an enormous cost. Here’s a sample:

“We can’t consider the reasonableness of forecasting without first deciding whether we think our world is one of order or of randomness.  Put simply, is it entirely predictable, entirely unpredictable, or something in between?  The bottom line for me is that it’s in between, but unpredictable enough that most forecasts are unhelpful.  And since our world is predictable at some times and unpredictable at others, what good are forecasts if we can’t tell which is which?”