Does capital flow to people over projects or ideas?
An article written by Alex Da Silva, Practice Leader, Gerard Daniels.
A few months ago, I attended a Capital Markets Outlook session hosted by the Institute of Chartered Accountants. One of the key takeaways for me was the notion that Capital typically follows people, not necessarily projects or ideas. Most of the panellists agreed that capital flows to those boards and management teams that have a solid track record of success developing projects and ideas into profitable ventures.
I was recently reminded of this notion during a meeting with a prospective client. We discuss a CEO appointment to a venture that was trying to commercialise a new exciting technology. The board of the parent entity were acutely aware that to raise the capital needed to fund the commercialisation process, they needed to instil trust in potential financiers that they had the right executive management team at the helm to execute on the strategy. The right team in place invariably will reduce risk and the cost of capital.
Additionally, in a number of CFO appointment processes that I have been involved in recently, part of the key selection criteria is for candidates to not only have strong risk, compliance and corporate governance experience (‘ticket to the game’ for a CFO in my view), but also a solid track record in successfully raising capital within debt and equity markets for successful projects and/or fund growth. Once again, this highlights that Boards and CEO’s are looking to appoint executives who have had a successful track record in attracting capital, particularly in an environment where both debt and equity markets are certainly more discerning these days on what and to who they allocate capital to.
Since the Capital Markets Outlook session, I have posed the question of capital flows to people, more so than projects to those CEO’s and CFO’s in my network and mostly agree, to a point. In some of more speculative industries there have probably been more capital flows to unsuccessful projects than successful one over time and some of these failures all had the right people and commercials in place.
There will always be circumstances beyond management’s control e.g. externalities that will adversely impact the success of a project or a business idea, despite having strong commercial fundamentals in place and having a board and management team in place with a track record of success. However, capital markets will continue to invest in those projects that have solid commercial fundamentals, but also the right people in place to realise their investment successfully. You can have a great idea or project with great fundamentals, but without the right people, the probability of success is typically low. Whereas, if you allocate capital to the right people, with all things being equal, the probability of a return will invariably be high.
Finally, with the notion that capital follows people, it has been interesting to be part of processes where companies are investing as much into attracting the right people as they are in attracting capital. Boards and the executive continue to be acutely aware that there exists a symbiotic relationship between capital and people and that appointing the wrong people into key positions may mean a failure to obtain finance on a timely basis or the cost of capital will be too high, with the consequence that opportunities are missed.