How to do a Culture Due Diligence

by Javier Munoz

Recent research by Shikhart Ghosh, senior lecturer at Harvard Business School has found that 3 out of 4 venture backed startups fail. I am sure we all agree there must be something we can do to change this alarming failure rate! We are not claiming that doing a Culture Due Diligence is the Holy Grail; However, we are sure that it would help investors make better investment decisions by letting them assess whether a founding team, startup, or established company has a Minimum Viable Culture to deliver the company’s intended value proposition.

The Parnassus Workplace Fund, is an example of how investing in Culture brings exceptional returns. This fund invests in companies in the “Best Places to Work” lists or in companies that meet similar criteria. The Parnassus Workplace Fund ranks highest in shareholder return compared to 1,303 other peer funds. (Read more here)

Another recent study published by the Journal of Private Equity, states that one of the key strategies for venture capitalist’s to increase the odds of startup success is by focusing on team building in their portfolio companies. But to turn a team into a kill it takes more than just team building, it takes Culture Building to truly build an asset.

 

Why is Culture such a critical asset for companies today?

It’s a critical asset because companies such as Zappos and many other culture driven high-performing companies have raised the bar and set a new Culture Standard. Up and coming companies cannot expect to succeed without meeting this new standard.

 

Investing in Culture is also a numbers game. It results in:

33% more benefits (Gallup)

43% more productivity (Hay Group)

37% more sales (Shawn Achor)

300% more innovation (HBR)

-51% turn over (Gallup)

-66% sick leaves (Forbes)

-
125% lack of motivation (HBR)

 

Then, how can investors improve their due diligence process?

Investors could conduct a Culture Due Diligence by using our Culture Canvas along with a set of proven methodologies designed to fill in the canvas and make assessments that investors could use to improve their investment decisions.

 

What is the Culture Canvas?

When we created the Culture Canvas, we were inspired by the Business Model Canvas developed by Alexander Osterwalder, which has become a standard for business model design. The Business Model Canvas is widely used in many entrepreneurship programs in universities such as UC Berkeley, Stanford, and Columbia, among others… The Culture Canvas complements the Business Model Canvas to facilitate the assessment of this critical company asset in more detail.

culture_canvas_dh_p

 

What are the benefits of doing Culture Due Diligence?

After completing a Culture Due Diligence, you will be able to determine whether the company features:

1. A Minimum Viable Culture strong enough to face key challenges

2. A Product-Culture Fit that aligns culture with the company’s value proposition

This information will allow better investment decisions resulting in less failed investments!

 

About Javier

javierIn 1995, Javier started his first company, a Web design firm in Miami mostly focusing on providing services to small businesses and entrepreneurs. To do his job, he found himself asking questions about the founders, about their purpose, vision, values, products and services. In many occasions, he realized the answers to these questions were not clear. So, he found himself coaching customers on how to clearly define the fundamental aspects of their business. He did it even as he realized it was not supposed to be part the job. However, he enjoyed it tremendously! From these humble beginnings, Javier has built a career out of following his passion… helping people, and building tools to simplify their processes and create greater happiness at work.  You can follow Javier on Twitter @justaction!

  • Investment freak

    This is key to de-risk any investment….product and market fit is not enough!! what about Culture fit??? i love this article…more of this please! ;))

  • Javier Munoz

    Culture criteria can be used to make better investment decisions from the very beginning, EVEN if it is a two-founder startup team. Going through the Culture Canvas from an early stage helps you have a clear understanding of what is really motivating the team, it establishes what is the DNA of the culture that will be established. It also helps the founders integrate culture in the Business Model from day one and not as an afterthought.

    Aside from using Culture criteria in due diligence processes, you may also use it to develop the existing investment portfolio, or when doing M&A. The Culture Canvas and its associated methodologies are paving the way to make this easy…