There are many variables and unknowns in determining whether to invest in a nascent company. Often the best way to gauge viability is not the business plan, but the quality of the leadership team. The challenge is figuring out how specifically to vet these people, as many of the traditional methods have proven ineffective. 

An interesting trend that is on the rise, and one that we at Maine Venture Fund are interested in learning more about, is to utilize testing as a way to determine the merit of a company’s leadership.

There are the traditional methods of accessing a company’s leadership team. Reference calls are made, which rarely prove to be very informative. There is also the “trusting your gut” method, which presents its own litany of issues, from unconscious biases, to your “gut” just being flat-out wrong.

An answer might be found in the growing movement of companies asking employees to take purpose-designed tests that judge various abilities and produce measured and standardized results. This is often used to screen applicants, from entry level positions to upper-management positions, but can also be used on current employees. Google is famous for this. 

The tests are designed and developed by third-party companies that specialize in pre-employment testing software. Many of these companies are growing rapidly. Criteria Corp. has administered its Criteria Cognitive Aptitude Test to more than 2 million people. Mettl, another such company, has more than 1,500 corporate clients globally.

Tests are timed and standardized, and often are structured to assess technical skills and critical thinking as well as attempt to gauge analytical and leadership potential. The tests can be tailored to fit a specific industry or company’s needs.

The difficulty and stress associated with the tests is very much intentional; few people get more than half of the answers correct. The tests are designed to highlight desirable traits in individuals, such as attention to detail, and problem-solving ability. Conversely, it also helps weed out a company’s worst performers.

However, there are limitations to hiring based on this kind of testing, not least of which are the tests’ inabilities to capture and track things like specific industry knowledge and emotional capacities. These types of qualities still remain more important to the vast majority of companies.

At this point, we are investigating how investors might utilize this type of testing to assess management as an input to deciding whether to fund an early stage company. We have a TUCK grad student doing some research for us and we are talking to other investor groups on how they assess a company’s leadership team. So, for now we have more questions than answers. But we do believe there is validity to this approach and it is something we will continue to pursue.

Stay tuned — we will do a follow up as we learn more! 

The Rise of Purpose-Designed Testing

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