Author: Tom Koor

Tom Koor

How profitable is private equity?

How profitable is private equity?

 What is the purpose of this article?

This article enables a discussion regarding the profitability of PE (Private Equity) funds.  The focus is on traditional PE funds with a fixed liquidation date. Much, but not all, of the data is about buyout PE funds.

The audience for this article includes: LPs (Limited Partners), GPs (General Partners i.e., PE fund managers) and PE fund portfolio company leaders.

This article does not provide tax, legal or financial advice.

You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: How profitable is Private Equity

What are the critical learnings in this article?

  • The traditional PE equity value creation model appears broken. For 40 years the approach has been financial leverage and increasing the price to EBITDA multiple. This approach now often appears to fail.
  • The future is impossible to predict. The future is uncertain. The future cannot be predicted by extrapolating historical trends.
  • Successful GPs and LPs will be those who have the desire and ability to transform themselves.

What types of companies get PE investments?

  • The company is well established and mature. There is a long operational and financial history. The company revenue is often in the $100’s of millions.

How many years does a PE fund exist before it is liquidated, all of its investments sold, and cash distributions to LPs completed?

  • I’ve often read that a PE fund lasts for 10 years. But what are the facts?
  • At the end of 2024, the average age at liquidation was about 15 years. 1

Some recently launched PE funds have target lifetimes of 15 to 20 years or no fixed end date.

 How profitable have PE funds been?

#1 If you had the talent to assess GPs and could predict managers would be successful, you could have had excellent returns. But many LPs did poorly or lost money.

#2 PE has outperformed the S&P Small Cap 600 and Russell 2000 by about 6% per year in the past 5 and 10 years. It’s been about 3% per year outperformance in the past 15 years. 2 Many PE portfolio companies are comparable in size the companies in the S&P Small 600 600 and Russell 2000.

#3 What have been the IRR returns for PE funds?

What were the IRR results for fund launched from 2000 to 2007, based on Q4 2024 data. 3

LPs lost money or had poor returns in bottom decile funds. Top quartile funds did well.

  • The yearly IRR for the combined assets of all PE funds ranged from 7.81% to 22.56%
  • The yearly median fund IRRs ranged from 8.00% to 16.20%
  • The yearly bottom quartile fund IRRs ranged from 3.29% to 8.54%
  • The yearly bottom decile funds IRRs ranged from -2.68 to +2.00%
  • The yearly top quartile fund IRRs ranged from 13.93% to 22.60%

#4 What were the IRR results for North Americans PE funds launched from 2010 to 2015, based on Q4 2024 data.

I have not included the published IRR results. Why not?  Many of these funds have not yet liquidated. Thus, the IRR numbers often include both actual cash returns to LPs plus hoped for future returns.

#5 How many North American PE funds have lost money for LPs?

LPs lost money, and never recovered all of their investments, in over 10% of the North American funds launched from 2000 to 2007.4

What have been the massive changes in the public vs private equity markets?

  • Over the past 10 years private equity has spent $900 billion taking public companies private. 5
  • From 2000 to 2024 the number of US public companies declined from about 7,000 to 4,500. The number of PE backed companies grew from about 2,000 to 11,600. 6
  • 61% of the stock value creation occurs prior to the IPO, leaving less value creation potential for the average investor. 85% of US unicorns that went public were unprofitable in 2023. 7
  • 44% of the Russell 2000 companies are unprofitable. 8
  • The conventional thinking that smaller companies outperform larger companies is not supported by facts. The Russell 2000 has been underperforming the S&P 500 and Nasdaq composite by increasing amounts over the past 20 years. E.g. over 20 years: -5.6% per year, over 10 years: -9.2% per year, over 5 years: -10.7% per year. 9

What are the current GPs face in providing cash returns to LPs?

  • The traditional PE equity value creation model appears broken. For 40 years the approach has been financial leverage and increasing the price to EBITDA multiple. 10 This approach now often appears to fail.
  • The total PE assets appear to be greater than the capacity and demand from IPOs and operating companies.
  • There is a backlog of portfolio companies waiting for exits The assets under management have tripled since 2014 while the value of exits has remained flat, resulting in a build up of unsold assets. 11 Late 2024, global buyout funds were holding about $3.6 trillion of unrealized value in about 29,000 unsold companies. 12
  • To provide capital returns, GPs: are borrowing money to give to LPs or selling some assets to the GP ‘s continuation fund. 13 (the cash from LPs investing in the continuation fund can be given to LPs in the original fund.) Most existing investors in a PE fund decline the option to roll over their investment in a continuation fund run by the same GP. 14
  • There different points of view regarding portfolio companies sold to a continuation fund. Some believe these portfolio companies have major profit growth potential and they should be retained.  Others believe these portfolio companies have few or no buyers and thus are being sold to avoid a write-down.
  • LPs are getting return on capital by selling their interest in a fund to a third party. This is a secondary investment.  Online marketplaces are emerging to enable LPs to sell their PE fund investments.

What will the future look like?

  • The future is uncertain and impossible to predict. The future cannot be predicted by extrapolating historical trends.
  • The future will be turbulent, with unforeseen major crisis.
  • The future will be even faster changing: technology, what customers perceive as urgent needs and problems, global political environment.
  • Competition will become even more fierce. Competitors will grow even faster, fuelled by unlimited capital.
  • Historical knowledge, skills, experience, and facts will become obsolete even faster.

What are the implications of the future upon GPs?

  • Increasing equity value by financial leverage and multiple increase will have limited applicability.
  • The knowledge, skills, experience, facts, and software of many GPs has become obsolete.
  • One of the critical GP skills will be helping portfolio leaders understand customers and provide what customers perceive as a competitively differentiated value proposition.
  • Future successful GPs will be different from those who succeeded in the past.
  • GPs will have to transform themselves.

 What are the implications of the future upon LPs?

  • The knowledge, skills, experience, facts, and software of many LPs have become obsolete.
  • LPs will have to be able to assess which GPs will be able to transform themselves and transform their portfolio companies.
  • LPs will have to be able to assess which GPs have the talent needed to succeed in the future.
  • LPs will have to transform themselves.

 Why will most GP and LP leadership transformations fail?

  • The main reasons for failure are psychological and cognitive.
  • Leaders succeeded due to the success of their past mental models. In a very different future, those mental models are no longer valid. It is often impossible for leaders to consciously recognize this.
  • Leaders, like most people, keep repeating what they know how to do and what has proven to work in the past.
  • The leader is trapped by their own expertise.
  • Leaders often like to be perceived as decisive and correct. Their ego makes it difficult to admit mistakes, to say “I don’t know”. Many leaders will continue to make decisions without listening, learning, and unlearning.
  • Transformation is inhibited by cognitive biases such as: status quo bias (preference for no change), loss aversion (failures are more emotionally acute than successes), over confidence in their own judgement and abilities.
  • Many leaders are afraid to fail. It takes courage to do new things with no certainty of success.

What are your next steps – as an LP?

  • Define the words/concepts you’re using, in a glossary. I’ve seen major confusion when the same words mean different things to different people. Different data sources will have different definitions.
  • Document your future cash flow requirements, with scenarios.
  • State your overall investment thesis.
  • Define your asset allocation mix and criteria for changing the mix.
  • State your private equity investment thesis.
  • Describe future scenarios.
  • Determine the required GP talent, skills and tools needed to be successful.
  • Assess GPs against talent requirements.
  • To do fact-based analysis you may have to: pay for access to databases, interview GPs and their portfolio company leaders, analyze the GPs data room, and utilize AI tools.
  • When looking at IRR – determine the IRR of cash to LP, excluding hoped for returns.
  • When looking at NAV, four possible additional metrics about portfolios are cash received if the company was: IPOed, sold to an operating company, sold to a secondary buyer, or sold to the GPs continuation fund.

Footnotes

1 “Private Equity in 2025: The outlook for fundraising, deals, and performance” , Preqin, January 05, 2025

https://www.preqin.com/news/private-equity-in-2025-the-outlook-for-fundraising-deals-and-performance

2 “Private Equity Can Add Diversification to Your Public Index Holdings”, page 6, iCapital, 2025 July 16

https://icapital.com/category/insights/private-equity/

3 “ Private Equity PitchBook Benchmarks Q4 2024”, Page 19,PitchBook

https://pitchbook.com/news/reports/q3-2024-pitchbook-benchmarks-with-preliminary-q4-2024-data

4 ibid., Page 23

5 “Private Equity Can Add Diversification to Your Public Index Holdings”, page 5, iCapital, 2025 July 16

https://icapital.com/category/insights/private-equity/

6 ibid., Page 5

7 ibid., Page 5

8 ibid., Page 5

9 ibid., Page 6

10 “Bridging Private Equity’s Value Creation Gap”, page 2, McKinsey, 2024 April 12

https://www.mckinsey.com/industries/private-capital/our-insights/bridging-private-equitys-value-creation-gap

11 2025 Global Private Equity Report – Bain, Page 4,6

https://www.bain.com/insights/topics/global-private-equity-report/

12 ibid., Page 17

13 What is a continuation fund? A GP creates a new fund, managed by the GP. Some assets are sold to the new fund.  LPs have the option to receive cash or roll over their investments into the new fund.

14 Kobi Kastiel, Yaron Nili “The rise of private equity continuation funds”, Chicago Booth Stigler Center January 2024 page 1

https://www.chicagobooth.edu/research/stigler/research/-/media/5d46328c68e0466b9787f42d98275f3b.ashx

 What further reading should you do?

How profitable is angel investing? Koor and Associates

https://koorandassociates.org/selling-a-company-or-raising-capital/how-profitable-is-angel-investing/

How profitable are search funds? Koor and Associates

https://koorandassociates.org/selling-a-company-or-raising-capital/how-profitable-are-search-funds/

How profitable is venture capital? Koor and Associates

https://koorandassociates.org/selling-a-company-or-raising-capital/how-profitable-is-venture-capital/

Your company will fail? Koor and Associates

https://koorandassociates.org/avoiding-business-failure/your-company-will-fail-v1/

What are the core components of talent? Koor and Associates

https://koorandassociates.org/creating-business-value/core-components-of-talent/

LP (Limited Partner) assessment of a fund. Koor and Associates

https://koorandassociates.org/selling-a-company-or-raising-capital/lp-limited-partner-assessment-of-a-fund/

Tom Koor

How profitable is venture capital?

How profitable is venture capital?

 What is the purpose of this article?

This article enables a discussion regarding the profitability of VC (Venture Capital) funds. The focus is on traditional VC funds with a fixed liquidation date.  The article scope excludes: evergreen and perpetual funds.

The audience for this article includes: LPs (Limited Partners), VC fund managers, and VC fund portfolio companies.

This article does not provide tax, legal or financial advice.

You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: How profitable is Venture Capital

What are the critical learnings in this article?

  • If you were good at predicting which fund managers would be successful, you could have had excellent returns. But many Limited Partners LPs lost money from their investments.
  • The trend has been that the % of funds providing any cash return has been declining.
  • I have read multiple articles that some LPs have started to question VC fund managers who are showing high IRR results (which include both actual realized returns and estimated future unrealized returns) while the LPs are receiving little or no cash because the fund managers are unable to sell their investments to buyers.

What types of companies get VC investments and why?

  • The company has gone past the startup stage. The company has found a repeatable, scalable, and profitable business model with lot of potential customers who are willing and able to pay to solve their problems and needs. The company has found a profitable solution to scale.
  • Investment is needed to quickly grow the company.
  • The company may show losses (both from a cash flow and accounting perspective) due to the focus on lifetime customer profitability.
  • The number and size of fundraising rounds has nothing to do with whether or not a company is in the VC stage. Some companies have raised more than a billion dollars, never left the startup stage, and shut down.
  • A company may slip back into the startup stage at any point in its life.

How many years does a VC fund exist before it is liquidated, all of its investments sold, and cash distributions to LPs completed?

  • I’ve often read that a VC fund lasts for 10 years. But what are the facts.
  • Only 7 % liquidate within 10 years. Median funds takes slightly longer than 14 years. 46% take 15 years or longer.1

How profitable have VC funds been?

If you were good at predicting which fund managers would be successful, you could have had excellent returns. But many LPs lost money from their investments.

 

Let’s look at the IRR for funds that were launched at least 15 years before the report date.

#1 US VC report published in 2017.2

What have been the IRR results for find launched in each year from 1988 to 2000?

If you were good at predicting which fund managers would be successful, you could have had excellent returns. But many LPs lost money from their investments.

The yearly IRR for the combined assets of all funds ranged from: -0.89% to 100.83%

The yearly median fund IRR ranged from: -3.76% to 41.65%

The yearly lower quartile IRR ranged from: -11.58% to 21.54%

The yearly upper quartile IRR ranged from: 3.20% to 80.62%

 

#2 US VC report published with data up to 2023 3

What have been the IRR results for find launched in each year from 2000 to 2010?

The yearly IRR for the combined assets ranged from: -0.65% to 15.4%

The yearly median fund IRR ranged from: -0.35% to 12.84%.

The yearly bottom quartile IRR ranged from: -10.39% to 4.69%

The yearly upper quartile IRR ranged from: 4.65% to 22.87%

What will be the returns for recently launched funds?

  • No-one can predict the future.
  • The trend has been that the % of funds providing any cash return has been declining.
  • I have read multiple articles that some LPs have started to question fund managers who are showing high IRR results (which include both actual realized returns and estimated future unrealized returns) while the LPs are receiving little or no cash because the funds managers are unable to sell their investments to buyers.

Based on Q1 2025 results, what has been the approximate % of VC funds which provided any cash returns?4

What have been the results for funds 3 years after launching?

  • Funds launched in 2017: 33%
  • Funds launched in 2018, 2019, 2020 – all about 22%
  • Funds launched in 2021: 10%

What have been the results for funds 4 years after launching?

  • Funds launched in 2017: 52%
  • Funds launched in 2018, 40%
  • Funds launched in 2019, 32%
  • Funds launched in 2020: 28%

What have been the results for funds 5 years after launching?

  • Funds launched in 2017: 70%
  • Funds launched in 2018, 43%
  • Funds launched in 2019, 35%

What are your next steps?

  • Define the words/concepts you’re using, in a glossary. I’ve seen major confusion when the same words mean different things to different people.
  • Define your long-term cash flow requirements and plan, with scenarios.
  • Determine your asset allocation over time.
  • Do your own fact-based research.

Footnotes

1 The New Reality of the 14-Year Venture Capital Fund, Institutional Investor, Feb 19, 2015

https://www.institutionalinvestor.com/article/2bsv31916hb46dpp501ds/portfolio/the-new-reality-of-the-14-year-venture-capital-fund#:~:text=Venture%20capitalists%20structure%20and%20market,than%2014%20years%20to%20end.

2 Page 13 US Venture Capital Index and selected benchmark statistics Dec 31, 2017, Cambridge Associates

https://www.cambridgeassociates.com/wp-content/uploads/2018/05/WEB-2017-Q4-USVC-Benchmark-Book.pdf

3 2024 Q4 Venture Capital Pitchbook Benchmarks , Page 12

https://pitchbook.com/news/reports/q4-2024-pitchbook-benchmarks-with-preliminary-q1-2025-data

4 Q1 2025 VC Fund Performance Report – Carta

https://carta.com/data/vc-fund-performance-q1-2025/

 

 

What further reading should you do?

LP (Limited Partner) assessment of a fund.  Koor and Associates

https://koorandassociates.org/selling-a-company-or-raising-capital/lp-limited-partner-assessment-of-a-fund/

Your company will fail. Koor and Associates

https://koorandassociates.org/avoiding-business-failure/your-company-will-fail-v1/

How profitable is angel investing? Koor and Associates

https://koorandassociates.org/selling-a-company-or-raising-capital/how-profitable-is-angel-investing/

How profitable are search funds? Koor and Associates

https://koorandassociates.org/selling-a-company-or-raising-capital/how-profitable-are-search-funds/

Tom Koor

How profitable are search funds? V3

How profitable are search funds? V3

 What is the purpose of this article?

Help investors think about whether to invest time and money into the search fund asset class.

The audience for this article includes: investors considering search fund investments, and search fund founders.

This article does not provide tax, legal or financial advice.

You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: How profitable are search funds V3

What are the critical learnings in this article?

  • The IRR for traditional search funds in Canada and the US has been 35.2%.
  • To make a profit by investing in search funds, you need the ability to predict which people (searchers or managers of funds which invest in searchers) have the talent to be successful.
  • 66% of search funds with an investment return, lost some or all their investor money. A small number of search funds generated much of the IRR return e.g. 8 exits had IRRs of 100% or more.
  • You may need to fund between 30 to 45 searchers, to have a high chance of approaching the IRR for the asset class as a whole.

What is a search fund?

What is a traditional search fund?1

An investment vehicle formed by one or two entrepreneurs (i.e. “searchers”) along with investor mentors.  They search for, acquire, and lead a privately held company for the medium to long-term. The searcher and investors exit at that time.  Investors fund the search costs and the acquisition costs.  The entrepreneur becomes the CEO after the acquisition.

  • These investors are very actively involved as: coaches, mentors, advisors, and board directors. The investors do far more than provide capital.
  • The searchers typically have an MBA.
  • The searchers search for a private company to acquire, lead, grow, and sell.
  • It takes 2-6 months to find the investors and capital to launch the search fund.
  • The search takes 12-24 months.
  • Growing the value of the company takes 4 to 7 (or more) years.
  • The exit process takes 6 months.

What are alternative search fund models?2

  • Self-funded search: the searcher funds the search themselves, without investors.
  • Single investor model: only one investor e.g. single professional investor, family office, private equity firm, etc.
  • Long-term hold: hold for more than 10 years.

 How profitable has the search fund asset class been

The following metrics are for the U.S. and Canada

  • 681 traditional search funds formed from 1984 through to Dec 31, 20233

The IRR has been: 4

  • 1% for all investments made, and 33.0% if the top 5 companies were excluded.
  • These IRR returns have been relatively constant from 2008 to 2023.
  • A small number of search funds generated much of the IRR return e.g. 8 exits had IRRs of 100% or more.5

66% of search funds with an investment return, lost some or all their investor money. (See Appendix 1)

How many search funds do you need in your portfolio?

You need a large number of search funds in your portfolio. Why?  Many funds lose money with their acquisitions or have poor returns.  You need a large number to reduce the risk of too many poor performing funds.

A Monte Carlo simulation of search fund performance suggests a portfolio size of 20 to 30 funds that have made acquisitions.6 Given that 37% of search funds don’t make an acquisition, you’d need to fund between 32 to 48 searchers, to have a high chance of approaching the IRR for the asset class as a whole.

What is the capital you require?

The following is my brief analysis of the capital you require for your search fund portfolio to approach the IRR returns of the asset class as a whole.

  • As an investor, your initial search fund investment might range from $25,000 to $50,000. Funding 32 to 48 searchers would require from $800,000 to $2,400,000.
  • Additional funds would be required to support acquisitions.
  • In the traditional search fund model, you must provide much more than capital: you need the skills and knowledge to: coach, mentor, advise, and deliver value on the boards of search funds.

If you have a small portfolio, you have a high chance of returns below the asset class as a whole.

What are your next steps?

  • Review your investment thesis, asset allocation, and investable assets to determine if you have the capital to create a portfolio of search funds.
  • Assess your skills, experience, relationships, capabilities, and time availability to determine your potential to coach, mentor, and provide value as board director.
  • Consider if you’ll create and manage a portfolio of search funds OR if you’ll invest in a fund which has a large portfolio of search funds.
  • If you’re considering investing in a fund with a portfolio of search funds, you should: Build a financial model which considers the fees and exit times of the fund; and create a due diligence process to assess the fund’s: talent, processes, business model, and historical results.
  • Regardless of the path you decide to take you must also assess the talent of the other investors. Why? The success of the traditional search fund model depends on the ability of the other investors to provide value via coaching, mentoring, and board directorships.

Footnotes

1 Sara Heston and Peter Kelly, “2024 Search Fund Study – Research Overview”, Stanford Graduate School of Business. Page 3

https://www.gsb.stanford.edu/faculty-research/case-studies/2024-search-fund-study

2 Ibid., 27

3 Ibid., 4

4 Ibid., 8

5 Ibid., 21

6 Andrew Locke, Diversification in search fund investing: The only free lunch?

https://www.linkedin.com/pulse/diversification-search-fund-investing-only-free-lunch-andrew-locke/

 What further reading should you do?

Stanford Graduate School of Business – search fund primer

https://www.gsb.stanford.edu/experience/about/centers-institutes/ces/research/search-funds/primer

Search Funds – What has made them work? Rob Johnson, IESE

https://media.iese.edu/research/pdfs/ST-0357-E.pdf

International Search Funds – 2024 – Selected Observations, IESE Business School, University of Navarra

https://www.iese.edu/media/research/pdfs/ST-0658-E

 

Appendix 1

Data is from “2024 Search Fund Study – Research Overview”, Stanford Graduate School of Business.” Page 5

681 search funds raised.  Relatively small investment made by some combination of investors and the searcher.

7 raised capital but then changed direction away from a search fund

674 raised capital to follow search fund direction

150 still searching – no financial result at this point.

166 still operating – no financial results at this point

316 funds with no financial result yet,

358 have a financial result.

196 exited with no acquisition – relatively small initial investment lost.

40 did acquisition but had negative return

236 lost some or all of investment 122 had positive return

66% of investment made (236/358) lost some or all of the investment

Tom Koor

Are you an Angel investor or gambler? V3

Are you an angel investor or gambler? V3

 What is the purpose of this article?

Help you identify whether you are an Angel investor or a gambler.

This article does not provide tax, legal, or financial advice.

You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: Are you an Angel investor or gambler V3

 What are the critical learnings in this article?

  • You may need to create a portfolio of 20 or more companies.
  • You might need to invest $800,000 or more.
  • You need the skills and time for both due diligence and helping founders succeed. Money by itself is not enough.
  • You need to determine if you’re putting capital into early-stage companies because: you are an investor; you are a gambler; or this is a charitable activity and not part of your overall investment portfolio.

How do you recognize if you are an investor?

  • The primary purpose of your investments is to grow and preserve your financial wealth.
  • There may be secondary purposes such as enabling social good.
  • You may have a variety of asset classes. These provide diversification, which may increase the probability of financial return and reduce the probability of financial losses.
  • You are tracking the return of your investments.

There are many other ways to spend money, other than investing

  • For most people, the major of their spending does not go into investments.
  • Hobbies, entertainment, social activities, intellectual stimulation, charities, giving back, and gambling are just some of the ways money is spent. g. I buy 6 lottery tickets a year at $3 each.
  • These other activities are not investing. I might win millions with my lottery ticket. Lottery tickets are not where I invest money.
  • If the primary purpose of your spending is other than growing and preserving wealth, then that spending is not part of your investing.

What is an angel investment

  • An early-stage company may get angel investment before venture capital firms make an investment
  • An angel investor may continue to make investments, along side venture capital funds and others, as the company grows.

How do you recognize if your angel investments are actually gambling?

What are the facts?

The following findings are from a 2020 study of more than 10,000 individual early-stage portfolios on AngelList.1

  • Angel investments, as an asset class, generate 15% IRR (combination of realized and unrealized gains)
  • Investors who made 1-5 investments had a median return of 0.0% IRR.
  • Investors who made 10 investments had a median IRR of about 6%. 32% of these investors lost money.
  • Investors who made 20 investments had a median IRR of about 7%. About 16% of these investors lost money.
  • Investors who made 50 investments had a median IRR of about10%. About 11% of these investors lost money.
  • Investors who made 100 investments had a median IRR of about 14%

Many, if not most, angel investors have a limited return, although the asset class as a whole performs relatively well. A small portfolio of investments has low median IRR and significant chance of losing some or all of your capital.

 How do you change the odds to be an investor rather than a gambler?

There are four ways to be an angel investor rather than a gambler.

#1 Create a portfolio of 20+ investments

This will require significant amounts of your time and capital.

#2 Spend more than 40 hours on your personal due diligence.2

  • Spend more than 20 hour of due diligence time for each potential investment.
  • Angels who spend less than 20 hours have an average return of 1.1X capital.
  • Angels who spend more than 20 hours have an average return of 5.9 X capital.
  • Angels who spend more than 40 hours have an average return of 7.9 X capital.

You must consider if you have the skills and knowledge necessary for effective due diligence.  I don’t know the relationship between increased due diligence and the number of investments.

#3 Join an angel investor group

  • The rationale is to reduce your due diligence workload, get exposed to a larger number of good opportunities, and learn from successful investors.
  • I have no advice on how you can conduct due diligence on an angel investor group, considering its members, its processes, and its potential for future financial success.

#4 Invest in an angel fund

  • The fund should have a large number of investments in its portfolio.
  • I have no advice as to how you could conduct due diligence on an angel fund, assess management, and determine the potential for future financial success.

How should you think about the amount of capital needed to become an angel investor and not a gambler?

The following example is based on a set of assumptions:

  • You’re going to make 24 upfront investments over 1-3 years. As noted above, your median return may be a little more than 7%IRR.  Like that any exits in the first three years will be failures. These early exits may not provide any capital for reinvestment.
  • You’ll invest in pre-seed: 75% fail3
  • You’ll invest at seed stage, 50% fail3
  • You’ll invest in Series A; 50% fail3
  • You’re investing at seed and Series A for two reasons: these companies have survived; and later stage investor may impose terms (such as liquidation preferences) which reduce the value earlier investments.
  • At each stage, each individual investment is $25,000. In some cases, the startup may have larger minimum cheque sizes.
  • Your capital requirement may be: (Pre-seed: 24 X $25,000) + (seed: 6 X $25,00) + (Series A: 3 X $25,000) = $825,000

Often, the seed and Series A investments are large than pre-seed.  This means that your overall capital requirement may range to a $1,000,000 or more.  If you’ve decided to allocate 10% of your investable assets into the angel asset class, your total investments may need to be $10,000,000 or more.

 What are your next steps?

  • Define the words/concepts you’re using, in a glossary. I’ve seen major confusion when the same words mean different things to different people.
  • You cannot predict the future. The above fact-based analysis is historical. Many changes have occurred in the past few years:  the amount of capital available at the early stage has exploded; many early-stage funds have been created; the number of early-stage investors has grown. You’ll have to determine what the future scenarios could be.
  • The angel asset class as whole may do well, but your personal results depend upon your investment process and thesis. Assess whether you have the appropriate skills and time to be an Angel investor.
  • Carefully review and understand published reports from investors and funds. Some state their results as including both realized and unrealized gains.
  • Make your own assumptions and analysis regarding the amount of capital you’re going to devote to angel investing.
  • Determine if you’re putting capital into early-stage companies because: you are an investor; you are a gambler; or this is a charitable activity and not part of your overall investment portfolio.

Footnotes

1 Nigel Koh, Abraham Othman, “How portfolio size affects early-stage venture returns”, AngelList, https://angel.co/blog/how-portfolio-size-affects-early-stage-venture-returns

2 Robert E. Wiltbank, PhD Willamette University, Warren Boeker, University of Washington, “Returns to Angel Investors in Groups, November 2007”

https://www.angelcapitalassociation.org/data/Documents/Resources/AngelGroupResarch/1d%20-%20Resources%20-%20Research/ACEF%20Angel%20Performance%20Project%2004.28.09.pdf

3 “Startups’ success and failure rate in 2023”

https://spdload.com/blog/startup-success-rate/

 

 What further reading should you do?

How profitable is angel investing? Koor and Associates

https://koorandassociates.org/selling-a-company-or-raising-capital/how-profitable-is-angel-investing/

Your company will fail. Koor and Associates

https://koorandassociates.org/avoiding-business-failure/your-company-will-fail-v1/

Tom Koor

How profitable is angel investing? V4

How profitable is angel investing? V4

 What is the purpose of this article?

  • Share with you some fact-based profitability analysis from the U.S. angel community. I am not aware of similar detailed fact-based based analysis of the Canadian angel community.
  • Enable you to think about whether you want to make money as an angel investor and what you might have to do to make money.

This article does not provide tax, legal or financial advice.

You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: How profitable is Angel Investing V4

What are the critical learnings in this article?

  • Someone making investments in individual angel startups has the potential to make profit if: has the capital to create a diversified portfolio, the time to do due diligence and support the portfolio companies, the talent to select potentially profitable startups.
  • Someone making investments in an angel fund has the potential to make profit if: has the time to do due diligence and the talent to select fund managers who will be profitable in the future.
  • In either of the above cases, you may need to wait 10 or more years before achieving a cash profit.

 What are the three ways to look at angel investing profitability data?

  • As an overall asset class, considering many angel investors.
  • As an individual angel group or angel fund.
  • The profitability of an individual angel investor, such as yourself.

How profitable has angel investing been in the period leading up to 2007?1

This study examined the results from of 1,137 exits ((acquisition, IPO, or company closure) from 539 angel investors in angel associations over a 20-year period, with most of the exits occurring after 2004. The average return was 27% (excluding out of pocket costs and assuming zero value for the investors’ time).

Due diligence had a large impact on investor capital returns.

  • Angels who spend less than 20 hours have an average return of 1.1X capital.
  • Angels who spend more than 20 hours have an average return of 5.9 X capital.
  • Angels who spend more than 40 hours have an average return of 7.1 X capital.

Investor knowledge of the portfolio company’s industry had a large impact on capital returns.

  • Investors with at least 14 years of relevant industry experience had double the capital returns of investors who did not have relevant industry experience.

Ongoing involvement with the portfolio company (e.g. coaching and mentoring, being the lead investor, serving on the advisory board or board of directors) has a large impact on investor returns.

  • Angels who interacted with the company twice a month achieved a 3.7X return.
  • Angels who interacted twice a year received a 1.3X return.
  • Interacting more than twice a month does not improve returns. The quality and type of interaction was more important than frequency.
  • 52% of all exits were at a loss.
  • 7% of the exits returned more than 10 times the money invested, and accounted for 75% of the total returns.
  • 39% of the investors had portfolios that lost money.
  • The top 10% of investors earned 50% of the returns.
  • 45% of the startups had no revenue when they received the angel investment.

 

How profitable has angel investing been in the period leading up to 2020? 2

The data scientists at AngelList analyzed 10,665 investor portfolios (April 2020). The analysis showed that the realized and unrealized IRR for all the investments is 15%. The 2007 study above only examined realized IRR.

The median IRR return for investors is heavily driven by the number of companies in their portfolio.

  • 50 company portfolios had a median IRR of about 10%; 11% of these investors lost money.
  • 20 company portfolios had a median IRR of about 7%; 16% of these investors lost money.
  • 10 company portfolios had a median IRR of about 6% 32% of these investors lost money.
  • 1-5 company portfolios had a median IRR 0%.

What has been the performance of some individual angel funds in the U.S. in 2020?

The ACA (Angel Capital Association) Investor Insights report for 2020 shares insights from some large, long established U.S. angel groups.  My article does not name those groups.  You should refer to the report if you wish the names of the groups. The report is available to members of the ACA.

Angel group A analyzed 159 outcomes (exits and shutdowns) since 1997.

#1 A large portfolio is key to large returns

  • Equal sized investments in all the companies would have generated 4.8X return.
  • 3 of the 159 exits generated 74% of the total return.
  • Monte Carlo simulation showed that only 26% of investors with 5 company portfolios would have obtained 4.8X return
  • Even with a portfolio of 50 companies, there was only a 37% chance of achieving 4.8X return.

 

#2 Large returns require investors being able to wait 10 years.

  • It takes 4.5 years for investors to get their initial investment back. There are lots of failures in the first few years.
  • It takes 10 years to achieve 4.8X return. After 10 years, there is a very modest increase in returns.

Angel group B analyzed the return of their 27 members over 20 years.

  • A large portfolio is key to large returns. Investors with 25 company portfolios had 4.5 times the IRR return of investors with 1-4 company portfolios.

How profitable has angel investing been in the United States as of January 1, 2025?

AngelList published the results of the funds on their platform.  The IRR includes both realized and unrealized gains.

  • Angel funds launched in 2017: 25% had IRR less than 13.9%; median was 19.7%; 25% had IRR of over 29.2%.  But the actual cash distributed to investors 75% of the time was less than 64% of their investments.  It takes time to make a cash profit.
  • Angel funds launched in 2021: 25% had IRR less than -3.0%; median was 1.2%; 25% had IRR of over 6.4%.  But the actual cash distributed to investors 75% of the time was less than 2% of their investments.  This illustrates the J-Curve.  In he first few years of a fund, portfolio companies need capital to grow, which results in future profits.  And portfolio companies fail in the early years.

How useful are performance reports from angel groups?3

  • Published results for angel groups often don’t consider the timing and dollar amount of every individual investor action. Assumptions are made because the angel group members don’t share details for every transaction.
  • One example of the impact: an angel group reported a 12X return on investments in one company while the return for one individual investor was only a 1.5X return. The 12X return was if you invested day 1.  The individual investor invested in a later round.  The angel group analysis assumed that all investments were made on day 1.

You have the potential to make money as an angel investor if:

  • You or your co-investors have deep current relevant market knowledge of each portfolio company’s customers and market.
  • You devote significant time to due diligence.
  • You remain involved with the company post-initial financing.
  • You have the financial resources to create a diversified portfolio of at least 25 companies and to make follow-on investments.
  • You can wait 10 years to achieve a significant financial return.

You have the potential to make money as an investor in angels funds if:

You have the talent and time to assess fund managers and be able to pick future high performers.

 What are your next steps?

  • Define the words/concepts you’re using, in a glossary. I’ve seen major confusion when the same words mean different things to different people
  • Review your overall investment thesis e.g. what asset classes will you be investing in, why, and what expected returns (this includes volatility, and time to achieve returns)
  • Determine is angel investing would be a charitable activity or an asset class that is helping you achieve your overall investment thesis. Many angel investors are not interested in financial return, and their angel investments are not part of their financial return focused investment portfolio.
  • Define your angel investment thesis.
  • Determine if you have the skills, knowledge, and finances to create your own diversified portfolio or if you will invest with fund managers or if you will join a group of angel investors.
  • If you are investing with a fund manager, you must do due diligence. It is key to analyze their cash returns over 10 years. I have come across many funds that include unrealized returns.  Unrealized returns are not cash in the bank. You will also have to assess their talent and processes.  If the funds returns are driven by only one exit, you must determine if their overall results have been driven by luck or by knowledge, skills, experience, and processes.
  • If the fund manager is just starting their fund or has only been in operation for a few years, then you need to do more detailed due diligence, just as you would for any other startup. If you don’t have deep relevant experience in the fund industry, then you need some with that experience to work with you. Your due diligence focus will be on talent assessment and the fund’s investment thesis.
  • If you decide to invest via an angel investor group, you need to do due diligence. You need to assess whether the processes and talent will help you build and manage a profitable long-term portfolio. It is key to analyze the groups metrics and cash returns. One large U.S. angel group tracks 83 (yes 83) metrics for every investment made by a member. Some U.S. angel groups have detailed metrics regarding their members. If the group’s return is driven by one large exit, then you must determine if their overall results have been driven by luck. Assess which members have deep relevant industry experience aligned with your angel investment thesis. Assess the angel group processes. If you don’t already have deep relevant angel investing experience, then you need help from those who have that experience.

Footnotes

1 Robert E. Wiltbank, PhD Willamette University, Warren Boeker, University of Washington, “Returns to Angel Investors in Groups, November 2007”

https://www.angelcapitalassociation.org/data/Documents/Resources/AngelGroupResarch/1d%20-%20Resources%20-%20Research/ACEF%20Angel%20Performance%20Project%2004.28.09.pdf

2 “How portfolio size affects early-stage venture returns”, Nigel Koh and Abfraham Othman, AngelList, https://angel.co/pdf/lp-performance.pdf

3 “How much do angel investors earn?”, DC Palter

https://entrepreneurshandbook.co/how-much-do-angel-investors-earn-1bc06cc8166f#:~:text=Conclusions,from%20a%20single%20huge%20exit.

4 The state of U.S. early-stage venture and startups: 2024, Angellist January 28,2025

https://www.angellist.com/blog/the-state-of-us-early-stage-venture-startups-2024The

What further reading should you do?

Are you an angel investor or a gambler?

This article contains an example of the capital you need to be an Angel investor.

https://koorandassociates.org/selling-a-company-or-raising-capital/are-you-an-angel-investor-or-gambler/

Tom Koor

Traditional succession planning dooms your company to failure. V3

What is the purpose of this article?

Enable investors, the board of directors, and C-Suite to discuss how to improve succession planning.  The focus of this article is on the board of directors and C-Suite.

You can download a PDF of this article from: Traditional succession planning dooms your company to failure. V3

What are the critical learnings in this article?

  • Board directors and C-Suite executives must be able to make major decisions on the day they are appointed. Need to learn about the company for 6-12 months risks failure.
  • Board directors and C-Suite executives need to have the capabilities to succeed in a future which is very different from the past. These leaders are of limited value if they only have the skills and experience to solve yesterday’s problems with the day before’s solutions.
  • Board director and C-Suite talent requirements must be defined in terms of the 10 core components of talent. The traditional approach of focusing on crystallized intelligence (i.e. historical skills, knowledge, and data) is insufficient in today’s turbulent and hyper-competitive world.

What does traditional succession planning look like?

  • A person is interviewed for a board director or C-suite position.
  • There is an assessment and due diligence process.
  • The C-suite candidate accepts a job offer and on the first day of their job has accountability and delegated authority to make decisions.
  • The board director is put forward for election. On the date that they are elected they have accountability and decision-making authority.
  • Give them lots of time to get up to speed.
  • Once they are up to speed, see what happens – do they succeed or fail?
  • Failure is tolerated with the hope that the leader will improve.

BUT

  • “Two-thirds of US publicand private companies still admit that they have no formal CEO succession plan in place”1
  • I assume that the board of directors’ succession planning is in a similar state.

How effective has traditional succession planning been?

Close to half of successors fail.  Most board directors have limited knowledge of their company and approve plans to fail.

  • 40-to-50 percent of new leaders fail within the first 18 months.2
  • One in three CEO successions fail.1
  • Most companies successfully execute their plans to fail.3
  • Most company directors do not understand: the strategy, how the company creates value, and industry dynamics.3

How long did it take for leaders to get up to speed and make an impact?2

  • Most new leaders—92 percent of external hires and 72 percent of internal hires—take far more than 90 days to get up to full speed. Many executives admit it took them at least six months to achieve real impact (62 percent for external, 25 percent for internal hires).
  • CEOs face an even longer runway: On average, stakeholders give them nine months to develop fully a strategic vision and win support from employees, 14 months to build the right team and 19 months to increase share price employing that direction.
  • I assume that board directors also require significant time to get up to speed.

Why did this approach work in the distant past?

  • Customer requirements and needs changed slowly.
  • Competitors did not emerge or grew slowly.
  • Technology changed slowly.
  • Crisis were few and far between.
  • In the past, the near-term future looked similar to the past

 Why does the traditional succession plan execution often lead to failure?

  • Customer requirements and needs change very rapidly.
  • Now, competitors suddenly appear and rapidly grow to global scale. Unlimited capital is available to new companies who are successfully destroying existing companies.
  • These days, new technologies suddenly appear, and old technologies rapidly change.
  • The selection process is flawed or doesn’t exist.
  • Today, and in the future, there will be never ending crisis. Crisis will not wait until a director or C-Suite leader gets up to speed. Massive damage will have occurred by the time someone gets up to speed.
  • The near-term future will be radically different from the near-term past. It has become impossible to predict the future.
  • The preparation and onboarding process is flawed or doesn’t exist.
  • Exiting of failing leaders takes too long or doesn’t happen. A weak or non-existent succession process results in failing leaders remaining. There is no pool of qualified successors.

What are the three fundamental changes that must be made to succession planning?

  • Board directors and C-Suite executives need to be up-to-speed on the day they assume accountability and decision-making authority.
  • The potential successors need to learn, develop themselves, and be assessed prior to day one.
  • Successors need to have the capabilities to succeed in a future which is very different from today and from the past. Assessment and development processes must change.

What does a successor look like on the day before they assume decision making authority.

The leader:

  • Understands who the key members of the company’s ecosystem are, their expectations, and has (or creates) relationships with them. Key members include: employees, team members, customers, suppliers, partners.
  • Is self-aware of their strengths and weakness. Self-awareness is very different from personal opinion.
  • Announces changes to their team on day one.
  • Understands the company’s culture and know what actions to take to change it.
  • Understands the company’s past performance, priorities, and actions. Know what actions to start taking on day one and what priorities to change.

What are your next steps?

  • Be clear on how the future may be different from today and the past
    1. What will be the purpose of the company?
    2. Who will be the ecosystem members?
    3. What will be the long-term trends, both likely and unlikely?
    4. What will be the near-term challenges?
    5. What will be the future scenarios? The future is impossible to predict
  • What’s the value the director, or C-Suite member must enable?
  • What are the implications of the above regarding talent components the successor will need to have? 4
    1. Self-awareness? Both internal and external.
    2. Character? Values, morals, and ethics? Courage? Perseverance?
    3. Relationships and relationship building skills? Persuasion? Negotiation? Creating and maintaining followers?
    4. Communications? Writing? Speaking? Body language
    5. Crystallized intelligence? (i.e. historical skills, knowledge, and data)?
    6. Fluid intelligence? (ability to solve problems without past experience)?
    7. Cognitive skills? Long0term memory? Working memory? Logic and reasoning? Visual processing? Processing speed? Attention?
    8. Able to quickly learn and unlearn?
    9. Creativity?
    10. Physical? Senses? Strength? Endurance?
  • Identify potential successors, inside and outside your company.
  • Assess talent without direct contact with successors.
  • Assess talent via direct contact with successor e.g.
    1. Reference checks
    2. Formal background checks
    3. Behavioural interviews
    4. Psychological and cognitive ability testing
    5. Simulations, both a day-in-the-life and crisis simulation
  • Prepare:
    1. Development plans for successors and a monitoring process.
    2. The onboarding plan leading up to the day the person assumes decision making authority.
    3. The ongoing assessment and development plans, which evolve over time. The regular assessment considers whether or not the person must be replaced with one of their successors.

 Footnotes

1 CEO Succession starts with developing your leaders, McKinsey

https://www.mckinsey.com/featured-insights/leadership/ceo-succession-starts-with-developing-your-leaders

2 It really isn’t about 100 days, McKinsey

https://www.mckinsey.com/capabilities/people-and-organizational-performance/our-insights/the-organization-blog/it-really-isnt-about-100-days

3 Is your company planning to fail?  Koor and Associates

https://koorandassociates.org/avoiding-business-failure/is-your-company-planning-to-fail/

4 Core components of talent

https://koorandassociates.org/creating-business-value/core-components-of-talent/

What further reading should you do?

Your company will fail.  Koor & Associates

https://koorandassociates.org/avoiding-business-failure/your-company-will-fail-v1/

Why are value, morals, and ethics important? Koor & Associates

https://koorandassociates.org/values-morals-and-ethics/why-are-values-morals-and-ethics-important/

Tom Koor

Your survival depends upon what you’ve learned.

Your survival depends on what you’ve learned.  In the past three months, what have you learned about your customers that no-one else knows? What have your learned about how to enable your customers to achieve more value from your solution than from your competitor’s solutions?

The purpose of this email is to share my learnings and unlearnings, with the expectation that some will be of value to you. This email was 100% written by me – not by AI.  When you send me an email, my response is 100% written by me.

My biggest learnings in the past three months:

  • AI has been very powerful in finding fact-based research regarding the issues and challenges I’m dealing with.
  • Facts alone don’t tell me what to do. I have to think about the implications and the next steps.
  • The facts may also be out-of-date and not relevant in todays turbulent, fast changing, and hyper competitive world.

Sharing my learnings

Below are links to my website containing new and revised points-of-view since my last update. The critical learnings are included. Each article designed to enable discussion among founders, owners, shareholders, investors, CEOs, and boards of directors. The learnings and unlearnings are applicable to any size company, ranging from early-stage startups to large global enterprises.

Links to my points-of-view articles:

Traditional Business Transformation dooms your company to failure. V2

  • Most transformation efforts fail and destroy company value.
  • The failure is due to leadership flaws with the company leadership: the board of directors, CEO, and C-Suite.
  • The leadership has limited understanding of employees and how to gain employee commitment to transformation.

https://koorandassociates.org/business-transformation/5920-2/

Do you need to transform your company? V4

  • Many business leaders think that they need to change the direction of their company, in order to be financially viable.
  • Transforming while ahead of the competition is more successful than transforming when you are forced to.
  • Cost cutting is not the solution to under performance.
  • If your company is underperforming, compared to the competition, determine what changes are required to the board of directors and C-Suite,
  • Often the board of directors and C-Suite do not know that their company is in crisis or heading toward crisis.

https://koorandassociates.org/business-transformation/do-you-need-to-transform-you-company/

What is business transformation? V3

  • There is no commonly agreed upon standard definition of business transformation.
  • Your company must create your own definition and criteria for what is business transformation, which everyone understands.

https://koorandassociates.org/business-transformation/what-is-business-transformation/

Is your company planning to fail? V5

  • Most companies are successfully executing their plans to fail. Most companies fail or produce poor investor returns. (Read “Your company will fail”, which is the first article under “What further reading should you do?”)
  • Plans are comprised of two parts: what is in them and what’s not in them. Plans reflect decisions made and decisions not made.

https://koorandassociates.org/avoiding-business-failure/is-your-company-planning-to-fail/

Your company will fail. V3

  • Most companies will: fail, disappear, or provide poor returns to their investors.

https://koorandassociates.org/avoiding-business-failure/your-company-will-fail-v1/

How profitable are search funds? V2

  • The IRR for traditional search funds in Canada and the US has been 35.2%.
  • Traditional search fund investors provide far more than capital. They also provide coaching, mentoring, board directorships.
  • You need to fund between 30 to 45 searchers, to have a high chance of approaching the IRR for the asset class as a whole.

https://koorandassociates.org/selling-a-company-or-raising-capital/how-profitable-are-search-funds/

Personal Update:

  • Mentoring a startup at the University of Toronto Department of Engineering. The approach was based on weekly advisory board meetings.
  • Continuing as Board Director at a private company.
  • Continuing as a Patient Family Advisor at Sunnybrook Hospital.
  • Continuing my long-term fundraising for the Geoff Carr Fellowship at Lupus Ontario. Over the past 18 years family, friends, neighbours, and colleagues have contributed almost $270,000. You can use the donation link later in this update
  • Continuing with the Angel Capital Association in the US.
  • Focusing on my two professional purposes: #1 Enabling current and emerging business leaders to succeed, #2 Enabling business leaders to have a positive impact on society.
Tom Koor

Traditional business transformation dooms your company to failure. V2

Traditional business transformation dooms your company to failure? V2

 What is the purpose of this article?

Help shareholders, investors, founders, the board of directors and C-Suite discuss and improve business transformation.

This article does not provide tax, legal or financial advice.

You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: Traditional business transformation dooms your company to failure V2

What are the critical learnings in this article?

  • Most transformation efforts fail and destroy company value.
  • The failure is due to leadership flaws with the company leadership: the board of directors, CEO, and C-Suite.
  • The leadership has limited understanding of employees and how to gain employee commitment to transformation.

What are some definitions of business transformation?

#1 “Transformation is about improving performance, not just cutting costs. Companies boost the odds of achieving breakthrough results when they simultaneously improve their operating discipline and make portfolio moves that collectively redefine their business.”1

#2 “Transformation spans your entire organization, to address all the changes needed to reach your full ambition.“2

#3 “…rapid, visible, and sustainable step-change improvement in business performance; strengthen their organizations to win in the future; and turn their companies’ upside potential into radical performance gains.” 3

#4 “Business Transformation is the process of fundamentally changing the systems, processes, people and technology across a whole business or business unit, to achieve measurable improvements in efficiency, effectiveness and stakeholder satisfaction. As such, a business transformation project is likely to include any number of change management projects, each focused on an individual process, system, technology, team or department”4

 What is the Oxford Dictionary definition of transformation: “a thorough or dramatic change in form or appearance. “its landscape has undergone a radical transformation”

Transformation usually fails.

  • Major changes almost always fail. 12% achieve their target; 20% are total failures; 68% diluted the value of the company.5
  • More than two-thirds of large-scale tech programs are not expected to be delivered on time, within budget, or within their defined scope. 6
  • Efforts to recover a poor business typically fail. 33% of the companies grew; 35% went bankrupt or were acquired; 32% stalled. Only 10% of the stalled companies recovered.  7
  • Roughly 70% of transformations fail.8
  • More than half of M&A deals destroy value for investors.9
  • McKinsey research shows that companies who disregard analysis of employee mind-sets NEVER have an extremely successful transformation.10

What is one consulting firm’s perspective on why most transformations fail?11

I have paraphrased the comments from the article.  Any misinterpretation is my fault.

  • CEO doesn’t set a sufficiently high aspiration.
  • CEO unable to persuade the C-Suite regarding the need for transformation.
  • CEO and the leadership team doesn’t address skills needed to drive transformation.
  • The organization doesn’t buy in.
  • The organization won’t make the effort to make the change happen.
  • Lack regular performance management discussions.
  • Lack leadership oversight meetings.

Why do I think transformation efforts fail and doom your company to failure?

  • The consulting firm above points out the leadership flaws, especially with the CEO and C-Suite.
  • But where was the board of directors? Did they appoint and retain the right CEO? Did they approve the transformation plan?  Did they monitor the ongoing execution.  Did the have the appropriate skills to make decisions regarding: CEO appointment & retention, transformation plan approval, and monitoring of the transformation plan?
  • The board of directors and C-Suite are excluded from the transformation. The culture, skills, processes, values morals, and ethics of the board of directors and C-Suite do not change.
  • The CEO and C-Suite have not built the urgent need for transformation and ensured that every employee understands and will support major change. g. Telling employees that they need to make major changes in order to increase company profit and C-Suite compensation ensures failure.
  • The board of directors and C-Suite don’t understand the employees and therefore don’t have the understanding necessary to craft a successful transformation plan and communication’s plan.
  • The C-Suite does not have good two-way communications with the company.
  • The transformation does not make the talent and processes changes to ensure that future transformation will not be required. The transformation does not create a company which is continually changing and improving, driven by deep understand of the customers, employees, competition and how the company’s ecosystem is evolving.
  • A continuously successfully evolving company does not need two sets of organizations structure i.e. does not need a Chief Transformation Officer, Transformation Office, and transformation managers/teams throughout the company.
  • The word “Transformation” is usually misused and thus causes confusion. Many large projects are called “Transformation” when all they actually are a large project.
  • The Transformation is not driven by the future scenarios for customers and the company ecosystem, but is rather focused internally. One major consulting firm (I won’t share the name) states that their approach to transformation is “Start with the balance sheet and then profit and loss statement.”

 What are your next steps?

#1 Define the words/concepts you’re using, in a glossary.  I’ve seen major confusion when the same words mean different things to different people.

 

#2 State the facts as to what is driving your need for transformation:

  • Declining customer and employee satisfaction, declining market share, declining profits, declined return-on-equity, ecosystem pressures, etc.?
  • Passion to increase customer and employee satisfaction, increase market share, increase profits, increase return-equity, position company to succeed in more of the future scenarios, etc.

If all you have is assumptions and opinions, get facts.

#3 Review the purpose of the company.  Ensure the transformation supports the purpose of the company.

#4 Estimate the impact and degree of change required to your: customer relationships, ecosystem relationships, talent (at all levels), technology, and processes.

#5 Based on the above facts and analysis, assess the degree of resistance to the transformation e.g. if the transformation will result in the termination of employees, why would the current employees support the change?

  • Resistance to change can occur at all levels e.g. will board directors and C-Suite support the company being bought if this results in the directors and C-Suite losing their jobs.
  • Be able to answer the question that everyone who needs to change has: “What’s in this for me?”

#6 Determine if this transformation is a change which can be planned, executed, and benefits achieved by the existing board of directors, C-Suite, organization talent, and processes.  If not, what needs to change?

#7 Determine if you need an interim Transformation Officer to enable the creation of a future organization which will be constantly evolving i.e. no future need for a Transformation Officer.

Footnotes

1 McKinsey, “The truth about transformation”,

https://www.mckinsey.com/featured-insights/the-truth-about-transformation

2 Bain, “Business Transformation”

https://www.bain.com/consulting-services/transformation

3 Boston Consulting Group, “Business Transformation”

https://www.bcg.com/en-ca/capabilities/business-transformation/overview

4 Change Associates, “What is business transformation?”

https://changeassociates.com/what-is-business-transformation/

5 Patrick Litré, David Michels, Sebastian Walter, Melissa Burke, “Soul searching: true transformations start within” Bain

https://www.bain.com/insights/soul-searching-true-transformations-start-within/

6 November 13, 2024  Boston Consulting Grouphttps://www.bcg.com/publications/2024/most-large-scale-tech-programs-fail-how-to-succeed#:~:text=BCG’s%20latest%20research%20shows%20that,year%20for%20a%20single%20program

7 David Jacquemont, Dana Maor, Angelika Reich, “How to beat the Transformation Odds”, McKinsey

https://www.mckinsey.com/~/media/mckinsey/business%20functions/people%20and%20organizational%20performance/our%20insights/how%20to%20beat%20the%20transformation%20odds/how_to_beat_the_transformation_odds.pdf

8 Harry Robinson, “Why do most transformations fail?” McKinsey

https://www.mckinsey.com/capabilities/transformation/our-insights/why-do-most-transformations-fail-a-conversation-with-harry-robinson

9 John Kotter, “Leading Change: Why transformation efforts fail”, John Kotter, Harvard Business Review, January 2007

https://hbr.org/2007/01/leading-change-why-transformation-efforts-fail

10 Scott Keller, Bill Schaninger, “Getting personal about change”, McKinsey Quarterly

https://www.mckinsey.com/capabilities/people-and-organizational-performance/our-insights/getting-personal-about-change

11 “Why do most transformations fail? A conversation with Harry Robinson”

https://www.mckinsey.com/capabilities/transformation/our-insights/why-do-most-transformations-fail-a-conversation-with-harry-robinson

 

What further reading should you do?

What is business transformation? Koor & Associates

https://koorandassociates.org/business-transformation/what-is-business-transformation/

Do you need to transform your company? Koor & Associates

https://koorandassociates.org/business-transformation/do-you-need-to-transform-you-company/

Why is trust critical for transformation success? Koor & Associates

https://koorandassociates.org/business-transformation/why-is-trust-critical-for-transformation/

Transformation success depends upon human behaviour change. Koor & Associates

https://koorandassociates.org/business-transformation/transformation-success-depends-upon-human-behaviour-change/

Your company will fail. Koor & Associates

https://koorandassociates.org/avoiding-business-failure/your-company-will-fail-v1/

Is your company planning to fail? Koor & Associates

https://koorandassociates.org/avoiding-business-failure/is-your-company-planning-to-fail/

Tom Koor

Do you need to transform your company? V4

Do you need to transform your company? V4

 What is the purpose of this article?

Enable the board of directors, C-Suite, investors, and founders to understand whether there is a need to transform the company.

This article does not provide tax, legal or financial advice.

You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: https://koorandassociates.org/wp-content/uploads/2025/05/do-you-need-to-transform-your-company-v4.pdf

What are the critical learnings in this article?

  • Many business leaders think that they need to change the direction of their company, in order to be financially viable.
  • Transforming while ahead of the competition is more successful than transforming when you are forced to.
  • Cost cutting is not the solution to under performance.
  • If your company is underperforming, compared to the competition, determine what changes are required to the board of directors and C-Suite,
  • Often the board of directors and C-Suite do not know that their company is in crisis or heading toward crisis.

Global CEOs recognize that there’s a good chance their companies will not survive.

  • In 2023, 45% of global CEO thought that their company would be financially viable for 10 years or less, if it kept running on its current path.1
  • In 2024, four in ten CEOs believed their company will no longer be viable in ten years if it continues on its current path. The majority of CEOs believed they will not be in their current role in five years time. 2

Transforming while ahead of the competition is more successful than transforming when you are forced to.3

  1. Transforming while SR (Total Shareholder Return) matches or exceeds industry averages creates significantly more return in both the medium and long term, compared to transforming when you’re behind industry averages.
  2. At any point in the past 20 years, 30% of companies are significantly underperforming their sector but only 25% of transformations will result in outperformance in the short and long term.

Cost cutting is not the solution to under performance. 3

  • Long term *five year) value creation TSR out performance is due 43% to revenue growth and 32% to successful (note the world SUCCESSFUL) cost reduction.

What did the analysis of 4,446 CEOs in 2021 reveal about the impact of consumer trust?4

  • Consumer trust and company performance are linked. Consumer trust is the second biggest determinate of performance variance, after industry conditions.
  • Most business leaders have little understanding of their consumers. 87% of business leaders said consumers highly trust their company. 30% of consumers said they highly trust.

 What are the symptoms of a need for transformation?

The obvious facts demonstrate that the company is in crisis. E.g.

  • Losing customers or losing market share. Net Promotor Scores dropping.  Customer churn increasing and customer retention decreasing. The lifetime value of customers is exceeding customer acquisition costs.
  • Benchmarked performance is poor compared to competition.
  • Debt and interest payments are causing major losses and negative free cash flow. The company is profitable with positive free cash flow, if debt and interest payments are not considered.
  • The company is unprofitable with negative free cash flow, even if debt and interest payments are not considered.
  • Employee turnover is unacceptable.
  • Employee ratings of the company are unacceptable.
  • Potentially valuable employees are not applying or accepting offers.
  • The overall market size is shrinking.
  • Not being able to meet payroll in the short-term or meet covenant requirements in financing.

Often the board of directors and C-Suite do not know that their company is in crisis or heading toward crisis.

  • No ongoing monitoring and analysis of: the number of customers or market share, the Net Promoter Score, customer churn and retention; lifetime customer value and customer acquisition costs.
  • No benchmarking relative to the competition.
  • No free cash flow forecasting and related scenario analysis
  • No monitoring and analysis of employee turnover.
  • No monitoring or analysis of employee ratings.
  • No forecasting of long-term ability to meet payroll or meet covenant requirements in financing.
  • No monitoring and analysis of the market size i.e. the number of customers with urgent problems and needs who are willing and able to pay for the company’s solution.
  • No scenario planning.
  • No challenges from external advisors, consultants, and experts.

What is the root cause of the need for transformation?

The leadership talent (i.e. the board of directors and C-Suite) is the root cause of the need for transformation.

The leadership talent may not know what skills, experience, and knowledge they personally need in order to:

  • Continuously evolve the company to keep pace with customers, users, and the overall ecosystem.
  • Identify if the company is heading towards crisis, as noted above in the section regarding not knowing if in crisis
  • Avoid decisions which can result in crisis.

Your next steps

  • Define the words/concepts you’re using, in a glossary. I’ve seen major confusion when the same words mean different things to different people.
  • If your company is matching or exceeding your industry peers, determine how transformation can maintain or increase your lead. In today’s hyper competitive world, your competition is changing.
  • If your company is underperforming relative to your competition, first define the talent characteristics of a board of directors and C-Suite that would outperform the competition. Then assess your current board of directors and C-Suite relative to those characteristics.
  • Determine whether or not your company is in crisis or heading towards crisis.

Footnotes

1 PWC’s 27th annual global CEO Survey

https://www.pwc.com/gx/en/ceo-survey/2024/download/27th-ceo-survey.pdf

2 PWC’s 28th annual global CEO Survey

https://www.pwc.com/gx/en/issues/c-suite-insights.html

3 Bain, April 12, 2024 “Five truths (and one lie) about corporate transformation”

https://www.bcg.com/publications/2024/five-truths-and-a-lie-about-corporate-transformation

4 PWC Strategy + Business, “Translating trust into business reality”

https://www.pwc.com/gx/en/issues/trust/translating-trust-into-business-reality.html

What further reading should you do?

  • What is business transformation?

https://koorandassociates.org/business-transformation/what-is-business-transformation/

  • Is your company planning to fail?

https://koorandassociates.org/avoiding-business-failure/is-your-company-planning-to-fail/

  • Do you understand your customers?

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

  • How do you succeed with transformation?

https://koorandassociates.org/business-transformation/how-do-you-succeed-with-transformation/

Tom Koor

What is business transformation? V3

What is business transformation? V3

What is the purpose of this article?

This article enables shareholders, the board of directors, C-Suite and others to discuss business transformation.

This article does not provide tax, legal or financial advice.

You must do your own research and fact-based analysis using current and relevant information.

You can download a PDF of this article from: https://koorandassociates.org/wp-content/uploads/2025/05/what-is-business-transformation-v3.pdf

What are the critical learnings in this article?

  1. There is no commonly agreed upon standard definition of business transformation.
  2. Your company must create your own definition and criteria for what is business transformation, which everyone understands.

What are some definitions of business transformation?

#1 “Transformation is about improving performance, not just cutting costs. Companies boost the odds of achieving breakthrough results when they simultaneously improve their operating discipline and make portfolio moves that collectively redefine their business.”1

#2 “Transformation spans your entire organization, to address all the changes needed to reach your full ambition. “2

#3 “…rapid, visible, and sustainable step-change improvement in business performance; strengthen their organizations to win in the future; and turn their companies’ upside potential into radical performance gains.” 3

#4 “Business Transformation is the process of fundamentally changing the systems, processes, people and technology across a whole business or business unit, to achieve measurable improvements in efficiency, effectiveness and stakeholder satisfaction. As such, a business transformation project is likely to include any number of change management projects, each focused on an individual process, system, technology, team or department”4

#5 Business transformation has three categories of effort:5

  1. Operational: Do what you are currently doing, better, faster, or cheaper
  2. Core transformation: do what you are currently ding in a fundamentally different way e.g. Netflix changing from sending DVDs through the mail to streaming video.
  3. Strategic – Change the very essence of the company e.g. Amazon from retailing to cloud computing services.

#6 Transformation is described in terms of the changes to the company’s business model. The business model describes how a company creates value for itself while delivering products or services to C&U (Customers and Users). 

There are 9 components to the business model:

  1. Target C&U segments
  2. C&U value proposition
  3. C&U relationships
  4. Channel
  5. Key partners
  6. Key resources
  7. Key activities
  8. Cost structure
  9. Revenue streams

Each type of transformation is described in terms of changes to the three critical customer components of the business model and other business model changes.

  1. Who are the target C&U segments?  Who exactly is the company creating value for? What are the geographic, social, and demographic characteristics of each C&U segment? What is the market size?
  2. What is the value proposition of each target C&U segment?  A value proposition is the C&U perception of value i.e. All of the C&U perception of achieved benefits vs all of the C&U perception of incurred costs.  Benefits may include: financial and non-financial e.g. time savings, convenience, status, etc.  Costs may include financial (purchase costs, costs to switch, other adoption costs, ongoing costs) and non-financial (e.g. time, inconvenience, loss of status, etc.)
  3. C&U relationships.  What type of relationships do C&U expect to have with the company?

Customer needs, the competition, technology, the economic and political climate are constantly evolving and changing.  Successful companies understand the outside world and evolve as the world around them changes.

Transformation becomes an issue when the company’s leadership no longer understands the outside world, makes decisions in this isolation, and then has a crisis.

There are five types of transformation. A company may be undergoing more than one type of transformation at the same time.

#1 Restructuring

  1. Target CU& segments: The company remains focused on the same (or subset) of target C&U with the same set of problems and needs.
  2. C&U value proposition: The value proposition perceived by C&U is little changed.
  3. C&U relationships:  Limited changes to C&U relationships
  4. Other business model changes: The actions taken have a financial focus: reducing debt, selling assets, reducing the number of C&U (Customers and Users), reducing unprofitable C&U, reviewing all components of the business model to reduce debt and costs, selling pieces of the company, etc.

#2 Turnaround

  1. Target C&U segments: The company remains focused on the same (or subset) of target C&U with the same set of problems and needs.
  2. C&U value proposition: Focus on fast major improvements to the perceived value proposition.
  3. C&U relationships: Focus on fast major improvements to the C&U relationships.
  4. Other business model changes: Changes necessary to support the value proposition and relationship changes.

#3 Operational Transformation

  1. Target C&U segments: Focused on the same (or subset) of target C&U with the same set of problems and needs.
  2. C&U value proposition: The value proposition perceived by C&U is little changed.
  3. C&U relationships: The C&U may expect major changes to their relationships with the company e.g. move from in-person to mobile app.
  4. Other business model changes: Components of the business model are improved by a large factor e.g. 10 times.

#4 Business Model Transformation

  1. Target C&U segments: The focus is still on the same C&U, but their problems and needs have fundamentally changed.
  2. C&U value proposition: The solution perceived by the C&U requires fundamental change.
  3. C&U relationships; The C&U expect fundamental change in their relationships with the company.
  4. Other business model changes: Most or all components of the business model require fundamental change. 

#5 Strategic Transformation

  1. Target C&U segments: There are new C&U with new problems and needs requiring a new business model.  Think of Google.  It started out to be the best search engine.  Now Google produces the Android operating system, smart phones and has been working on driverless cars.
  2. C&U value proposition: These new C&U will have different value propositions than those for existing C&U.
  3. C&U relationships: A strategic transformation is basically creating a new company.
  4. Other business model changes:

What are potential measures of transformation outcomes?

  1. Customer perception e.g. NOS (Net Promoter Score), Customer Satisfaction, Customer perception of competitively differentiated value proposition)
  2. Customer behaviour e.g. Retention, Market share, spending per customer
  3. Employee perception e.g. Employee satisfaction, employee engagement
  4. Employee behaviour e.g. % of desired hires who accept, retention/turnover
  5. Company operational e.g. productivity measures, elapsed time for tasks.
  6. Company financial e.g. Return on investment
  7. Shareholder e.g. perception, total shareholder return
  8. Partners and suppliers e.g. perception, ease of doing business, revenue and profit.
  9. Regulators e.g. perception and compliance reports
  10. Politicians
  11. External analysts e.g. variety of measures
  12. Society and the public e.g. a variety of perceptions.
  13. Board of directors

Who needs to change or act differently in order to achieve the target outcomes?

  1. It depends upon the scope and type of transformation.
  2. People could include: cash paying customers, users, partners & suppliers, board of directors, CEO, C-Suite, employees.

What is the greatest challenge in achieving the outcomes?

  1. Those who need to change do not understand the benefits to them and thus resist or do not change.

What are your next steps?

  1. Define the words/concepts you’re using, in a glossary.  I’ve seen major confusion when the same words mean different things to different people.
  2. Define for your company the criteria for what is business transformation. Not every project is a transformation project. Use some examples.

Footnotes

1 McKinsey, “The truth about transformation”,

https://www.mckinsey.com/featured-insights/the-truth-about-transformation

2 Bain, “Business Transformation”

https://www.bain.com/consulting-services/transformation

3 Boston Consulting Group, “Business Transformation”

https://www.bcg.com/en-ca/capabilities/business-transformation/overview

4 Change Associates, “What is business transformation?”

https://changeassociates.com/what-is-business-transformation/

5 Scott Anthony, Harvard Business Review, Feb 29, 2016, “What do you really mean by business  transformation”.

https://hbr.org/2016/02/what-do-you-really-mean-by-business-transformation