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6 ways culture shapes due diligence
Jiufen
On the other side of the planet from my home in Texas lies Jiufen, the Taiwanese coastal mountain village pictured below.
A month ago, I had no idea it existed.
This week, I was able to enjoy a short visit.
But wandering through Jiufen Old Street did more than fill an afternoon.
It reminded me that culture plays a massive role in everything we do - including diligence.
The Observer Express
Don’t have time to read the entire post right now? No worries, here are the main points:
The culture in which we are raised forms much of what we consider to be “normal.” This perspective applies just as much to the way we approach investing and due diligence as to anything else.
Psychologists have developed 6 cultural dimensions for us to consider:
Power Distance
Individualism
Motivation Towards Achievement
Uncertainty Avoidance
Long Term Orientation
Indulgence
“Normal”
Culture is the social air we breathe.
It’s a combination of our language, customs, religion, clothing, food, music, and more.
Every community has one, and as I was reminded this week, cultures are often radically, wonderfully, different.
I found myself asking this question: “How does culture affect due diligence?”
The 6 Dimensions Defined
To explore an answer, I’ve decided to leverage a tool for understanding cultural differences that we studied during business school. The “Cultural Dimensions” framework developed by Dr. Geert Hofstede has been used for decades to help business leaders, sociologists, and politicians better understand other cultures.
The framework includes 6 categories, each of which places a given community on a scale between one extreme or the other.
The six categories are listed and defined below (definitions are directly quoted from the Hofstede Insights website), and I’ve briefly attempted to contextualize each to the topic of startup investment due diligence.
1. Power Distance
“Power Distance is defined as the extent to which the less powerful members of institutions and organisations within a country expect and accept that power is distributed unequally.”
I think this dimension is a bit difficult to apply since an investor and entrepreneur are partners in the success of a venture. However, I see it revealed most through the way an individual approaches the diligence process in general. The investor generally holds more “power” in the sense that they’re the one driving diligence and considering an investment (though there are some cases where the entrepreneur seems to hold more power if it’s a “hot” round). Do they tend to lean into that power or not?
2. Individualism
“The fundamental issue addressed by this dimension is the degree of interdependence a society maintains among its members. It has to do with whether people's self-image is defined in terms of ‘I’ or ‘We’. In Individualist societies people are supposed to look after themselves and their direct family only. In Collectivist societies people belong to 'in groups' that take care of them in exchange for loyalty.”
This is most directly reflected in the way an investor group performs diligence and invests together or individually. Some investor groups, for example, perform little collective diligence and invest with complete independence (high individualism). Others, in contrast, exhibit more collectivist tendencies by sharing diligence on every deal and only investing alongside peers.
3. Motivation Towards Achievement
“A high score (Decisive) on this dimension indicates that the society will be driven by competition, achievement and success, with success being defined by the winner / best in field - a value system that starts in school and continues throughout organisational life. A low score (Consensus-oriented) on the dimension means that the dominant values in society are caring for others and quality of life. A Consensus-oriented society is one where quality of life is the sign of success and standing out from the crowd is not admirable. The fundamental issue here is what motivates people, wanting to be the best (Decisive) or liking what you do (Consensus-oriented).”
This category is shown most in the types of investments being made, and the questions asked of those investments. For example, someone with a high-achievement score will seek to invest in “winner-take-all” opportunities and will ask questions like “What’s your plan to own the market?” In contrast, a more consensus-oriented investor might prioritize investments that clearly benefit society in some way and ask questions like “How will your company’s success make the world a better place?”
4. Uncertainty Avoidance
“The way that a society deals with the fact that the future can never be known: should we try to control the future or just let it happen? This ambiguity brings with it anxiety and different cultures have learnt to deal with this anxiety in different ways. The extent to which the members of a culture feel threatened by ambiguous or unknown situations and have created beliefs and institutions that try to avoid these is reflected in the score on Uncertainty Avoidance.”
There is massive uncertainty involved in startup investing. Most startups fail. So by default, an investor must have some level of comfort with uncertainty. That said, assuming an investor is comfortable with these risks at a basic level, there are interesting implications from this category on diligence. A high uncertainty avoidance investor will need to know a lot more than one who is more comfortable with uncertainty. Does the company need to have financial projections and a 5-year strategy? If so, how important is the level of detail? How well must the market be understood and defined?
5. Long Term Orientation
“This dimension describes how every society has to maintain some links with its own past while dealing with the challenges of the present and future, and societies prioritise these two existential goals differently. Normative societies, which score low on this dimension, for example, prefer to maintain time-honoured traditions and norms while viewing societal change with suspicion. Those with a culture which scores high, on the other hand, take a more pragmatic approach: they encourage thrift and efforts in modern education as a way to prepare for the future.”
Startups are often aiming to shape and form new industries, so startup investors naturally trend low in this dimension. That said, I think this often shows up when asking about the problem. The extent to which an investor goes to really understand how the specific problem is being solved today tends to be much higher for investors with a more natural long-term orientation.
6. Indulgence
“This dimension is defined as the extent to which people try to control their desires and impulses, based on the way they were raised. Relatively weak control is called "Indulgence" and relatively strong control is called ‘Restraint.’”
I think this dimension shapes the speed with which an investment is made and the overall levels of diligence required. More “indulgent” investors require less “validation” and instead tend to invest “because they liked the deal.” In contrast, a more “restrained” investor finds much more necessity for diligence, validation, and hard data to be convinced of an investment’s quality.
Final Thoughts
Our culture shapes the way we think about everything, including due diligence. The 6 cultural dimensions are power distance, individualism, motivation towards achievement, uncertainty avoidance, long-term orientation, and indulgence. The next time you consider an investment, pause for a moment and ask yourself: “How might each of the 6 dimensions be informing my process?” You may be surprised by what you discover.
What do you think?
Are there other ways that culture influences diligence?
Weekly Observations: 3 Lessons Learned
Effective managers generate results and retain their people.📈Keaton and I are currently reading “The Effective Manager” by Mark Horstman. I should’ve read it years ago. Having a clear definition of what “good” looks like in management is both refreshing and relieving. I’m looking forward to implementing what I’ve learned very soon.
Solving one problem always creates another problem.✈️This week, I reflected on the marvels of air travel. I realized the airplane is a fantastic solution to the problem of transporting humans quickly from point A to point B (when B is a long way from A). However, I also realized that new supporting problems like “keeping travelers comfortable” or “organizing flight logistics” quickly arise. By inductive reasoning, my current theory is that “markets” are basically just layered collections of connected problems and solutions.
Google Translate is the greatest thing ever. 🗨️When no one speaks English and you prefer to not roll the dice on dinner (again), Google Translate is the real hero.
Weekly Links: 3 Things I Found Interesting
Thanks for reading, have a great week.
-Andrew
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P.S. - I recently finished creating The Angel Network Toolkit: 90 Resources for Cultivating a Thriving Community of Pre-Series B Investors, and I’m sharing it with anyone who refers a friend.
How did I do this week?
About Me
I cultivate flourishing.
I'm also the CEO of PitchFact, where our mission is to cultivate flourishing specifically through efficient and collaborative early-stage diligence. I'm a proud husband, grateful father, and honest friend. My love languages include brisket, bourbon, and espresso.