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As an investor, my goal is to find companies that can differentiate themselves strategically to drive sustainable growth. That focus may seem self-evident, but it had to be learned.

Executive Summary

Mark Watson, who once co-founded a VC fund and now serves as CEO of global insurer Argo Group, reveals that investing has an instinctive component. Still, his gut instincts are supported by patterns of organizational health that are common among successful companies. Here, Watson shares seven clues that guide his investment decisions.

In particular, I’ve had to break it into discrete categories of investigation that ultimately influence my decision to invest or not. The topics include all the typical elements of a business plan: line of business, stage of development, size and maturity of the market, product roll-out, operational and marketing plans, quality and experience of the management team, intended use of the funds, and cash-flow projections.

But I learned early on that, beyond clinical assessment, investing has an instinctive component. I began to get gut feelings about a company based on patterns and clues I uncovered in my research. Importantly, I began to be able to see what a company might do differently to make its plan work, particularly as a part of Argo.

Today, after 20 years working as a CEO in one of the companies I invested in, I understand a lot more about what makes a company succeed. The qualities that give me the gut instinct to invest are more clear today. Here, in my opinion, are seven markers that I look for as indicators of success. Would investors find them in your company?

success1. You know why you exist.

I had run an insurance company for almost 15 years when my young son asked me to explain what I did, other than ride on planes and talk on phones. I answered, “I help other businesses stay in business.”

There was no doubt in my mind that, as a global underwriter, our mission as a company is simple and clear. Yet many companies—especially early-stage companies—have no compelling reason to exist other than to make money. In an age of global competition, that urge is not enough. The reason for your company’s existence must relate to the needs of your customers, and it must be both useful and true. If the reason seems misplaced or muddy, it will take much longer for your company to achieve stable growth.

2. You prove you understand innovation deeply.

It’s not enough to have great ideas about new products and services, yet that’s often all investors see in a business plan.

Innovation in a growing company is a process of continuous reformation, and much of that will come from small, interactive improvements in strategy, execution, structure, talent management and customer relationships. Because the needs of your customers change constantly, everything your company does that affects customer value must be constantly open to change.

That happens only in companies that have built and maintain a culture of innovation. And that’s rare. As a test, veteran investors will ask about a company’s approach to improving its processes. A great answer is, “We take out any step that doesn’t add value for the customer.”

3. You define how you build relationships with your customers.

The best way to know what you can sell is to know exactly what your customers need. It’s often hard to distinguish what they truly need from what they say they want.

Henry Ford is famously thought to have said, “If I had given my customers what they wanted, I would have built a faster horse.” He understood better than his customers the increasingly mobile environment in which they would be working—and only then because he watched them and knew them well.

In the digital world, true customer intimacy is difficult to achieve. Make a plan detailing how you will build deep relationships. It should include programs beyond mere digital communication. (How close can you really get to someone through email, text, chat lines and voice mail?) If yours is a growth-oriented company, you will take practical steps to get closer to your customers and understand their challenges. That requires finding ways to monitor and measure your success in making those relationships profitable.

4. You differentiate your company with deep domain expertise.

Any company that cannot differentiate its offerings from those of the competition will be forced in the end to compete on price alone. And that will be the end.

Value is a perception that your customers hold about the relative worth of the offerings before them. While your prices are always a factor, much of that perceived value will come from the belief that your company understands their needs better than the others.

That takes deep understanding of the environment in which your customers operate. Too often a company is expert only in the products it builds. Over and over again I have seen how customers will pay a premium to a vendor that knows the customer’s world and provides value.

5. You stay flat enough.

As companies grow, their tendency is to build an ever-deepening stack of management layers, a hierarchy of hierarchies. In an earnest effort to manage their executives’ scope of control, they separate leaders from doers and unintentionally create a communication gap that stifles innovation and execution.

mark-watson-2016Value is a perception that your customers hold about the relative worth of the offerings before them.

Mark Watson, CEO, Argo Group International Holdings, Ltd.

New ideas must be quickly socialized up and down the chain of command.

Work relentlessly to find the right balance between reporting structures and communication structures. Stay flat enough to make sure creative conversations about improvement flow freely through your organization.

6. You hire and reward “A” players.

All CEOs admit that their people are their greatest asset. But do they back it up?

The fact is that high-performance employees (typically, the top 10 percent of your company’s workforce) drive 80 percent of your company’s revenue. If you’re intent on growth, you will put concrete plans in place to hire, reward and retain high-performing people. With your executive team, determine how to build an engaged workforce and decide how you intend to move unengaged staff out of the organization.

7. You make sure every employee understands your strategy.

No matter how good your team, if they don’t understand where you’re headed, they will not perform well together. Your company’s strategy should both identify your destination and set out a plan to get there.

Investors look for a strategy that’s sound, but they also judge whether strategy is understood throughout the organization. Top-down communication (by email or on intranets) is less effective without face-to-face dialogue.

Design and maintain strong programs of employee communication that rely on in-person conversations with individuals and teams at every level. Only then will your employees be able to align their activities and ambitions with the overall goals of your company.