We all know “great companies” when we interact with them as consumers. They feel different. They almost seem like they have some special power or special sauce that leads to great experiences, strong execution, and high customer satisfaction. At Evolutionary Tree, we believe that this specialness comes from companies having built a unique and effective culture.

Why should investors care about culture? At Evolutionary Tree, we are always trying to get at root causes. We believe that the root cause of sustainable future growth is innovation. But, if you go back even further, you find the original entrepreneurs who first identified a business opportunity with a founding mission. A mission is nothing without a team of talent, and talent loves a conducive environment for creativity and collaboration. This is where culture comes in. A healthy culture is vital for attracting and retaining—and fully engaging—talent, which in turn unleashes a series of innovations to sustain growth. For this reason, long-term investors should care (a lot) about a company’s culture. From our vantage point, the chain leading to investment success flows from the following root causes:

In this blog post, we will focus on how culture contributes to the success of innovative businesses. While this topic may be viewed as a little touchy feely, we believe it is of profound importance. In fact, one of the eight investment criteria we use to evaluate investments is: Exceptional Talent with a Unique Culture. Each company we own in portfolios has built a strong culture that contributes to long-term success.

We all sense that culture matters, but here’s hard evidence. A 10-year academic longitudinal study conducted at the Queen’s University Centre for Business Venturing (using data from 111,000 employee surveys) provided robust evidence of tangible benefits for positive cultures that drive high levels of employee engagement:

You can see above some of the benefits of a positive culture that engages talent, including higher employee productivity, higher customer satisfaction, and improved financial performance. In addition to being a talent magnet and accelerant, culture confers competitive advantages, many of which are subtle and difficult to replicate by competitors. Think of the unique interactions and feeling you get when you enter an Apple store and fix your computer at the Genius Bar. Doesn’t it feel different, better? That is what a strong and unique culture can do: it can create differentiation. And being differentiated means your products or services cannot be commoditized. So, you can charge premium prices, which improves profitability. Great Culture = Competitive Advantage = Profit.

Decoding Culture: Some Techniques We Use to Assess Company Culture

Assessing culture is an important part of our research process, but it is not easy. Culture is the product of values, norms, behaviors, and beliefs. As a result, it is difficult to pin down or quantify. For this reason, so many investors seem to overlook the importance of culture. We believe our focus on this critical element, and our willingness to assess the “softer” elements of a company, can enhance our ability to add value over the long term.

We led off this blog post discussing how cultures are “felt” and how you know a great culture when you experience one. This is the first clue we use to analyze company culture. We use a variety of methods to “experience” a culture. For consumer companies, we try to use the product or service and interact with the company in its natural setting. Equally powerful is standing on the shoulders of users by talking with consumers, as well as accessing user surveys, reviews, and data like net promoter scores. From these puzzle pieces a picture of the culture emerges.

For business-focused companies, the most powerful experience for assessing culture is attending company user conferences or events where we can interact with employees, customers, and partners. We also interview industry experts within the broader ecosystem. Company cultures emanate good or bad vibes (for lack of a better phrase), either pulling in talent and partners, or repelling them. We much prefer cultures that are talent and partner magnets. Talking directly with people outside an organization can illuminate whether a business exhibits this unique quality.

We have also found that companies with strong cultures are proud to share it, knowing that it adds a halo to their brand and aiding in their effort to attract talent. You should be able to find a company’s mission statement and a list of values on their website. Dig further and you can often find more. Companies are even sharing internal “culture code decks” used to train employees, a true window into the secret sauce of leading companies. Again, we spend time talking with users and external participants in the ecosystem to see whether what a company says aligns with the true experience of users.

The Importance of an Adaptive Culture in the Age of Innovation

In today’s fast-evolving economy, the concept of culture takes on greater importance and, in particular, those cultures that are highly adaptive. Past academic studies have shown that company cultures that are strong and consistent can boost financial performance. While these attributes are still important, the quality of adaptability is now of paramount importance. With new digital-based business models driving accelerating change in industry after industry, companies must adapt or be displaced by next-generation offerings. Cultures that encourage thoughtful risk-taking and decentralized leadership models—key features of an adaptive culture—enable companies to innovate and evolve more quickly than their competitors.

We actively search for companies with unique cultures, especially ones that encourage innovation. We do this because the value creation chain starts with mission and culture; in turn, culture drives innovation; and innovation then drives growth and wealth creation. We believe we own a collection of leading innovators in client portfolios that each exhibit strong, adaptive cultures. We are excited to see what new innovations these creative cultures will cook up in the future.

If you are interested in reading the more detailed version of Evolutionary Tree’s Thought Piece on culture, which includes company examples, please download the full version below, Specialness & the Power of Culture.