by PV Bóccasam. Operating Partner
Over the last decade, I have found board meetings, especially those of venture-backed companies, to be more perfunctory, less strategic, and entirely focused on one thing: maximizing the next round’s valuation—rather than helping the portfolio company create compelling customer value.
Board meetings should serve as an opportunity for the venture industry to create great corporate leaders capable of making the very best decisions. Yet, I encounter plenty of investors who aren’t interested in rolling up their sleeves and helping the portfolio company scale. They only care about raising the next round at a head-scratching valuation.
In the mid-90’s, as a first-time entrepreneur, I was blessed with an experienced group of early-stage investors who set the bar so high that I mistakenly thought it was the norm. Then came along a new crop of post-2000 dot.com entrepreneurs, alongside young MBA-wielding venture investors, exercising their board-level clout for the very first time.
Facing the ‘Great Recession’ of 2008 and armed with nothing but panic and despair, these young-gun board members cut short the lives of many a great company—rather than helping them navigate through choppy times. That’s when I realized what enormous and outsized influence venture-led boards play in the success or failure of early-stage startups.
Sadly, I also discovered that their mismatched influence is often misplaced and mistimed. Comparatively, having sat on a publicly listed board, I personally witnessed how a calm group of experienced executives can harness their collective intellect and viewpoints and quietly work their operational magic.
Creating an environment for an honest dialog
Venture investors typically believe that their minds are just as valuable as their money, and that their critical advice can help shape their investments into unicorns and dragons. VCs with very little operating experience often claim a particular investment is going to ‘return the fund many times over’. Even the finest funds and best VCs have suffered from this kind of hubris.
But when this mindset runs rampant, it can poison the venture industry by creating a value-destroying environment characterized by blindly chasing returns and outflanking others by ‘over-funding’ the potential winners. VCs have lived through feast and famine before but have never addressed the core problem: creating honest dialogue at the board level and establishing the right level of governance on where and when to draw the line.
For companies that make it through the proverbial product-market fit stage, there are typically numerous investors involved, including angels, early-stage VCs, and, when appropriate, growth-stage VCs. These investors all end up on the same side of the capitalization (ownership) table, dreaming of an IPO or a mega ‘up-round’. The problem here, however, is that entrepreneurs now have to satisfy different return profiles for different kinds of investors—and the ‘victory lap’ is different for every one of them. This is compounded by the fact that now there are mega growth investors that regularly plow money into early-stage companies, with little to no board oversight.
The investor who came in last has a radically different set of incentives than the friends-and-family angel who supported the entrepreneur from the beginning and now wants to take their chips off the table. This toxic mix of bravado, brashness and misaligned incentives is where honest board level conversations need to occur, but never do.
Board directors need to play a ‘fiduciary role’ here that is independent of their shareholder role within the company. This ability to wear multiple hats and speak openly about what is best for the company, and not just for the investors, becomes critical to value creation. We have seen this play out in many board rooms, and it’s not lost on me how many times one needs to be reminded of this important and critical corporate governance principle.
Know your investor, like you know your trouble-making family member
For entrepreneurs, the initial selection of investors is non-trivial—after all, these partnerships can often last for years and even decades. It’s imperative for entrepreneurs to slow down for a moment and take the time to understand who they are getting into bed with financially. If they don’t, their dreams of startup glory could quickly turn into a hellish and lonesome nightmare.
What does a nightmare investor look like? It could be someone who is willing to pay blindingly high valuations but has completely unrealistic expectations of growth. Someone with little regard for macroeconomic factors that might come into play, such as a devastating pandemic, international wars, crippling supply chain bottlenecks, spiraling interest rates, or a shortage of top talent.
For both entrepreneurs and venture capitalists to have these honest boardroom conversations there first has to be an understanding of their respective roles and responsibilities at the board level. It needs to begin with an appreciation for the sacredness of due process. It’s akin to maintaining poise and solemn focus when you enter a place of worship, where a certain decorum and formality is expected.
When everyone comes prepared, the right environment is created to ask hard questions, stress-test every assumption, and deftly analyze the facts at hand. It might make some boards uncomfortable, but this is what engenders trust. At times of conflict or struggle, responsible individuals will use the moment to build consensus and create even stronger relationships.
The ability to detach the management team from the problem at hand and look at facts objectively and judiciously is what sets great boards apart. Splitting facts from opinions may not be the easiest thing to do, but it is often the right thing to do. Every so often, even when boards know what they should do, they will try every other avenue first before they are forced to take the right course of action. This process is not only very exhausting, it can be very costly and sometimes even fatal to the business. Great boards agree, align, and never waver from their North Star.
Do the right thing
Boards are meant to be consultative skeptics and collaborative critics. Doing this without trying to be prescriptive or assuming any involvement in the day-to-day operations is important. No one can do it all. For boards to be effective, each member must assume a specific role or talent that they bring to the table. Ideally each board member complements not only the entrepreneur, but also the other members’ expertise. It’s like putting together a baseball team, you need one player in each position. Welcoming diverse viewpoints and encouraging dissent only sharpens the wisdom of making hard decisions and owning up to them.
It’s not about ‘who’ is right. Rather, it’s about ‘what’ is right— legally, ethically, and culturally. By focusing on the right set of questions, board meetings can serve as an opportunity for the venture industry to act as a positive role model for the next generation of great corporate leaders and enable them to make the very best decisions for many years to come.