Boardroom Dialogue

Take your time

This posting is a plea to entrepreneurs not to rush taking on investors or board members.  Since in private investing taking on investors usually involves taking on board members as well, both should be done with care -- getting rid of a board member can be nearly as impossible as getting rid of a ornery shareholder (yes they do exist).  And when they are one in the same....you can imagine the nightmare.

What does it say about an investor who gives you a check after your first meeting? Probably says the same thing as it would say about a person who agreed to marry you after the first date. Indeed, as Hugh Cullman of Silicon Alley Venture Partners has stated so well in many presentations on venture investing, getting married and getting funding are very similar. His speech is far more amusing than my recap here, but the point remains -- an investor who is planning to add value will take their time in looking at your company.  From my experience, it is 8-12 weeks sometimes more, rarely less before an investment passes all the due diligence, deal terms are worked out and the investor(s) and entrepreneurs have clarified how they will work together post-closing. While the investor (s) are doing this process, it is an ideal time for the entrepreneur to get to know them as well.

The most simple and logical form for the working relationship is the investor takes a board seat. Of course, if there are a number of investors involved, as there usually are in venture investing, then there is a choice of board member. The one who did most of the due diligence digging and/or hard ball negotiating  -- the lead investor -- is usually the one that pops into mind for the board seat. However, it could be that they are a deal addict and will focus their time and attention on the next deals and not on "dull" board meetings. Too often, an entrepreneur takes a passive role and the investor that squeaks the most  gets a board seat.  Such a board could end up full of strutting peacocks. Ask yourself, does this investor have the time, motivation, mentality and experience for a board role? If you're not sure of the answer, open the discussion and agree to a process for how the board can replace an investor representative if, for example, they fail to attend a number of board meetings or have a conflict of interest. 

Remember, you're in it together for the long haul, so take your time.

The Active Investor

During a talk recently,  Bo Peabody, author of "Lucky or Smart" and founder of Village Ventures and Tripod, mentioned that one of the things that entrepreneurs don't understand about VC's is that they really don't want to run the company. He pointed out that indeed they don't have time for it, and are busy with at least a few other portfolio companies and are really jazzed about the next few deals. Investors of many types, including angels, do count on the management being there to do their job, at least at the beginning of the relationship. Passive investors (yes, they do exist) may not even meet with management post-investment let alone have a seat on the board.

However, those active investors do get involved. Most often it is a board seat through which they evaluate, coach, advise, and assess a whole range of issues. From my survey (see survey report "Shining a Light") on boards of private equity-backed companies, a typical number of board meetings is 5-8 per year with a noticeable portion having more than 9 per year. Outside the board meetings the investor director is also searching for good candidates, dealing with financing issues and actively supporting the company in other ways. Adding in these other activities, the majority of these board members spend 10-30 hours a month on a portfolio company. 

It is not all just support when the CEO wants it. They are routinely monitoring the performance of their investment. Some entrepreneurs find this borders on "running their company", especially since most investor directors are querying what is happening with financials and sales on a detailed level.  These reporting requirements are usually spelled out in the investment documents. So, entrepreneurs, read the fine print and if you can't live with the involvement or monitoring by your active investor, then don't take their money. 

Jeff Bussgang's 5 reasons entrepreneurs don't like VCs

In reading Jeff Bussgang's 5 reasons entrepreneurs don't like VCs, I was reminded again of the common misunderstanding that perpetuates among entrepreneurs. They believe a board is there only to help them. It is not. It is also and essentially to monitor what is going on at the company on behalf of shareholders. Yes, value add is perhaps what the VC spent most of his/her time selling the entrepreneur on, but at the end of the day, the little time the VC has will be spent often just on the basic monitoring.

Reason number one was: "Board room M.O.:  show up late, pound on the Blackberry, look up and ask a question that was answered 2 hours ago." That is a clear sign of a sloppy, ill-prepared, over-committed board member who ideally should be replaced. Since most boards won't do that, remember for next time, entrepreneurs, to look deeply into the eyes of the prospective investor, know what their time committments and what their board habits are before you sign the deal.

Getting those industry contacts

The first thought about boards that many entrepreneurs have is to use it to bring in sales. Indeed, in the survey I recently completed on boards of private equity and venture-backed companies, the majority of the entrepreneur respondents said that they expect board members to provide names of prospects. Of course, someone with high level contacts in your industry such as a C-level executive would be really able to open doors.

However, you may want to stop and think about what a board will be dealing with -- your compensation and performance, detailed financial information and strategic plans and other sensitive information on partnerships, customers etc. Do you want a high-level executive of a customer or partner company in your industry involved in all those areas? Probably not. It is so awkward to ask him or her to leave the meeting when the sensitive subject comes up.

So a better way to get them involved is through an advisory board or council next to the regular board. You may or may not chose to have the members of your advisory board meet together, although if you want to efficiently gather their insights on strategic issues, a group gathering is preferrable.  Also, such a meeting would likely also be more appealing to that individual depending on who else you've recruited to the advisory council. It helps also to have one or two members from the regular board involved in those gatherings to keep everyone singing from the same song-sheet.

Adding the right value

Dear entrepreneurs,

So you would like investors who not only invest in your company, but also add lots of value. What kind of value did you have in mind? Smart money, right? Well, investors have a finite amount of time and at the end of the day, those who invest in more than one or two companies, will not manage your company. You need to. You want to, right? That is why you're an entrepreneur. 

But very few good investors will put their money into your dream and check in only once a year.  They will be or at least should be involved in governing your company, and that means at a minimum monitoring what is happening at the organization as it grows. And yes, they judge whether it is going well or not,  assessing the management team, the market, the financial status multiple times per quarter.  At the end of the day, like it or not, the board of directors is the CEO's boss in that they hire and fire the CEO.  And as we know CEO's of companies backed by private equity and venture capital do get fired at a rate of well over 50%, as my survey showed.

Unfortunately, we seem to have forgotten the folly of the bubble years where entrepreneurs demanded oh so much more than just money.  Many VC's also put a lot of words on their web sites about how much value they can add, and their deep experience in the industry. I believe that many an entrepreneur had a false impression of what that value-adding really meant.  I was hearing these pleasant promises from panelists at a venture fair just last week. Yes, good advice comes from these investors with deep experience, but they do not and should not fill in weaknesses in the management team or become an extension of the sales team.

It is time to be clear before signing all those shareholder agreements about what are board members' responsibilities and what is management's.