What VC Boards Get Wrong

Ralph Ward – Last year, U.S. venture capital investment hit $100 billion, says TechCrunch. With these sort of numbers, and this many VC partners sitting in startup boardrooms, there is plenty of opportunity for governance miscues.

Scott Lenet has seen the VC world in California from all sides, and has some good thoughts on where things go wrong in the boardroom, and how to get them right. Launching his venture career with Geocapital partners in 1992, he went on to co-found DJF Frontier, and currently runs Touchdown Ventures. (Plus, he teaches at UCLA and USC). Lenet took a few minutes out to share his views on getting VC governance right:

  • “I’ve seen how quickly these startups can grow and become important, but there’s a risk of hurting people if they’re not run properly. There’s very much a quasi-libertarian view that there are no rules, that entrepreneurs should be empowered, but monitoring them is the job for people on the board.”
  • “The number one [governance] mistake I see is directors not paying attention. But you can’t really monitor and manage a board if there’s nothing to monitor, so you have to have regular meetings, with the financial statements, to see how healthy the company really is. The financials are like a crime scene, and our job as a board is to investigate.”
  • “A problem of the industry is that most [VC partners] don’t know how to be a director. There’s no training, other than, if you join a firm, some senior partner may say come to a board meeting with me and watch. There’s no testing, no qualification, and it’s very uneven. There should be a chair to run the meeting and assure the agenda is covered, but, in many of these [venture] companies, the concept of the chair is whoever’s the most powerful person in the room. The founder wants to be the chair, but without knowing how. People are thinking about power dynamics rather than running a
    proper meeting.”
  • “The single best thing that helps [VC board] maturity is when you add a true outside director. I went through this in negotiating with a founder. He was willing to have an outside director, but wanted the director to be there at his discretion. Companies grow fastest when we agree on adding a truly independent director. They elevate the discourse, and everyone tends to grow up and do a good job.”
  • “The power balance has shifted [on VC boards]. This has been the longest up cycle in my career, and when markets are up, power shifts to the entrepreneurs. It’s extremely important [for VCs] to be seen as entrepreneur friendly now, and there’s a trend toward founders keeping more control — examples are Tesla, Facebook and Uber, where founders have unusual control of the board. A lot of VCs now give founders more power, thinking this could lead to a billion-dollar company, even if we don’t
    like it.”
  • Still, “it’s important to do a real CEO review, and it’s just not the same without a real board. The purpose is not to fire the CEO, but discuss how to invest in growth. An separate executive session at the end of the meeting, where the chair or full board then give feedback to the CEO, is important too. Do it every time — frequent, clear [board] communication with the CEO is crucial.”

 

Originally published in Boardroom Insider