Two weeks ago, longtime venture capitalist Chris Olsen, general partner and founder of Drive Capital in Columbus, OH, sat down for a portfolio company board meeting. It turned out to be a crazy exercise.
“Two of the board members didn’t show up, and the company had a decision on the agenda to approve the budget,” said a frustrated Olsen. A “junior person was at the venture” — a co-investor in the startup — but that individual “wasn’t allowed to vote because they weren’t on the board. And all of a sudden the founder said, ‘Wait a minute, I can’t approve my budget because people don’t show up to my board meeting?’
Olsen called the whole thing “extremely frustrating.” He also said that it was not the first time that the recent board meeting was not held as planned. When asked if he regularly sees fellow investors showing up or canceling board meetings, he said, “I definitely do. I have definitely seen other venture companies where participation is definitely down.
Why are startup board meetings shrinking? There are general reasons, industry players point out, and the trend is alarming for both founders and institutions whose money VCs invest in.
Too busy.
Jason Lemkin, founder of Series and the force behind SaaStr, is one of the biggest crowdfunders in the community and early stage venture fund that both focus on software-as-a-service outfits. Lemkin says he has to plead with founders he knows to schedule board meetings because no one is asking them to do so.
Lemkin says the issue dates back to the early days of the pandemic, when startup investing — almost for the first time — turned into overdrive after a brief pause in action in April 2020.
“The little math that people miss is that between the second half of 2020 and the first quarter of this year, not only the growth in valuations, but the V.C. . . These funds will be deployed in one year instead of three years. So two years go by, and you’ve invested three or four times more in companies than you did before the pandemic, and that’s a lot.
Indeed, according to Lemkin, overachieving VCs began to focus only on portfolio companies whose valuations were rising, and ignored — assuming they had potential — startups in their portfolios that weren’t enjoying much momentum on the valuation front. “Until the market crashed a few quarters or so ago, speculation was crazy and everyone was a little drunk on ‘decacorn,'” Lemkin says. “So if you’re a VC and your principal deal is now $20 billion instead of $2 billion, and you have a $1 billion or $2 billion position in that company, you don’t care if you lose $5 million or $10. million [on some other startups here and there]. People were investing in deals at a furious rate, and they [stopped caring] As for writings, and the feedback was that people stopped going to meetings. They stopped meeting them.
Not everyone paints such a bright picture. Another VC who invests in seed- and Series A-level companies — and who asked not to be named in this piece — said that in his world, Series A and B-level companies are still holding board meetings every 60 days or so — to let management know what’s going on and keep investors informed. It has also (hopefully) been standard to receive support and guidance from those investors.
But this person agrees that the boards are “broken.” For one thing, he says, most of those he follows are left with virtual zoom calls that feel more meaningful than in the pre-Covid days. In addition to frenetic deals, two other factors conspire to make formal meetings worthless: late-comers who write checks for young companies but don’t hold board seats, he says, disproportionately skew their fellow investors. The amount of responsibility, and the fact that new VCs who have never been an executive in big companies—and sometimes haven’t even been mentored—and aren’t as valuable in boardrooms.
Not enough service
One question with all these observations is how important it is.
Personally, many VCs realize that tweeting plays a much smaller role in the company’s success than they would have you believe, and it’s common to engage in positive outcomes. One could argue that from a return perspective, it makes all the sense in the world for VCs to invest more of their time in their more obvious winners.
Additionally, board meetings can be a distraction for startup teams as they often prepare days in advance to present to their board, days that could otherwise be spent solidifying their offerings; It’s no mystery why not all founders like these seating positions.
Still, the trend isn’t healthy for senior managers who are looking for more time with investors. Board meetings are often one of the rare opportunities other executives on the team spend with startup venture backers, and as the future becomes clearer for many startups, it may be more important than ever for those startup executives to establish themselves. such bonds.
The trend isn’t healthy for founders who are trying to make sure they’re getting the most out of their team. Lemkin argues that daily board meetings keep startups moving in a way that even more mundane check-ins and investor updates can’t do. Ahead of 2020, senior staff said “every area of the company – cash, sales, marketing, production – and the leaders will have to sweat.” They must be sweating because they missed a quarter in sales. They had to sweat because they didn’t generate enough leadership. Without board meetings, “there’s no external enforcement when your team misses a quarter or a month,” he added.
And the trend isn’t good for startups that haven’t been through a recession before and may not appreciate all the downsides, from employees looking for other jobs to the consequences of suddenly stifling creativity. Eileen Lee, founder of seed platform Cowboy Ventures, believes that “good Series A companies and homegrown venture firms are doing a good job of crowdfunding,” but says that founders who chase valuations out of big money may be missing out. As assistance becomes more critical, guidance is needed. “He was always concerned about what would happen during a recession,” she says. “These are [bigger funds] Am I going to be there for you? Are they giving you advice?”
Of course, perhaps the biggest risk of all is that institutional investors like universities, hospital systems and pension funds who invest in venture firms and represent the interests of millions of people will end up paying the price.
“Anyone who tells you they did the same amount of diligence during the height of the Covid boom is lying, including me,” Lemkin said. “Everybody cut due diligence corners, deals were done within a day of zooming. And if you do the same level of diligence, you should at least do it very quickly [after offering a] Because there was no time sheet and this was inevitably cut into corners.
It probably doesn’t matter now to institutional investors, given how many investors have returned to them in recent years. But that could change now that they have a few checks coming back to them.
Once “a few million bucks go into an organization, someone has to represent the money to prevent fraud,” says Lemkin, who reportedly has a law degree.
“I’m not saying it will,” he continues, “but shouldn’t there be checks and balances? Millions and millions are invested in pension funds and universities and widows and orphans, and when you don’t do any hard work on the street and don’t do constant hard work in board meetings, you’re kind. Abrogating some of your fiduciary responsibilities to your LPs, right?”
