A venture capitalist of 25 years and author of several books, Brad Field has republished a book first published in 2013 to which Field, with the help of co-authors Matt Bloomberg and Mahendra Ramsingani, has added Too Little to it in this new second edition.
Call “Startup boards: A field guide to building and leading an effective board of directorsIts timing couldn’t be better. With public markets turbulent – and now up and running – board members who might have taken off smoothly in history’s longest bull market may suddenly find themselves at odds with the management teams they funded, as well as their colleagues After all, tough decisions are being made at the moment, and in the face of very different financial stresses, many venture capitalists are discovering that their jobs are becoming more difficult as well.
We spoke with Feld last week about the book and the challenges that startup boards currently face, and we touched on a slew of issues, from the importance (or lack thereof) of having an odd number of directors to avoid gridlock, to why every startup board has. It should have independent directors almost from the start. Could you Hear our conversation here; In the meantime, we hope you find the excerpts below, modified for length and clarity, helpful.
TC: Why are we reformulating and republishing this book? Why do startups need it?
BF: One of the reasons is that until recently, we had this amazing and positive market for entrepreneurship and ventures specifically where huge value was created. [notwithstanding a] A handful of cases where really bad governance has led to catastrophic corporate failures. At the same time, there has been a narrative, especially among companies, that they don’t really need boards of directors, [with] More entrepreneurs who are not taking advantage of board benefits – especially external board members.
This whole idea of the role a board of directors really plays and how it can be beneficial to a rapidly growing company is not only lost, but in many ways overlooked.
Isn’t that also the fault of venture capitalists who have been writing more checks faster and investing less in their board roles?
definitely. There’s no doubt that part of it has been overburdened with VC boards, or, in some cases, not really understanding their role, because you have a lot of VC board members without much board experience before. [jumping into VC].
[Part of it] . . . Associated with founder-controlled boards, where the founders have superior voting rights, or the founders don’t really have a responsibility to the board per se. So you had some of that.
You’ve also had a lot of investors, especially in the last couple of years, who put big checks into companies but haven’t taken board seats.
But I think on top of all that — the missing piece from this part of the narrative — that the most influential part of boards, especially in fast-growing, mid-stage companies, are the outside directors. Over many years, I’ve seen great value from early-stage external managers, particularly with new entrepreneurs, but also with experienced entrepreneurs, who can increase certain areas of expertise they lack with another CEO on the board. They also hear things from this peer differently than they do from a venture capital investor.
When should startup founders start considering independent directors?
Mine [co-author and serial entrepreneur] Matt Bloomberg He has something he calls one rule. His point is that for every funding round, if you add venture capital to your board, you should always add an outside director as well. So, if you start with two founders, and they each have a board seat and you add virtual capital and venture capital takes a board seat, you should add an outside director at that point. If you run another round and another VC takes a seat on the board, you should add a second independent director at that point. [Meanwhile]It amazes me how often an outside board member’s seat is empty when I invest in a company in a Series A or even a stage in Series B and there’s already equity capital on the board.
Because the founders were not aware of the need to do so? Because venture capital doesn’t want them to add to the board too quickly?
Oftentimes, venture capitalists configure the board of directors so that there is an independent director. This is very common. But no one is giving it priority. And it’s especially important in the kind of cycle we’re about to go through, which I expect to last for a long time.
If you have situations where you have landing rounds, you have recapitalization, you have lower comp sales in preference to liquidation – even if you’re dealing with something as simple as internal rounds – from a governance perspective, having an independent director on the board is a very important positive judgment characteristic.
There are a lot of cases where it is “nice to have”. There are some cases, if you don’t have that, you’re actually creating a real problem for yourself in terms of the ultimate legal dynamics around things like business rule rulingAnd what you can count on for these types of financing.
This is independent of the merits of an independent director [when it comes to] Governance is in a downturn, because a lot of times, you face a lot of challenges between founders and investors, and you may have a struggle between founders and investors. If you have one or more people in independent seats, they can play a completely different role when passions flare up, when there is real tension, or when there is real hostility between people because they have different urges.
I know a lot of founders who are good at it. I know a lot of venture capitalists who are good at dealing with that. I know a lot more VCs who are not good at navigating them. I know a lot more Founders who aren’t good at navigating it. It becomes difficult. And when you have more than two people sitting around the board table and they aren’t caught up in all those emotional dynamics, it often leads to better discussion and much better decisions.