We have a front row seat watching the ongoing growth and trials of the asean tech ecosystem scene. Since 2013, we have personally invested $9-10m into startups both directly and via asean Vc funds. We have interacted with thousands of founders and met many GPs and Principals of VC funds. On the side of larger organizations, we have been or are board members for stat boards, private entities, non profits which are relatively large with hundreds to thousands of staff and generate 7-8 digit profits or surpluses.
Lately due to the effects of the funding winter and the rerating of many tech stock valuations, we have been hearing disturbing stories coming out of startup boardrooms. There are stories of board members aggressively badgering founder mgmt who have opted for a strategic move towards profits. There are also stories of board members changing their minds about supporting with more funds at last minute creating cash crisis. And of course big ego board observers/members who just don’t add value but somehow still always want to give ideas and suggestions.
So it’s timely to share our views on this issue. Founders, feel free to share. GPs, while it’s normal to focus your personal time on winners, do make sure the less experienced board members you appoint to other portfolio startups do justice to the ethos of being a good member. Many of the issues raised below are happening.
1) Board member has a fiduciary duty to the startup. This means you think from the startup pov. Not your own career path at the investor , not your own investment value pov, not even founders pov. So if mgmt has decided to change strategy towards profit and not chase growth at all cost, you can question and debate but if the board has been updated and the topic discussed and voted, you need to go along with the new direction.
It doesn’t mean you don’t think, or bargain or try to improve chance of success. You can help mgmt decide better with useful datapoints that tell them on they are on wrong track. You can ask for mgmt to peg their pay and esop to delivering the profit with penalties for falling short. You can remind them they promised growth when fund raising from your fund. Get some goodwill even as they override you. But the truth is the market has changed. Good founders like those at sea and grab have already cut and turned profitable. Positive cash flow and profits matter as much as growth now.
2) Board members should be professional. Be punctual, don’t talk down to people. Prepare for board meeting. Read the agenda, minutes, updates. If you are suggesting something, prepare the arguments with data points. Even if out voted, remember for the founders it’s their one shot, so they rightly should have final say. If you are like most investors, you backed the founders more than the business projections. So remember that.
Of course there are caveats. In cases where investors own majority share, control board and want to keep growing and can fire founders, or founder did or wants to do something illegal or grossly unfair, then investors need to remove or act against founders. That’s a totally different issue.
3) Do what you say. Never lead a founder on esp if it’s about funding. If you are not sure your side will follow on or will be a backstop investor, pls don’t say you will on something so important if you aren’t 100% sure and willing to stake your job on it. It’s a small blip on your career to have a failed startup but it can cost hundreds of jobs and 10 years of each founder life.
Pulling a backstop which you promise is one of the worst things you can do. In fact, it’s best if you are brutally honest to tell founders early what intentions are in terms of future funding and how you view distressed deals.
4) Finally Board members should be empathetic. Listen to what mgmt is saying and corroborate with outside data and internal data. Don’t forget the business is the founders life and death. It’s just a job and one of 15 investments for you. When cash and exits were easy, it made sense for founders to believe in grow at all costs. Now they are just reacting to the listed markets when they want to go after profits and cashflow. Are you so sure they are wrong? And from any entity pov, it’s right to secure profits so that the entity can survive.
Yes, it does mean your investment is stuck longer or even down rounds for you. But that’s the nature of the markets right. Win some lose some. Winner can become dog, dog can become winner but 5 years later. Patience matters a lot when we invest.
5) Stay at the governance and strategic level. Don’t go into the weeds and try to talk about sales mgmt or product development unless you are really an expert at it. And even if you are, I would argue the board meeting is not the platform. It should be a separate sharing and the company can even pay you as a consultant to help. It’s cleaner and clearer that way.
6) Finally and this is optional but ning and I do it. Be cheerleaders for the company and for the founders. We find having this basic mindset helps us be more empathetic and get better results in terms of founder- Director relationship. We give more benefit of doubt.
So what happens if we get it wrong on the founders? Consistent bad dumb strategies and execution, and/ or worse ,unethical and mainly selfish behavior? Then we picked a wrong founder, should write investment off, learn from what went wrong in our selection, and resign from the board. That’s why we invest in a portfolio. Do we then still support cheerlead and support such founders? I think very hard. And when you are no longer a director the fiduciary duty disappears.
Founders, while this article is about how board members and observers should behave, your interest in and effort needed to build a cohesive useful board is even bigger. Done well, boards are a great source of perspective, network and advice. So you have to play the role to take its composition, quarterly running and updates very seriously and do it best of class. Spend time to get to know them personally if it makes sense. They are at least as impt as a key client. Remember no ego, only business.
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