The Curious Case Of The Bad Board Member

SUMMARY

How Entrepreneurs Can Deal With Bad Board Member Behaviour

Over the last 40 years, the US has evolved an entrepreneurial ecosystem with two of the most unlikely partners – venture capital investors and technology entrepreneurs. This alliance has led to an explosion of technology innovation, scalable startups, and job creation. Tied at the hip, VCs and entrepreneurs take large risks together. VCs invest in startups with minimal tangible assets and no certainty about the product’s viability, market size, or customer adoption. Entrepreneurs face all that, and add one more risk to their list: the bad board member.

The Bad Board Member

I had coffee last week with one of my ex-students. 30 months ago, he raised a Series A venture round from two name brand Silicon Valley VC firms. It was early in the day, but he looked tired. “I need some advice about my board. I get along great with one of the VCs, but the other one, Bob, is making my life miserable. Nothing I do is right in his eyes.”

He looked pained as he continued. “We never had any personal chemistry, and it’s gotten so bad in the last six months, our board meetings are just hell. They consist of Bob beating me up regardless of whether the results are good or bad. I can’t tell if he’s trying to get me to quit, fire me and bring on a new CEO or is just a miserable human being.”

My antenna went up when I heard that Bob was his board member because the senior partner who led the investment said he was too busy to take another board seat (and right after the closing had assigned Bob to take the seat for his firm.)

Uh oh, I thought. I lived through this one. Admittedly, my ex-student was quirky, bordering on eccentric, but he had a long and successful track record in Silicon Valley delivering complex products before he went back to get his MBA. He was a great engineering manager and recruited, hired and inspired a world-class team. This was his first CEO job. He said that Bob described him to others on the board as the “crazy aunt you hide in the closet when the guests come.”

We went through the status of the company, and at least from the outside it sounded good. In fact it sounded great: three major versions of the product shipped, multiple iterations and a few pivots under their belt, revenue was growing even faster than planned.

“Well you just need to talk to your other board members and ask for their counsel,” I offered.  “I did! I’ve talked to the other VC and he told me it’s a problem that I just need to work out with Bob.” Hmm, this wasn’t sounding good. “Why don’t you go back to the partner who led the deal and ask for his advice?”

The look on his face told me I knew what the answer would be. “Why do you think I’m having breakfast with you?  I did just that, and do you know what he said?” I sat there thinking I knew exactly what the senior VC said because I had heard it myself when I was an entrepreneur.

“The senior partner at the firm said he wasn’t going to get involved in “chemistry” issues.” Sounding both sad and frustrated he said, “What do I do now? I built a great company, and I think I’m being set up to be fired.”

The VC Lemon Law

Every venture capitalist I’ve heard talk about founder/board member problems treats them like they only happen in other funds. “Great VCs in brand name firms don’t have these problems” is the line I hear.

The venture capital industry is in denial.

The problem is as bad in large brand name funds as in the smaller firms. While most board problems arise from founder performance issues, naiveté or disagreements about strategy, a number are created by bad board member behaviour. While a VC can remove a founder who misbehaves, there is no corresponding recourse when a VC is the source of the problem, i.e the the VC is the bad board member.

Astonishingly, there’s no professional standards in the venture capital industry that acknowledges this problem even exists. Not only does the industry lack a code of conduct for a bad board member, but individual venture firms lack avenues for founders/CEOs to bring these problems to light. There’s no ombudsman or third-party in a firm to hear an objective review, and no remedy to deal with a partner’s bad behaviour. (And why would there be if the problems are only with the founders.)

The rationale seems to be rooted in both tradition and math. Like doctors, VCs tend to bury their mistakes. If a partner screws up a single company in a portfolio by being a bad board member, it’s not the end of the world since they have 20-30 companies in a fund.

If a single partner has a consistently terrible track record, he or she just won’t be invited into the next fund.  But, in the meantime, this bad board member has left a trail of broken companies. When it comes time to understand individual partner performance, information asymmetry is at play – like bad doctors, knowledge about a partner’s performance is limited—and entrepreneurs rarely have a say in the matter even if they do have some knowledge.

Finally, there’s more than a whiff of noblesse oblige at play. If firms believe that VCs always act responsibly and the problems are always with the founders, they don’t need to worry about bad board member behaviour. They can continue to pretend it never occurs.

The reality is that the VC business has expanded from the clubby group of 20 or so firms that sat on Sand Hill Road 40 years ago into an industry of ~400, so a bad board member cannot be brushed under the rug. My hope is that they realise that, with that expansion, comes a different set of responsibilities.


[This post by Steve Blank first appeared on the official website and has been reproduced with permission.]

Note: The views and opinions expressed are solely those of the author and does not necessarily reflect the views held by Inc42, its creators or employees. Inc42 is not responsible for the accuracy of any of the information supplied by guest bloggers.

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