Two weeks ago, longtime venture capitalist Chris Olsen, general partner and co-founder of Drive Capital in Columbus, OH, settled into his seat for a board meeting for a portfolio company. It turned out to be a maddening exercise.
“Two board members didn’t show up, and the company had a resolution on the agenda to approve the budget,” Olsen recalls wistfully. “There’s a junior person there for the venture firm” — a co-investor in the startup — but that person “isn’t allowed to vote because they’re not board members. So we have this dynamic where all of a sudden, the entrepreneur says, ‘Okay, wait a minute, so my board I can’t pass my budget because people don’t show up for the meeting?’
Olsen calls the whole thing “super, super frustrating.” He also says that this is not the first time that a board meeting has not gone as planned recently. When asked if he routinely sees co-investors showing up less often or canceling board meetings altogether, he says, “I’ve definitely seen it. Certainly I’ve seen other venture firms where the partnership definitely goes down.
Why are startup board meetings happening less often? There are a whole host of reasons, industry players point out, and they say the trend is dire for entrepreneurs and companies in which money VCs invest.
Jason Lemkin, a serial entrepreneur and the force behind SaaStr, both a community and early-stage venture fund focused on software-as-a-service outfits, is among those concerned. Lemkin said he had to request founders he knew to schedule board meetings because no one else was asking them to do it.
Lemkin says the problem is linked to the early days of the pandemic, when startup investing — virtually the first time — went into overdrive after a lull in activity in April 2020.
“The little bit of math that people are missing is that between the last half of 2020 and the first quarter of this year, not only did valuations go up, but VCs. . . These funds will be implemented in one year instead of three years. So two years go by and you can invest in three or four times as many companies as you did before the pandemic, and that’s a lot.
In fact, according to Lemkin, overcommitted VCs began to focus only on portfolio companies whose valuations were rising and they began to ignore the startups in their portfolio — because they thought they could afford to buy. “Until the market crashed a quarter or so ago, valuations were crazy and everyone was a little high on their ‘decacorns,'” Lemkin says. “So if you’re a VC, your top deal is now worth $20 billion instead of $2 billion, and if 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 are investing in deals at breakneck speed, and they are [stopped caring] About the writeoffs, and the consequence was that people stopped going to board meetings. They stopped having them.”
Not everyone paints such a clear picture. Another VC who invests in seed- and Series A stage companies — and who asked not to be named in this piece — said that in his world, Series A- and B-stage companies still hold board meetings every 60 days or so. It has long been the norm for management to let investors know what is going on and (hopefully) get support and guidance from those investors.
However, this person admits that the boards are “broken”. For one thing, most of the virtual Zoom calls he attends have been cut short, making it seem even more useless than the pre-Covid days. He also said that in addition to frenzied deals, two other factors conspire to make formal meetings less valuable: late-stage investors who write checks for young companies and don’t take board seats leave their co-investors unequal. That’s a lot of responsibility, and new VCs who have never worked as executives in big companies — and sometimes not even mentors — are less useful in boardrooms.
One question heated by all these observations is how important it really is.
Privately, most VCs agree that they play a much smaller role in a company’s success than they would have you believe on Twitter, where implying involvement in positive outcomes is the norm. One could even argue that from a returns perspective, it makes all the sense in the world for VCs to invest more of their time in their clear winners.
Moreover, board meetings are a distraction for startup teams, who spend several days in advance presenting to their board, days they would otherwise spend solidifying their offering; It’s no secret why not all entrepreneurs like these sit-downs.
However, this trend is not healthy for senior managers who want to spend more time with investors rather than less. Board meetings are one of the rare opportunities for other executives on a team to spend time with a startup’s venture backers, and with many startups having a clear vision of what the future holds, building those startup executives is more important than ever. Such bonds.
This trend is not healthy for entrepreneurs trying to make sure their team is getting the most out of it. Lemkin argues that routine board meetings keep startups on track in a way that even more routine check-ins and written investor updates can’t. Before 2020, he notes, top staff “will have to perform in every area of the company — cash, sales, marketing, production — and leaders will have to sweat it out. You have to sweat that you lost a quarter in sales. They have to sweat that they are not generating enough leads. Without board meetings, “there’s no external enforcement function when your team misses a quarter or a month,” he adds.
And from employees starting to look for other jobs, to the ripple effects of suddenly stifling innovation, the trend doesn’t bode well for startups that haven’t had a backlog before. While Eileen Lee, founder of seed-stage firm Cowboy Ventures, believes that “good Series A firms and local venture firms are doing a good job of showing up to meetings,” she notes that entrepreneurs chasing valuations from larger funds may be missing out. As assistance grows more complex, guidance is needed. “There’s always concern about what might happen in a recession,” she said. “Evena [bigger funds] Going to be there for you? Do they give 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 ultimately pay the price.
“Anyone who tells you they paid the same level of attention during the COVID outbreak is lying to you, including me,” Lemkin said. “Everybody has reduced attention, deals are done in a day on Zoom. And if you do it with the same level of care, you should at least do it a lot sooner [after offering a] The term sheet was because there was no time, and that inevitably led to cutting corners.
It doesn’t matter now how much venture investors have returned in recent years to institutional investors. But now that they’re getting fewer checks, that could change.
Once “a few million bucks go into a company, someone has to represent that money to prevent fraud,” said Lemkin, who has a law degree.
“I’m not saying it’s going to happen,” he continues, “but shouldn’t there be checks and balances? Millions and millions are invested by pension funds and universities and widows and orphans, and when you’re not paying attention along the way and you’re not paying constant attention in a board meeting, you’re kind of . abrogating some of your fiduciary obligations to your LPs?”