Two weeks ago, longtime venture capitalist Chris Olsen, general partner and co-founder of Drive Capital in Columbus, O., settled into his seat for a portfolio company board meeting. It turned out to be a maddening exercise.
“Two of the board members didn’t show up, and the company had a decision on the agenda to pass the budget,” recalled an exasperated Olsen. “A junior person was there for the venture firm”—a co-investor in the startup—but that person “wasn’t allowed to vote because he’s not a board member. And so we had this dynamic where all of a sudden the founder said, “Well, wait a minute, so I can’t approve my budget because people don’t show up to my board meeting?”
Olsen calls the whole thing “super, super frustrating.” He also says this isn’t the first time a board meeting hasn’t happened as planned recently. Asked if he regularly sees co-investors show up less frequently or cancel board meetings altogether, he says, “I’ve definitely seen that. I’ve certainly seen other ventures where participation has definitely been reduced.”
Why are startup board meetings happening less often? There are a whole host of reasons, industry players suggest, and they say the trend is worrisome for both founders and the institutions whose VC money is investing.
Overbooked
Jason Lemkin, serial founder and the force behind it SaaStr, a community and early-stage venture capital fund that focuses on software-as-a-service, is among those concerned. Lemkin says he has to beg the founders he knows to schedule board meetings because no one else is asking them to do so.
Lemkin says the problem dates back to the early days of the pandemic, when after a a short pause in April 2020 action, startup investing — done virtually for the first time — shifted to acceleration.
“A bit of math that people missed is that between the second half of 2020 and the first quarter of this year, not only did valuations go up significantly, but so did VC. . . will use these funds for one year instead of three years. So two years go by and you might have invested in three or four times as many companies as before the pandemic, and that’s too much.”
In fact, according to Lemkin, overcommitted venture capitalists began to focus solely on portfolio companies whose valuations rose, and they began to ignore—because they thought they could afford to—startups in their portfolios that did not enjoy so much speed on the rating front. “Until the market crashed a little bit about a quarter ago, valuations were crazy and everyone was a little drunk on their ‘decorons,'” Lemkin says. “So if you’re a venture capitalist and your best deal is now worth $20 billion instead of $2 billion and you have a $1 billion or $2 billion position in that company, you no longer care if you lose $5 million or $10 million” on some other startups here and there. “People invested in deals at breakneck speed, and they [stopped caring] so much for the write-offs, and the consequence was that people simply stopped going to board meetings. They stopped having them.
Not everyone paints such a clear picture. Another VC who invests in startups and Series A companies — and who asked not to be named in this piece — says that in his world, Series A and B companies still hold board meetings every 60 days or so — which has long been the standard so that management can keep investors informed of what is going on and also (hopefully) get support and guidance from those investors.
However, this person agrees that the boards have “broken”. For one thing, he says most he visits have relaxed into virtual Zoom conversations that feel even more informal than in the pre-Covid days. He also says that in addition to frenetic deal-making, two other factors have conspired to make formal meetings less valuable: late-stage investors who write checks to younger companies but don’t take board seats, leaving their co-investors with a disproportionate amount of responsibility and newer VCs who have never worked as executives at large companies—and sometimes haven’t even been mentored—and therefore aren’t as useful in the boardroom.
Undeserved
One question raised by all these observations is how much it really matters.
In person, many venture capitalists will admit that they play a much smaller role in the company’s success than they would have you believe on Twitter, where signaling participation in positive outcomes is the norm. One could also argue that from a return perspective, it makes all the sense in the world for VCs to invest most of their time in their more obvious winners.
Additionally, board meetings can be a distraction for startup teams, who often spend days in advance preparing to pitch to their board, days they would otherwise spend solidifying their pitches; it’s no mystery why not all founders enjoy these sit-down meetings.
Still, the trend is not healthy for senior executives, who may want more, not less, time to meet with investors. Board meetings are often one of the rare opportunities that other executives on the team get to spend with the backers of the startup’s venture, and as it becomes increasingly unclear for many startups what the future holds, it may be more important than ever these startup executives form such bonds.
The trend is also not healthy for founders trying to ensure they get the most out of their team. Lemkin argues that routine board meetings keep startups on track in a way that more mundane check-ins and even written updates to investors can’t. Before 2020, he notes, top executives will “have to represent every area of the company—money, sales, marketing, product—and leaders will have to sweat. They will have to sweat that they missed the quarter in sales. They will have to sweat that they didn’t generate enough leads. Without board meetings, “there’s no external enforcement function when your team misses the quarter or the month,” he adds.
And the trend is not good for startups that haven’t been through a downturn before and may not appreciate everything that downturns entail, from employees starting to look for other jobs to the ripple effects of suddenly curbing innovation. While Eileen Lee, founder of startup Cowboy Ventures, believes that “good Series A firms and local venture firms do well by showing up at meetings,” she notes that founders who have pursued valuations from large funds, necessary guidance may be lacking just when help becomes more important. “There’s always been a concern about what happens in a downturn,” she says. “Are these [bigger funds] will i 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, which invest in venture firms — and represent the interests of millions of people — will end up paying the price.
“Anyone who tells you they put in the same diligence during the peak of the COVID boom is lying to you, including me,” says Lemkin. “Everyone cut out the hassle, the deals were done in one day via Zoom. And if you put in the same level of diligence, you should at least do it very quickly [after offering a] term sheet because there was no time, and that inevitably led to cutting.”
Perhaps that doesn’t matter to institutional investors right now, given how much venture capitalists have returned to them in recent years. But with fewer checks are bounced for them, that may now change.
Once “several million dollars go into a company, somebody has to represent that money so that fraud doesn’t happen,” says Lemkin, who, perhaps worth noting, has 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, widows and orphans, and when you don’t, when you don’t do any diligence on the way in and don’t do constant diligence at a board meeting, you’re kind enough to abrogate some of your fiduciary responsibilities to your long-playing companies, right?’