Two weeks ago, longtime venture capitalist Chris Olsen, a general partner and co-founder of Capital drive in Columbus, Ohio, he took his seat for the board meeting of a portfolio company. It turned out to be a maddening exercise.
“Two of the board members failed to show up and the company had a resolution on the agenda to approve the budget,” recalls 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 they’re not the board member. And so we had a dynamic where the founder suddenly said, ‘Well, wait, so I can’t get my budget approved because people don’t show up for my board meeting?’”
Olsen calls the whole thing “super, super frustrating.” He also says that lately isn’t the first time a board meeting doesn’t go as planned. When asked whether he regularly sees co-investors show up or cancels board meetings altogether, he says: “I certainly saw that. I’ve definitely seen other venture firms where participation has definitely decreased.”
Why are fewer and fewer board meetings taking place? There are a whole host of reasons, industry players suggest, and they say the trend is alarming for both the founders and the institutions whose money VCs invest.
Jason Lemkin, a series founder and the power behind SaaStr, a community and startup venture capital fund that focuses on software-as-a-service outfits, is one of the concerns. Lemkin says he has to beg the founders he knows to schedule board meetings because no one else is asking them.
Lemkin says the problem is linked to the early days of the pandemic, when after a brief lull in action in April 2020, startup investments – made virtually for the first time – transcended.
“A little 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, but so did VCs. . . would deploy these resources in a year instead of three years. So two years go by and you may have invested in three or four times more companies than before the pandemic, and that’s too many.”
Indeed, according to Lemkin, overcommitted VCs began to focus solely on portfolio companies whose valuations were rising, and started ignoring startups in their portfolio that weren’t enjoying as much speed on the valuation front because they thought they could afford it. “Until the market collapsed a quarter or so ago, valuations were insane and everyone was a little drunk on their ‘decacorns,’” says Lemkin. “So if you’re a VC and your top deal is now worth $20 billion instead of $2 billion, and you have a $1 billion or $2 billion position in that company, you don’t care if you put $5 million or $10 million” on a few other startups here and there. “People were investing in deals at breakneck speed, and they… [stopped caring] equally about write-offs, and a corollary of that was that people just stopped going to board meetings. They don’t have them anymore.”
Not everyone paints such a grim picture. Another VC who invests in seed and Series A stage companies – and who asked not to be named in this piece – says that in his world, Series A and B stage companies still hold board meetings every 60 days – what has has long been the standard for management to keep investors informed of what is happening and also (hopefully) receive support and guidance from those investors.
However, this person agrees that plates are “broken”. For starters, he says most he attends have slacked off on Zoom calls that feel even more perfunctory than they did in pre-COVID days. He also says that in addition to the frenetic deal-making process, two other factors have conspired to make formal meetings less valuable: late-stage investors who write checks on younger companies but don’t hold a board seat, giving their co-investors a disproportionate amount of responsibility, and newer ones. VCs who have never served as executives in large companies – and sometimes not even mentored – and so aren’t that useful in boardrooms.
One question raised by all these observations is how much it really matters.
In private, many VCs will admit that they play a much smaller role in a company’s success than they would have you believe on Twitter, where demonstrating commitment to positive results is the norm. You could also argue that from a return perspective, it makes sense for VCs to invest most of their time in their more obvious winners.
In addition, board meetings can be a distraction for startup teams who often spend days in advance preparing to present to their board, days they would otherwise spend strengthening their offerings; it’s no mystery why not all founders enjoy these sit-downs.
Still, the trend isn’t healthy for senior managers who may want to spend more, not less, time with investors. Board meetings are often one of the rare opportunities other executives on a team get to spend with a startup’s investors, and as it becomes less clear to many startups what the future holds, it may be more important than ever that that startup executives themselves form such bonds.
The trend is also not healthy for founders who are trying to get the most out of their team. Lemkin argues that routine board meetings keep startups on track in a way that more informal check-ins, and even written updates for investors, cannot. By 2020, he notes, top employees “should be presenting in every area of the company — cash, sales, marketing, product — and the leaders should be sweating it. They should be sweating that they missed the quarter in sales. They should be sweating that they weren’t generating enough leads.” Without board meetings, “there’s no external forcing function when your team misses the quarter or month,” he adds.
And the trend isn’t good for startups that haven’t experienced a downturn before, and who may not appreciate everything the downturn brings, from employees looking for other jobs to the ripple effects of suddenly having to curtail innovation. While Aileen Lee, founder of the seed-stage firm Cowboy Ventures, believes that “good Series A companies and native venture firms would do well to show up at meetings,” she notes that founders who take valuations from large funds hunted, perhaps missing guidance needed, just as help has become more critical. “There was always a concern about what happens in a recession,” she says. “Are these [bigger funds] will be there for you? Do they give you advice?”
Of course, perhaps the greatest risk of all is that institutional investors such as universities, hospital systems and pension funds that invest in risk companies – and represent the interests of millions of people – will ultimately pay the price.
“Anyone who tells you they put in the same amount of zeal during the peak of the COVID boom times is lying to you, including myself,” Lemkin says. “Everyone has cut the scruples, deals were done within a day via Zoom. And if you put in the same level of dedication, you at least had to do it really fast [after offering a] term sheet because there was no time, and that inevitably led to budget cuts.”
Perhaps it doesn’t matter to institutional investors right now, given how many venture capitalists have come back to them in recent years. But with fewer checks coming back to them, that could change.
Once “a few million dollars go into a company, someone has to represent that money so there’s no fraud,” says Lemkin, who, perhaps worth noting, has a law degree.
“I’m not saying it would happen,” he continues, “but shouldn’t there be checks and balances? Millions upon millions are invested by pension funds and universities and widows and orphans, and if you don’t act diligently on the way in, and don’t constantly act diligently during a board meeting, you’re doing away with some of your fiduciary responsibilities to your LPs, right? ”