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On October 1st, New Jersey Governor Philip Murphy announced a $500 million plan to increase venture capital investment in the state. The move is motivated by New Jersey’s decline (relative to other states) in venture capital investment the last decade, and his belief that an expansion of publicly-subsidized venture capital pools will help turn things around.
The plan calls for the establishment of an evergreen fund (with no fixed time horizon), whereby the state will co-invest with venture firms that put money into New Jersey startups. Half of the $500 million will come from corporations through an auction of tax credits (sold at a discount and subsidized by public funds), and the rest would come from the co-investments made by venture capital firms. The state’s portion of net returns would be reinvested into the fund for future use.
Information on the plan is still sparse and there are a lot of details that need filling in. But that’s precisely why we’re speaking up now. The details really matter here—history is littered with failed government venture capital programs that didn’t get the specifics right. So, Governor Murphy, if you’re listening, we’d like to share some ideas with you as your plan begins to take shape.
Understand the problem first
For starters, it’s worth prodding deeper on what exactly is ailing New Jersey’s innovation economy. Is it truly a lack of venture capital supply, or has there also been a change in demand for venture capital (i.e., investment-worthy companies)? It is critical to consider both sides of the equation. “More venture capital” is sometimes the right answer, but in our experience, capital tends to follow good companies—not the other way around. Other factors may also be at play. As one example, New Jersey is heavily weighted in the same technological sectors that have seen their share of venture capital activity overall decline (healthcare and energy) and under-weighted in sectors that have grown the most (business and consumer software and services).
Recognize that entrepreneurship is multi-dimensional
Venture capital is just one of many resources for high-tech startups (we wouldn’t put it at the top, by the way). We recommend the governor take a comprehensive approach, from building “hard assets” like the talent base in the state to developing “soft assets” like seeding the environment for the right cultural conditions to take shape from the bottom up. This latter set of factors often go ignored, but they are critical for startup communities to be successful. The goal should be to make New Jersey the best place for startups to succeed, not to be the easiest place to raise a round of venture capital. These are not the same thing.
Get clear signals from the market
To his credit, Governor Murphy seems keenly aware of one of the biggest pitfalls of government venture capital programs—the lack of private-market participation—by making matching funds by professional venture investors a central pillar of the program. We’d encourage him to go further and require that the state’s participation in a funding round be no more than 40 percent, with the remainder of capital coming from investors or their syndicates. This will better align incentives and reduce moral hazard from investors hoarding the best deals.
Know the risks and rewards of the model you choose
Two of the most popular structures for government-sponsored venture capital programs are fund-of-funds (where the government invests into venture funds) and co-investing (where the government invests into companies). The first is a form of indirect investing where the latter is direct investing. Historically, state governments have been a poor direct allocator of capital into private companies, so the most effective approaches have generally been the fund-of-funds approach. The New Jersey plan appears to be a direct investment program, and for it to be effective, it will need to run by experienced investors with the right incentives and be structured in a way that limits its exposure to political pressure.
Agency and incentives matter—a lot
We have alluded to this in the previous two points, but it’s worth repeating because it’s the second major pitfall that typically sinks government-backed venture capital programs. Because the state will co-invest with venture capitalists, the investors will have agency, making it vital that the objectives of the investors are aligned with those of New Jersey. The successful fund-of-funds approaches have historically encouraged but not demanded the dollars be allocated 100% in the state they are raised from. Adverse selection can quickly come into play here, as the government becomes a source of additional capital, independent of the quality of the investment. Remember that venture capital investing, especially early stage, is extremely high risk / high reward (with a lot of failed companies and investments that go to zero). Avoiding the adverse selection problem is paramount for any co-investment program.
Organization and process will matter a lot too
The public officials charged with administering the program should have deep expertise as startup investors. They should also be compensated appropriately based on the performance of the investments—again, aligning incentives so that capital is put to its best use in the state. It’s also imperative that the individuals have existing relationships in the venture capital and startup community in the area, and that they can make decisions independently from any political influence, favoritism, or corruption. To build public trust, decisions and fund performance should be made in a transparent way. Hire the right people and make sure they are able to do their jobs without interference.
Concentrate activity—don’t spread it around
Though there will be pressure to spread public funds equitably around the state, a more effective strategy would be to bolster regions where startup activity is already occurring. The parts of northeastern New Jersey inside of the New York City metropolitan area account for about 80% of venture deals in the state. However, they are spread out across a wide geographic area, lacking a true center of gravity. This is problematic because modern, innovation-driven entrepreneurship thrives in dense, urban areas. Policies that work to improve density, particularly in areas across the Hudson River from Manhattan such as Hoboken, Jersey City, and even Newark, should be a major priority.
Respect the entrepreneurial process
For venture-backed startups, things move fast, they break, and chaos reigns. Most companies fail. In a typical well-performing venture fund, 50% of the companies will fail, 40% will break even or return very little, and 10% will carry the entire portfolio. Investment decisions must be made quickly and under a high degree of uncertainty (where, ultimately, failure is the norm). Finally, it can take a decade or more for a startup to generate a return on an investment. These conditions, and the decade-long timeframe, are unthinkable for government officials, which is why they need to appreciate this dynamic and protect the program accordingly.
Measure, learn, and adapt
Remember, this is an experiment, so you don’t have to do everything at once. Start small. Learn from what you’re doing, review, and adapt as needed. Repeat. For this to be possible, you need to take measurement seriously. This means building a robust measurement scheme into your roll-out plan and evaluating your activities along the way. As you get a better sense of what’s working, begin to expand your program if it makes sense. It’s also critical to understand that much of what you want to see in the data will take years to unfold and some of it won’t be able to be tracked directly.
Take a very long-term view
We know this is one of the biggest challenges for government engagement with startup communities because it grates against the political cycle, which is much shorter. But, for vibrant startup communities to take shape, it takes decades—at least twenty years—for things to really take hold. While progress can be tracked over a shorter time frame, you must make a long-term commitment to seeing it through. Reach across the aisle and build a bipartisan coalition that will better ensure that happens. The story of Silicon Valley is not an overnight success story; it’s now over 100 years in the making.
Build on your strengths and don’t over-engineer
Don’t try to create a technological or startup cluster from scratch—New Jersey has plenty of them. There is already a well-established tradition of healthcare around Princeton and parts of the northeastern suburbs of New York City, as well as some recent internet platform successes in Newark (Audible) and Hoboken (Jet.com). Something is happening there already. Instead of trying to build something from nothing, search for how you can support the existing infrastructure and fill gaps where key ingredients might be missing. If you don’t know what those are, ask the entrepreneurs. Ask them even if you do.
Make New Jersey a great place to live
One of the most important things of all is to make New Jersey a place where well-educated founders, management, technical teams, and their employees will want to live, work, and raise their families. The value of these indirect policies as a mechanism for entrepreneurship policy is often overlooked in the rush to use direct, blunt force objects that are more familiar to government officials. Young- and mid-career professionals value quality of place tremendously, and with the option to live in New York City and Philadelphia, it is critical that any talent attraction strategy be centered around quality of life.
These are just a few ideas that we might consider if we were tasked with structuring a state venture capital program—or more broadly, to improve the environment for startups in a state. We applaud Governor Murphy for his wise recognition that innovation-driven startups are a key to economic vitality and for his willingness to take action to expand opportunities in New Jersey. However, we also want to make clear that errors in conceptual and implementation strategies and tactics could doom a program to failure before it even gets going. Let’s hope Governor Murphy gets things right.
Today I have a major new study out for the Center for American Entrepreneurship, called Rise of the Global Startup City: The New Map of Entrepreneurship and Venture Capital. The report is the culmination of months of work that my co-author, Richard Florida, and I have been toiling away at, and we are really happy to be sharing it today.
What’s new here? We aggregated venture deals and capital invested across more than 300 metropolitan areas that span 60 countries, tabulating levels of activity and changes over time, beginning with the period before the financial crisis (2005-07), the period just after (2010-12), and ending with the most recent period (2015-17). We also break down activity by stages: Pre-VC (angel + seed), Early-Stage VC, Later-Stage VC, and something we call Mega Deals (those above $500M).
To our knowledge, our work on the distribution and dynamics of global venture capital activity at the level of metropolitan areas on such a scale is the first of its kind.
There are a number of key insights from the report, which I’ll summarize in a moment, and there is A LOT of data. We have organized this information in three key ways so that you can easily access our findings:
- We have produced a comprehensive, written report that lays out our findings and provides a lot of data charts and tables (with a nice foreword from Brad Feld);
- We have also produced a website, which tells the story of our findings and allows users to interact with the rich data set we constructed (both the print report and the site were beautifully designed by our friends at LGND).
- Richard and I have an OpEd in The Wall Street Journal, which is online today and will be in the print edition tomorrow (The Saturday Essay). It goes a bit further in describing the implications of our findings, and takes a particular tack on declining American competitiveness.
(I suppose there’s also a fourth. If you want a really short cut on the main findings and implications—particularly for the United States—I have summarized my thoughts in this Twitter thread.)
Overall, we document a significant expansion (massive growth), urbanization (driven by cities), globalization (driven by cities outside the United States), and concentration (driven by a relatively small number of global cities) of venture capital and startup activity in recent years. America’s long-held singular dominance of startup and venture capital activity is being challenged by the rapid ascent of cities in Asia, Europe, and elsewhere. While the United States remains the clear global leader, the rest of the world is gaining ground at an accelerating rate.
I encourage all of you to spend time with the assets we produced, as there is a wealth of information and lots of nuance around global venture capital and startup activity patterns. Plus, as I mentioned, we have a lot of cool data tools for your to play around with. However, here, I’ll provide a brief visual guide of our work.
Last week I published a report with the Center for American Entrepreneurship that analyzed the geography of venture capital first financings across U.S. metropolitan areas during the last eight years. You should definitely check out the full study on the CAE website because it includes a lot of interesting data and graphics. You should also check out this Twitter thread I posted on the day the study was released.
Thread on the geography of first rounds of venture capital in the U.S. below. TL;DR a nuanced story, but one I choose to view (mostly) optimistically. Full analysis here: https://t.co/ymnkj4WPVv >> pic.twitter.com/43sprXFgOY
— Ian Hathaway (@IanHathaway) July 31, 2018
Here, I provide a brief overview of the main takeaways from the study. I also include an interactive map that allows users to play with some of the data. The report finds:
- After a stellar five-year period of expansion between 2009 and 2014, a sharp contraction in the number of startups raising a first round of venture capital has occurred the last three years
- This contraction has been geographically widespread—fewer metro areas had a startup that raised a first round of venture funding and those that did had a smaller number of them.
- First financings are still highly concentrated among a small number of cities—in 2016-17, five metros captured 54 percent of all U.S. first financings and ten metro areas accounted for 68 percent.
- But, a number of startup communities continue to expand—including Boulder, Columbus, Indianapolis, Charlotte, Denver, and Durham-Chapel Hill, while others exhibited relative rises (including Madison, San Diego, Pittsburgh, Raleigh, Houston, Baltimore, Seattle, Ann Arbor, Honolulu, Philadelphia, and Santa Barbara).
- The longer arc tells a more positive story—the number of startups receiving a first round of venture capital in 2017 was still 84 percent higher than in 2009, and 38 percent of metros saw an increase in deals over this period.
Some may point to conflicting evidence about the emergence of new startup hubs in the U.S., but I believe this is still a mostly positive story—more startups in more cities are accessing venture capital compared with a decade ago, a brief period of over-exuberance is moderating, and the early-stage funding market seems to be moving toward a more stable yet geographically inclusive path forward.
But that statement is not boundless—there is critical nuance. The data are a stark reminder that startup communities take time to develop, that progress will be non-linear, and that the scope could be narrower than many would hope for. History suggests that the establishment of startup hubs must be thought of in terms of decades, not years, and there are limits to the number of cities that will ultimately emerge. It is still being determined which those will be, but the overall trend points to there being more of them.
A recent article in 5280 Magazine caught my attention. It profiled the economic vitality of the Boulder-Denver region, dubbing it “The Most Exciting and Innovative Tech Hub in the Country.” While I expect every local publication to champion its own hometown, this one happens to be on stronger footing than most others. You see, at least in terms of innovation and startup activity, Boulder is unique among its peers.
The article—which is excellent by the way—couldn’t have come at a better time for me personally. A few days ago, I moved myself and my family to Boulder to work on a book about startup communities. Not only did I come here to work closely with my friend and co-author Brad Feld, I also wanted to experience first-hand what makes this place so special. I came here to learn… and to contribute.
Boulder may be small, but it is mighty. My own research demonstrates that Boulder is a major outlier among American cities when taking into account population size: it has the highest density of technology startups in the country (by a long shot) and it has the second highest concentration of venture capital dollars invested behind the San Francisco-Silicon Valley region. This research is a few years old, but more recent figures confirm the trend.
As the chart above shows, when adjusting for city population size, Boulder has more than 10 times the average for the entire United States—second only to San Francisco-Silicon Valley, which has about 20 times the US overall. Boulder’s venture capital investment per resident far exceeds that of Boston-Cambridge, New York City, and Los Angeles.
Critics may suggest that per-capita figures are misleading, and that what really matters is critical mass. It is true that Boulder is small—with approximately 108,000 residents in the city itself, and about 322,000 in the broader metropolitan area, it is most similar in size to South Bend and Green Bay. And, in absolute terms, Boulder accounted for just 1.2 percent of total venture capital invested in the United States between 2009-2016. By comparison, Denver’s contribution was 1.6 percent and San Francisco-Silicon Valley’s was 40 percent.
But, Boulder’s undeniable successes dispel those critiques. Google and Twitter acquired local startups SketchUp and Gnip, and both maintain sizable (and growing) outposts here. Biotech firms Clovis Oncology and Nivalis Therapeutics each raised north of $100M in capital on their way to public listings on the NASDAQ. SendGrid was founded in Boulder in 2009, and although the company moved headquarters to Denver last year, most of its growth—the company employs around 400 people today—occurred in Boulder. And that’s just the tip of the iceberg.
So, what makes Boulder so special?
To start with, Boulder has some obvious natural advantages. It is a beautiful place to live, has copious amounts of sunshine, and a vibe that attracts people who are active, mobile, and educated. It has a major research university and hosts an array of public and private R&D facilities. Historically, Boulder has boasted flagship companies in data storage, pharmaceuticals, and natural foods, which spawned a number of startups in these areas.
However, many places have some or all of those resources, yet lag behind Boulder. In fact, research has shown that the average relationship (correlation) between these factors and local high-tech or high-growth startup activity is tenuous—cities that are startup hubs have most or all of these qualities, but not all cities that have most or all of these qualities are startup hubs. In other words, these “assets,” as I will call them, are necessary but not sufficient conditions for a dynamic startup ecosystem.
If it’s not hard assets that make the difference, then what does?
In her seminal work, Regional Advantage: Culture and Competition in Silicon Valley and Route 128, AnnaLee Saxenian demonstrated that the differentiating factor for Silicon Valley’s success was culture. Silicon Valley firms and institutions had porous boundaries, engineers and entrepreneurs cooperated in a system that valued technological progress over firm identity, and the region embodied a flat, network-based approach to innovation and “collaborative competition.” It wasn’t just the quantity nor the quality of individual actors in Silicon Valley that decided its fate—though both were necessary—but instead, it was the way in which they engaged with each other and with the system as a whole that made the difference.
Brad’s 2012 book Startup Communities: Building an Entrepreneurial Ecosystem in Your City, which this blog is largely a dedication to, is also fundamentally about culture and approach. It describes the attitude of the startup community in Boulder, drawing broader lessons for other regions to learn from. Among these are inclusiveness, playing positive-sum games, being mentorship driven, having porous boundaries, and giving before you get, along with others.
“What we discovered is a community [in Boulder and Denver] full of ambitious leaders who value cooperation” ~ 5280 Magazine
I’m only a few of days in, but I can already see something is special here. Boulder may look like a small city (~108K residents), and it may act like a small city (people are very friendly and open), but it doesn’t feel like a small city—at least not like the small cities I have known. Boulder is an unmistakably vibrant place, with an army of smart, enthusiastic people doing interesting things, and having fun along the way.
Ok, but what’s this got to do with coffee?
After two days of driving to get here—some of it through poor, mountainous weather—my dog and I were a little on edge. To make matters worse, we had a bizarre run-in with a giant, angry cat upon arrival that left her quite shaken. Frankie is a very sensitive soul, and this series of events—the travel, the new environment, and the cat from hell—left her even more clingy to me than ever.
Saturday morning rolled around and I needed my coffee. The house I’m renting was empty of rations, so I ventured out to the local java establishment. Dogs are very much welcomed outside, as could easily be seen by the array of them on the sidewalk (one local said to me, “Welcome to the West Pearl Dog Park!”), but forbidden from going inside. Fair enough. But Frankie wasn’t having it. She was not ok with any sort of separation between us. How the hell was I going to get my coffee without further traumatizing her?
That’s when the community kicked in. Two tables of complete strangers sprung into action, offering to care for my distressed dog, putting her at ease so that I could grab a cup of joe. As these, and other valiant efforts failed, one kind neighbor emerged from inside, extending to me a hot cup of coffee, a sugar-laden pastry, and a warm smile. A chair was gently pushed out from one of the tables and Frankie and I were invited to join in Saturday morning conversation, as if we had done so many times before.
What became immediately obvious to me is that these people—a diverse bunch—know each other very well. They all live in the immediate neighborhood, had done so for many years, and they interacted frequently at their favorite neighborhood meetup. And yet, here they were, immediately welcoming a stranger into their world, sharing ideas and insights about the place they call home.
It was all there right in front of me, what I had come to learn about, contribute to, and be a part of—a community of established “leaders”, who were inclusive, cooperative, playing a positive sum game, giving before they received, and mentoring a newcomer. It was what I had heard about, but was experiencing first-hand in a totally unexpected way—which in my experience, is how some of the deepest learnings occur.
Things unfolded as they needed to, and I’m looking forward to the adventure ahead. I do it with eyes open, ready for my opportunity to pay it forward… as one does in a community.
Presented at the UP Global Summit that happened last weekend, a new paper from Kauffman Fellow Suren Dutia makes a convincing argument for the need for a board of directors early in a company’s life cycle.
A board of directors and the need for corporate governance is an often over looked aspect in early stage companies. However, having a board of directors can lend experience to the company as well as a built-in mechanism for mentorship. Brad Feld and Mahendra Ramsinghani address this in detail in their new book, Startup Boards.
This paper from Dutia gives a good overview of the issues surrounding an early stage board of directors including why a board is needed and how board members are compensated.
You can find the full paper here.
I write books not to be the authority on an issue but to lay a foundation for an informed conversation. Below are the welcome additions to Startup Boards from David Thomas, a partner at WSGR in Palo Alto. These comments will join an errata when it becomes necessary.
You suggest that the idea of an executive session is useful for board discussion because it’s an attorney / client privileged discussion. But you don’t explain until later that the presence of the lawyer at the meeting is what makes it privileged. You clearly know this, but could be people who don’t.
The discussion of 280G isn’t as clear as it could be. A few comments on that:
- I’d drop a footnote that any payments in connection with a change in control could be parachute payments, not just carveouts (e.g., if acceleration is approved)
- I’ve never heard the term “280G election”. It’s always referred to a “280G vote” or a “280G cleansing vote”. From a pattern recognition perspective, you’re on your side of the votes much more than I am, so it could be phrasing that board types use.
- This one I’d strongly urge you to make—you say that 75% of shareholders not affected by the vote get to vote. This implies that the common holders who are the shareholders most affected are not counted in your 75%, which is absolutely not true. You meant to say 75% of shareholders not benefiting from the carveout.
Following are some nits around the Section 409A discussion:
- “Artificially low” implies that it has to be really discounted to be a problem, when in actuality 1 cent low and 1 dollar low have the same effect once the IRS audit starts.
- I’d also point out that serial acquirers are likely a bigger risk than the IRS. Google, Cisco, and Oracle look at this stuff closely.
- This and the next one are personal nits, IRS didn’t establish Section 409A, that was Congress.
- It actually happened October 4, 2004 “a day that will live in infamy” not in 2005
Today on Marketplace Tech, another blooming startup community was given a great write up. The article, Startups Think Outside the Silicon Valley Box, walks through some reasons how and why Salt Lake City, Utah is a fast up-and-comer in the startup scene. It might be because of the engineering research coming out of the University of Utah. It might be because of the low cost of living (making wages that startups can afford to pay top talent). It might be because of the foundation of a strong work ethic and perseverance due to the Mormon faith. Either way, entrepreneurs are choosing to build companies in Salt Lake City and venture capital is flowing in.
Read or listen to the full piece here at Marketplace Tech.
The most frequent complaint I hear from entrepreneurs in the emerging markets is the lack of risk capital in their country; investors willing to finance start-ups and early stage companies. Many founders travel to America seeking money and connections in the US venture ecosystem. While a few are able to raise cash, most don’t—and return home empty handed—to face an unknown future.
With trillions of dollars invested in food & beverage, fast moving consumer goods, retailing, wholesaling and construction to name just a few, plenty of money exists in the developing world—from Beijing to Buenos Aires to Bangalore—and from Moscow to Manila to Mexico City. So if there is so much capital seeking opportunities, why is it such a struggle to get local investors to open their pocketbooks and finance technology, 1st time entrepreneurs and early stage SMEs? And what actions can entrepreneurs implement to ‘shape’ their business models to the risk attitudes and behaviors of investors + learn to ‘sell risk, then opportunity’—to raise $ for their ventures?
I spoke on these subjects to entrepreneurs, investors and government officials from East Europe as the invited guest of US Ambassador to Croatia, Mr. Kenneth Merten and his economic section chief Thomas Johnston at the Brown Forum. This event commemorates former US Secretary of Commerce Ron Brown’s (Clinton Administration) efforts over 20 years ago to initiate trade between states of the former Yugoslavia—after years of war and conflict—and the United States. The theme of 2013’s event was ‘Entrepreneurship & Venture Capital in South East Europe.’
Topics in my 16 minute video talk include:
- Investor behavior is driven by the cultures of risk: What it is, how it differs in the emerging markets vs. Silicon Valley and actions to make risk your friend—not your foe
- Debunking myths—what investors (do/will) finance in emerging markets. Risks ‘bought’ by investors in the developing world & risks which scare them (beginning with slide #39)
- Business models which unlock capital—& those that don’t
What I ask of you
With a deeper understanding and insight into the risk behavior of capital, entrepreneurs can create and ‘shape’ business models to unlock the wallets of customers and investors. So please write me with the solutions and strategies you used to overcome the cultures of risk and raise $ for your venture.
An entrepreneur myself, I created Innovative Ventures Inc., (www.IVIpe.com) in 1986 to invest venture capital (VC) into university
technology from Michigan State University and the University of Michigan.
Then I Did Entrepreneurship and Venture Capital in International Countries
In 1990 with a few coins and lots of energy I led IVI’s international expansion into Canada & Europe, then Africa, later into Kazakhstan and Russia, created new venture funds and grant program to finance technology and entrepreneurs across these continents and countries through equity, debt, grants & royalty structures: $300+ million committed from Governments and development banks like the US Government, the European Bank for Reconstruction & Development, the World Bank and its investment arm the International Finance Corporation, Canadian Development Bank, European Commission, the Government of Kazakhstan and institutional investors.
I’ve lived, worked and invested in Canada, Europe, Africa, Kazakhstan and Russia (in Moscow for 10 years). Over the last 20 years I’ve acquired a deep understanding of investing in tech and non-tech companies/entrepreneurs (with domestic investors and Governments) in these regions, what works & does not (& why) in countries with different economic environments, cultural practices and legal regimes that require new protocols of doing business to balance the interests of all stakeholders to achieve success. Now I split my time in Michigan, Russia & Kazakhstan, and other places where contributions are needed.
Preparing your board package is a bit of an art and a science. The sample slide deck below offers a framework for consideration (please see “Notes” section of slides as well). The primary goal for the CEO is to communicate with the board, in adequate detail. Your board needs to hear about your progress (or lack thereof).
Here are some points to consider:
a) Progress metrics: Each startup has different metrics and at the very heart of it, you as CEO / founder need to prioritize these over the next 12 months. These metrics could include adoption, revenues or simply, customer discovery / development milestones. The art form lies in picking the metrics that matter – quite simply, ask yourself – what is the one development that would help the company to be seen as a leader in this space? Can this development help raise the next round of capital at increased valuation? This is not about pandering to investors but knowing what constitutes value creation.
b) Significant developments / changes: Board members need to know of any significant shifts. Fired your CTO? Pivoted to a new market? Increased burn rate by a factor of two? All of these are important enough that your board needs to know – ideally before the board meeting. At the meeting, these topics are the ones that yield a robust discussion. Remember, a board meeting is not a one-way brain-dump from CEO to board. It is a two-way street and if you do not pause, ask questions or breathe – it will ultimately lead to frustrations. The board is there to help but you have to let them help you.
c) Financials: No matter how cool the product feature set may be, make sure you include financial statements in your board package. These are ideally prepared by your part-time CFO and include your income statement, balance sheet and cash flow statements. For very early stage companies, its best to offer a simple snapshot of
(i) Cash at hand (ii) burn rate and (iii) months before we need additional capital.
Ultimately, remember that a board package is nothing but a prop for communication and discussion. Your goal is to ensure that (a) your board gives you a thoughtful input / feedback on the company’ progress (b) knows where you need help and (c) is able to help you along the way.
You can download the original PowerPoint Slideshow Here.
I manage and lead all investment activities for Invest-Detroit’s First Step Fund, a micro-finance fund that is focused on seed and early stage investments in the region. Since its launch, the Fund has invested in 40+ companies across technology, healthcare and energy sectors.
In 2011, I finished a labor of love – a book titled “The Business of Venture Capital: Insights from Leading Practitioners on the Art of Raising a Fund, Deal Structuring, Value Creation, and Exit Strategies (Wiley Finance). See: http://amzn.com/0470874449
As Mentor-in-Residence at University of Michigan’s Office of Tech Transfer , I helped spin-out a Life Science tools start-up, 3D Biomatrix. In 2012, this company was recognized by Wall Street Journal Technology Innovation Awards (chosen among 536 entries).
At the MEDC, I led the efforts for development of two Fund-of-Funds programs that was signed into a legislation and currently deploys $200 million in VC Funds. I serve on the investment committee of two seed funds and on the Board of University of Michigan Social Venture Fund.
- Brad Feld (Boulder, CO)
- Greg Gottesman (Seattle)
- Ben Huh (Yes, I legally report to myself. Xzibit and I feels.)
- Rich Levandov (Boston)
- (Unnamed, open seat)
What does a Board do?
The Board is another tool of business. You can use it wisely, or it can use you. Legally, as a corporation, we are required to do certain things according to the legal documents we all signed (this gets really complex and there are a million ways to do it) but the role of the Board, regardless of who is on it and why, is to: look after the best interests of the shareholders/owners of the corporation.
In this case, our Board members have a specialty (not all businesses are the same), they represent the world of high-risk, high-reward Venture Capital investment and invest in startups of a certain, smallish size. (Vs. say, a large publicly-traded company, or a charitable organization.) The Board of Directors are also not the same thing as Board of Advisors. Advisors don’t take on legal responsibility of looking after the company, Board of Directors do. Often, this gets confused, but BoD is the real deal where the rubber meets the road. BoA is a loose collection of advisors.
In human history, we have an illustrious pattern of fucking up the art of representation, oversight and management — over and over again. Mob rule? Meh. Despotism? Sucked ass. Monarchy? High failure rate. Democracy? Not bad. Companies are no exception. The Corporate Board is a method of shareholder representation, oversight and management.
A healthy Board should be independent, thoughtful, supportive, and aligned. This is the art of corporate governance that’s a real thing and a seldom visible and seldom credited KEY CONTRIBUTOR to the success and failure of many companies. Corporate governance is fascinating to a business nerd like me, and again, like all things in business, deceptively simple, yet virtually impossible to master. (Major BoD failures make the news, but successes don’t. Hello, Enron!)
There are many duties (legal, ethical, and quasi) of a board. Here are some examples:
- Hire/fire the CEO (Shareholders vote — based proportionally on the number of shares each one controls and the Charter of the company– to elect the Board of Directors, who in turn hires/fires the CEO. My legal and ethical obligation as CEO is to the Board and by extension the shareholders of Cheezburger.)
- Review and approve executive hires
- Review and approve the official plan
- Review and approve the financial controls and accounting
- Review and approve mergers and acquisitions
If the Board members are smart, well-connected, and helpful, FANTASTIC! But there is actually no law that requires each company to have smart, well-connected, and helpful Board members.
I’ve been exposed to a fair number of board interactions through my friends who are CEOs of their own companies. I also sit on the Board of one other company, Circa (a way to be on the other side of the table) where I try to not be a shitty Board member.
What’s it like working for your meta-self and the Board?
We have excellent Board members. (I’m not just saying that because Brad gets these blog posts emailed to him.) Because we were profitable, we were able to reject about a dozen different interested VCs before we took money from this group — because I couldn’t tell if they were good or bad until Greg and Brad came along. Our investors were heads and shoulders above the rest.
The key to what makes them great is that:
- They believe that the best way to create a great return on their investor is to support the CEO.
- They believe in WORKING HARD to do it, and they love doing it. As Rich told me once “it’s a great gig, if you can get it.”
That’s all I ask of them. Really. That’s it.
I’ve met a lot of VCs who do not work hard to help their companies. They come to a meeting every few months, don’t read up on the business, dish out irrelevant advice, and then leave. Bad Board members waste the time of the company — this is the cardinal sin of Board members.
I can list many examples of our Board members busting ass at all hours, on and off vacation because I asked for help. They take me at face value and while they are not afraid to challenge my thoughts and assumptions and whip me out of a funk, they trust me and defer the decisions to me — no matter how much or how little stock a CEO owns, it’s their company until it’s not.
And in return, I don’t hold back, and I don’t put up a wall. They see me at my best, and also at my worst.
I talk to them quite often. Before the days of the Internet, the Board operated on a far slower, monthly, or quarterly schedule. You’d spend hours in meetings reviewing reports and financial data. Now, we send them information as soon as we have it, which keeps them and us more connected, productive, and allows us to use our valuable Board Meetings to discuss opportunities and issues, not reports.
Side-note: How does the business of a Venture Capital investor work?
Greg, Brad, and Rich all have to look out for the best interests of THEIR investors (called Limited Partners, or LPs for short) who gave their companies (venture capital firms, VC for short) money (capital) to invest in companies like ours through a financial instrument and a legal entity called a “fund” (a VC firm usually operates several separate funds at any given time since a fund’s lifecycle runs only for several years).
It’s the job of venture capitalists (usually called “partners” in a VC firm) to invest the money of their LPs from a particular fund and spread the risk out over many investments. And in about 5-15 years, if things work out, they send the LPs a bigger box of money (return on investment). If the VCs are good at this, they get to raise new funds, and do it over again.
Their jobs depend on our success too.
Problems always have answers:
A bad CEO comes in just as many flavors as bad Board members. One of the things I have gotten better since that day was not just presenting the problem, but also showing what we’re doing to fix, mitigate, not-repeat it. If it’s my legal duty to be honest with the board, and if it’s my ethical duty to tell them as quickly as possible, it was all my learning as CEO to present the best possible solutions with the problem.
Good Board members won’t tell you how to solve the problem. Like good teachers, they show you the direction, they prod, they support, they suggest, but the solution is mine to own, and I am accountable and responsible for the decisions I make. It’s a strange thing, but I can disagree with my Board for weeks, but once I make the decision, they support me 100%. I count myself lucky to have people like this back me. They serve as role models for me as to how to be an employee and manager.