The Bad Board Member

1/19/11Follow @sgblank

Over the last 40 years the U.S. 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, VC’s and entrepreneurs take large risks together. VC’s 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 VC’s, 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 plan.

“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 VC’s 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 behavior on the part of a … Next Page »

Steve Blank is the co-author of The Startup Owner's Manual and author of the Four Steps to the Epiphany, which details his Customer Development process for minimizing risk and optimizing chances for startup success. A retired serial entrepreneur, Steve teaches at Stanford University Engineering School and at U.C. Berkeley's Haas Business School. He blogs at www.steveblank.com. Follow @sgblank

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  • http://www.dailygrommet.com Jules Pieri

    Steve,
    You had me reading this post with bated breath–great story-telling. But then…it ended. I thought there was going to be another page. The one with the answers, the success stories, the solutions, recommendations. I look forward to the sequel. I’ve seen the situation you describe, so just telling the story is a good deed. Thanks.

  • Sam

    I’m with the comment above. Come back to us with the “B case” on this one.

  • http://www.dmd.co.nz Ken

    Also waiting for the sequel article!

  • Chris H.

    There is a solution for this (ie. naming the VC). The only way to improve this is by improving transparency. CEOs are criticized in public, the same should apply to VCs. One place to get started is through forums like thefunded.com

  • http://www.digitalics.net Scott B.

    I’m with Chris on transparency.

    One thing you didn’t touch on is that this also impacts the other VC firms on the deal. If I was a partner at firm X, and deals kept blowing up when firm Y’s junior guy was on the board, I’d think twice about doing deals with firm Y in the future.

    You still have that trail of dead firms but perhaps firm y is able to ruin fewer deals in the future.