The Bad Board Member
Steve Blank1/19/11Follow @sgblank
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board member. Yet while a VC can remove a founder who misbehaves, there is no corresponding recourse when a VC is the source of the problem.
Astonishingly, there’s no professional standard in the venture capital industry that acknowledges this problem even exists. Not only does the industry lack a code of conduct, but individual venture firms lack avenues for founders/CEOs to bring these problems to light. There’s no ombudsman or third party in a firm to hear an objective review, and no remedy to deal with a partner’s bad behavior. (And why would there be if the problems are only with the founders.)
The rationale seems to be rooted in both tradition and math. Like doctors VC’s tend to bury their mistakes. If a partner screws up a single company in a portfolio it’s not the end of the world since they have 20-30 companies in a fund. If a single partner has a consistently terrible track record, he or she just won’t be invited into the next fund. But in the meantime this bad board member has left a trail of broken companies. When it comes time to understand individual partner performance, information asymmetry is at play—like bad doctors, knowledge about a partner’s performance is limited—and entrepreneurs rarely have a say in the matter even if they do have some knowledge.
Finally, there’s more than a whiff of noblesse oblige at play. If firms believe that VC’s always act responsibly and the problems are always with the founders, they don’t need to worry about bad board member behavior. They can continue to pretend it never occurs.
The reality is that the VC business has expanded from the clubby group of 20 or so firms that sat on Sand Hill Road 40 years ago into an industry of ~400. My hope is that they realize that with that expansion comes a different set of responsibilities.
Lessons Learned
- Most Entrepreneur/VC clashes arise from founder performance issues
- Infrequently the cause is bad behavior from a board member
- Currently founders have no recourse
- After 40 years of growth the VC industry still operates with “small club” rules and mindset
