The Bad Board Member

1/19/11Follow @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

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.