In 2000, amidst the DotCom bust, I was asked to mediate a dispute between a CEO and his Board. The company, having raised $100 million and on the brink of failure, had received a windfall $20 buyout million offer. Investors clamored to sell but the CEO insisted on a larger share of proceeds. Interviews with the CEO and investors betrayed a mutual mistrust that had festered into bitter enmity. Logic did not prevail when splitting the proposed buyout proceeds. The deal collapsed and the company went bankrupt.
Contrast this with Pubmatic, an ad tech company founded in 2006 in which NGP Capital was an early investor. Pubmatic grew quickly to over $100 million in revenues but hit a wall in 2012 when incumbent online platforms built proprietary technology and brought advertising in-house. Most third-party ad tech vendors failed but Pubmatic survived and ultimately thrived due to a nimble shift in strategy, great execution by management, and a patient, supportive Board. Revenues flatlined for five years, including one year when sales dropped by 20%, as Pubmatic rewrote the software and pivoted the business from a transaction to a software subscription revenue model. CEO Rajeev Goel cut costs, established a profitable business, rebuilt growth to over 30% annually, and completed a successful initial public offering in 2020 valuing the company at over $1.5 billion.
Pubmatic succeeded because the CEO had built an early foundation of transparency and trust while the business prospered. An independent Director with deep industry expertise helped guide strategy through the crisis. Investor Directors with decades of experience both as investors and entrepreneurs did not panic and adopted a recovery strategy that would take years to fully implement. The CEO and Board worked collaboratively to recruit executives who rebuilt the technology and business. Ultimately, Pubmatic was one of the few ad tech companies to emerge as a successful public company.
Crucible moments: Leadership litmus tests
Crucible moments test the strength of organizations large and small. Countries rise or fall during wars, civil unrest, and economic crises. Britain displayed the indomitable will to resist the German blitz in 1940 in "Their Finest Hour" only months after France had ignominiously wilted. In sports, great teams raise their game in playoff competition while pretenders fade. We lionize champions who display remarkable grit while the coaching carousel fills each year among teams that underperformed expectations.
Startups seemingly confront crucible moments daily. The pressure to survive and thrive is unrelenting. Board gridlock can be a death knell for startups that must respond quickly to opportunities and threats. A cohesive Board culture – one that is capable, coordinated, collegial, and concentrated on company success – is essential in nimbly navigating in a highly competitive, rapidly changing market.
Having overseen governance best practices across our $15 billion global equities portfolio at the International Finance Corporation as well as our $1.7 billion global venture portfolio at NGP Capital, I have seen how great Boards can augment and alter company outcomes. While Board practices vary widely across Asia, Europe, and the United States, the characteristics of an effective Board are consistent worldwide. This article offers a roadmap for crafting a cohesive Board culture based on our experience at NGP Capital over nearly two decades.
Cultivating cohesive board cultures
“Happy families are all alike; every unhappy family is unhappy in its own way.” Tolstoy’s quote has inspired the Anna Karenina principle: a deficiency in any foundational factor dooms an endeavor to failure. Thiel’s Law is the corollary for founders: "A startup messed up at its foundation cannot be fixed."
Founders recognize this and often prioritize vision alignment and chemistry over valuation, fund reputation, and track record when selecting venture investors. In a recent survey of European tech founders, 57% selected vision match and 27% chemistry while just 17% designated valuation and track record among their top three criteria when selecting investors.
In Building Better Boards, Nadler and Behan identify five types of boards ranging from passive to highly involved Boards as illustrated in Table 1. Engaged Boards were deemed the most effective. They are well-informed and offer insight through relevant industry and functional experience. They reach decisions collectively in collaborative discussions among Directors and management. While respecting the role of management in running the business, Directors add value where appropriate leveraging their expertise and industry network.
The merits of an engaged board are readily apparent, especially for startup Boards that operate in uncertain, rapidly changing industry conditions. In our survey across over one hundred portfolio companies, NGP Capital observed that 75% of Boards consistently achieve this balance. We found that engaged, effective Boards are generally cohesive, capable, and well-informed. As Table 2 illustrates, effective Boards consistently coalesce in the ‘sweet spot’ while challenges arose among Boards that drifted outside the target zones.
Effective Boards are transparent, collaborative, and highly engaged. Following are selected best practices observed across our portfolio companies.
1. Transparency: building trust and early response systems
Communication is critical during crises as Mike Useem described well in The Leadership Moment. At the outset of covid, a dozen portfolio companies lost over 75 percent of revenues overnight. The CEOs of GetYourGuide and Security Scorecard rose to the occasion with weekly updates to employees and the Board. Both companies survived and emerged from the crisis in a stronger position.
Financial reporting is a statutory commitment, yet quality varies widely. A robust reporting system builds trust and transparency and is highly correlated with Board engagement and company performance.
Early-stage companies typically report key metrics monthly and full financial results quarterly. A best practice is monthly reporting on a few key metrics accompanied by a brief discussion of notable activity and actual performance relative to the plan. Quarterly reporting contains full unaudited financial statements and key metrics with a comparison to budget, the prior quarter, and the same period the prior year with a discussion of performance and variance to plan.
Robust reporting saves time as it streamlines individual communications with the Board and investors. Informed investors are better able to contribute expertise and tap their referral network where relevant. Well-designed key metrics also establish an early warning system enabling the company to rapidly respond to changing market conditions and customer requirements.
2. Cohesive Boards: Aligning interests and managing structural differences
Investors and founders have a vested interest in startup success, yet misalignment among founders or investors is the most common challenge to a cohesive Board culture. In Founder’s Dilemmas, Noam Wasserman offers a great guide for prospective entrepreneurs on foundational factors to help align interests when starting a business.
Many factors may undermine Board alignment of interests. Founders may resist accepting different roles when new executives join as the business grows. Investor-preferred shares and management common shares alter incentives in new funding rounds or exit discussions. Investors enter at different valuations and have different capital constraints, and exit timelines. Investor Directors have fiduciary duties to both portfolio companies and their limited partners, which usually coincide but sometimes conflict. These differences often surface at critical junctures such as when startups weigh capital efficiency versus growth, raise new financing rounds, or consider exit options.
Startups can best address these latent differences by balancing the Board with Investor Directors and Independent Directors as we discussed in Building Effective Boards. Buying out early investors and providing some liquidity to founders in new funding rounds may also alleviate alignment issues. Recruiting an independent Board Chair who can reinforce Board culture can alleviate pressure on the CEO when moderating diverse Director viewpoints.
Workfusion has run this playbook well and maintained a cohesive Board while raising over $350 million in seven rounds. The company has recruited four Independent Directors, including a non-executive Chair, and bought out two early major investors in the past two rounds. The remaining Investor Directors have a long horizon and share a common interest in value appreciation in the years to come.
3. Board Engagement: Leveraging networks and expertise
Boards are deliberative bodies. Good Board meetings are discussion-oriented, not reporting exercises. Board pre-read materials prepare Directors with background for Board discussions. The CEOs of Immuta and Scoop distribute a Board letter sharing reflections alongside a presentation with slides earmarked for Board discussion.
Coda CEO Shishir Malhotra has devised an innovative system called Dory and Pulse that solicits input from all Board attendees before the meeting. Named after the inquisitive fish in Finding Nemo, Dory collects questions while Pulse anonymously reflects Director views on discussion topics and company progress generally. Soliciting individual views shared with all attendees prior to the Board meeting encourages diverse viewpoints and avoids Board groupthink. Any firm can use Dory and Pulse to manage meetings. Sherpany offers an alternative solution for managing meetings, which ANYbotics uses for its Board meetings.
While hybrid Board meetings are common after covid, in-person Board meetings are most effective. Half of our portfolio companies host hybrid Board meetings, 35% are in person and 15% have remained entirely remote. Among effective Boards, all are either in-person or hybrid, while those that rely on remote Board meetings often struggle.
Many of our portfolio companies host dinners the evening before the Board meeting. Dinners and offsites are a good opportunity to engage the executive team informally and cover open-ended strategic topics beyond the purview of standard Board meetings.
Executive participation in Board meetings is highly correlated with company performance. Our survey found that 3.6 executives regularly attend Board meetings on average. In addition to the CEO and CFO, who attend all Board meetings, startups also often invite heads of operations, product, sales, and marketing. Higher participation among high-performing companies may reflect the presence of stronger executives or more inclusiveness when companies are doing well.
4. Balanced Boards: Eliciting diverse perspectives
As Tables 1 and 2 suggest, Boards have a responsibility to challenge company leadership on occasion, yet Boards generally support management and engage exploratively through questions and discussion. Good questions elucidate management thinking and elicit new ideas that management may consider, refine, own, and implement.
Effective Boards are inclusive. Discussions dominated by one or two outspoken Directors kill Board culture and rob the company of diverse perspectives. Many CEOs encourage different, controversial points of view to expand strategic options. A collaborative culture gives Directors more freedom to speak candidly and offer different perspectives.
Across our portfolio, 86% of U.S. and 42% of European companies hold executive Board sessions. These sessions typically follow immediately after the formal Board meeting and encourage wide-ranging feedback from all Investor and Independent Directors and observers in a closed, confidential setting. The Board Chair or lead Director coalesces these views and shares them with the CEO either separately or with the reconvened Board. Our survey indicates that these Board sessions increase transparency, collaboration, and Board engagement. When practiced routinely when times are good, executive sessions build trust that improves Board effectiveness during crucible moments.
Cultivating cohesive board cultures: A roadmap
Board building is an ongoing activity, a continuous improvement process based on evolving business needs and resources. Public Boards standards have increased substantially in recent years. Today over 80% of public Boards conduct annual internal assessments, twice the rate of two decades ago. Startups have fewer guide posts but more opportunities to differentiate based on Board performance. Our experience indicates that effective Boards can tip the balance between success and failure.
Boards have two functions as illustrated in Table 3: (1) conformance, which focuses on risk management and looks at the past and present; and (2) performance, which focuses on opportunity and looks to the future. Startups and their Boards safeguard the present, exploit current assets, and explore future opportunities.
Table 3: Effective Boards: Balancing Risk and Opportunity
Startup growth is a balancing act. Many startups operate in winner-take-most markets that disproportionally reward high growth and market leadership. Yet more companies die of indigestion than starvation.
A Startup Board culture sets the tone for balancing current needs and future opportunities. Optimizing this balance requires experience and judgment. Startup Boards benefit from expertise and insights from diverse perspectives.
Delivering value requires a capable, committed Board coordinated on common objectives. This series of two articles offer a roadmap for building better Boards based on our experience at NGP Capital that can increase the likelihood and magnitude of your success. We hope these ideas have been helpful and wish you the best in making the most of your startup success.