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Running Length 00:10:21

Episode Summary

When Priya informed her board that the company missed its quarterly sales target, she was met with a barrage of attacks. The real error wasn’t the business shortfall — it was how she managed the situation. Learn how to avoid her mistakes.

Full Transcript

HEIDI: Welcome to The Startup Solution, and “The Case of the Boardroom Blow-up.”

Hello, I'm Heidi Roizen from Threshold Ventures. The Startup Solution is a podcast where we unpack the “oh shit” moments faced by entrepreneurs, and then find the best ways to get through those moments alive — and with a little luck, maybe even better off.

What you’re about to hear is a re-enactment of a board meeting I participated in a number of years ago. The names and details have been changed to uphold our commitment to the Entrepreneur Protection Program. Let’s listen in now as Priya, our CEO, shares some news.

PRIYA: Next, I want to talk about the quarter that we just completed. I'm so sorry that the slide was not in the deck that we sent out last night as we were still finalizing the numbers. As you can see, unfortunately, we only hit 72% of our sales target for the quarter.

BOARD MEMBER 1: Whoa, whoa, whoa, wait. What? What the hell? Why are you only telling us this now?

BOARD MEMBER 2: The quarter is three months long.

BOARD MEMBER 3: Let me get this straight, Priya. You either knew things were going badly and didn't tell us, or you weren't on top of it enough to know it was happening in the first place. And either way, it's really bad.

BOARD MEMBER 1: This is a disaster. 

HEIDI: Sadly, I’ve been in more than a few board meetings like this during my decades as a VC. As unpleasant as they are for me, I guarantee they are even more unpleasant for the CEO in the hot seat.

So let’s spend a few minutes on how we got here in the first place, and then let’s figure out how to keep this from happening to you.

In my opinion, the biggest mistake Priya made actually happened long before this board meeting. It was clear to me from the dynamic in the room that Priya hadn’t put any work into moving her relationships with her VCs from pitching to partnership.

In the beginning, when you're an entrepreneur and you meet a VC, you start the relationship by pitching — putting your best foot forward in the hopes of convincing them that you are their next great deal. And there’s nothing wrong with that. That’s how the process works.

However, once you have their capital in the bank, that relationship needs to evolve: from pitching to partnership.

And in a partnership, you as the CEO should expect that person, the VC, to help you make your company successful. And the best way you can help them help you is with timely data about what you are experiencing — good or bad.

Unfortunately, what I’ve seen happen is that people who are used to being in pitch mode can get stuck in that mode with their investors.

We even have a technical term for it at Threshold. We call it “happy ears.” The entrepreneur seems to hear only the positive, and likewise disclose only the positive. That may make for a few initial low-stress board meetings, but ultimately it doesn’t contribute to the mission of making the company successful. And at some point, the negative usually catches up with you, and by then it has probably gotten way worse.

Priya needed to understand that her board members can only help if she shares the good, the bad, and the ugly with them. In fact, one of our credos at Threshold is: we want to be your first phone call — regardless of whether the news is good or bad.

Is that because we love bad news? No! What we do love, though, is data. We want to help you navigate through bad things. And the sooner we know about those bad things, as well as any color about why they happened, the sooner we can help you manage them.

With the exception of a truly combative board member — a Boardzilla, which I’ll talk more about in another episode — most board members I know do want to be helpful. They just need the right information, at the right time, to maximize that positive impact — and it’s on the CEO to make sure that happens.

So, yeah, maybe you lost a big contract. Maybe your new product is late. And yes, maybe you aren’t making the quarter by a lot. It’s bad news. But it’s also data. And the more helpful brains you put on those problems — brains that are already on your team and already invested in your success — the sooner you can get help in identifying potential solutions.

Especially in the case of bad news, the “when” is as important as the “what.” As soon as you have a handle on it, sitting on bad news generally makes things worse. And for sure, holding that information until a board meeting, where you drop it on everybody all at once, is like lighting a fuse on a big fat bomb.

I have a piece of simple advice about board meetings that I’ll sum up in two words: no surprises.

Unless something happened literally in the last few hours, there is no good reason for dropping information bombs in a board meeting. Trust me: the worst of the blast will blow straight at you.

Yet I’ve seen this behavior surprisingly often, usually stemming from the basic human desire to avoid pain. The CEO will send the board deck at 11 pm for an 8 am meeting and say, “Oh, we're sorry. We were waiting for some last-minute numbers.” I think sometimes they are even hoping that the board won’t have time to read the deck before the meeting. And kinda hoping that somehow they’ll do a better job delivering the bad news in person to everyone at the same time.

From my experience, that strategy never works.

This tactic is at cross purposes to the goal of being in a true partnership. Don’t you actually want your board members to be operating from a position of knowledge? How can they help if they aren’t informed?

If you’re shaking your head in disbelief at what I’m saying, maybe it’s time for you to work on some “relationship therapy” with your board members.

I’m a huge believer in putting effort into building relationships between entrepreneurs and investors. The best relationships start with empathy, and empathy can only be developed from a mutual understanding of each other’s circumstances.

Then, relationships are further grown with an attitude of respect and a drive towards open and honest communication. And you know what, it’s kinda not that different from any other human relationship. After all, even VCs are human. At least so far.

I’m actually kind of amazed that many entrepreneurs don’t know the most basic things about how venture funds work, where the money comes from, how we are evaluated within our firms and by our investors, what we have to report back to our partners — stuff like that. I think entrepreneurs should know this and should talk to their VCs about these topics, as every firm and every person is different. Understanding these things not only lays the groundwork for empathy, it also may help you navigate situations down the road when the pressure is on.

After you talk with your investor about the circumstances and challenges each of you faces in your role, next, spend some time on communication.

When I’m in the early days of a relationship with an entrepreneur, I try to understand how each of us likes to share information. What is the best way to reach each other when something is urgent? How often should we talk? What are my expectations of them in terms of data frequency and granularity? What are their expectations of me? And we always talk about the importance of having that challenging news travel the fastest, even though that may be an uncomfortable thought at first.

Since board meetings are such a standard part of the package, I also try to cover those up front, before I ever attend one. And I always share my golden rule of board meetings: No Surprises.

We talk about the importance of providing a deck that has the most critical data to discuss, with ample time for the board to digest it — at least a day in advance of the meeting. Many of the best entrepreneurs I know call each board member in the week before the board meeting, to preview the most important topics, share any breaking news, and ask the board member for their input in advance. Some even share the deck a few days in advance and call each board member for feedback before the meeting.

Definitely no surprises in the boardroom for those CEOs.

Now, I’m sure some of you are hearing me describe all this and are thinking “Good lord, that sounds like so much work.” Well, it is! But let me try to reframe for you why it’s actually a great investment for you to make.

The way I look at it, you have a number — at least I hope you do — of experienced, useful people, who you don’t pay a penny to, who can help you solve problems. All this interaction is going to help you get the most out of them. So it is actually a worthwhile investment of your time.

And let me give you one final reason to put all this work into these relationships. In most company structures, the CEO reports to the board. So in most cases, the board is at least technically your boss. And if you do any research on “managing up,” as it’s been called, the advice you will find is pretty much the same as what I just talked about. So it’s probably a pretty good thing to do for that reason, too.

To wrap, I believe it’s well worth it to build good relationships with each member of your board. And to do so you need to proactively move each relationship from pitch to partnership, work with them to understand what each role entails, and lay the rails for frequent and honest communication.

If you do that, I believe you will actually get more benefits from your investors, beyond just the money.

And at least you won’t have to wear a flak jacket to your next board meeting.

And that concludes “The Case of the Boardroom Blow-up.” For the record, this situation is real, but Priya is not, and no startups were exposed or harmed in the recording of this podcast.

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