Building and Managing an Effective Board

The third NetForum meeting took place on January 23^rd, 2013.  The discussion centered around the topic of “Building and Managing an Effective Board.”  This is a much different question and challenge for a private company funded by VCs or a strategic investor than it is for a public company.  What one can expect from board members appointed by an investor varies greatly, from full engagement or intrusiveness to minimal support or indifference.  Yet, this is the group required by law to manage the company. Partners at Willkie Farr & Gallagher, Serge Benchetrit and Gordon Caplan, joined the meeting to share some of their experiences advising Boards. 

Clearly, the management-Board relationship is one of the foundational elements of a venture/PE-funded enterprise. It is one fraught with potential conflicts, definitely, but also a source of support that management teams can leverage. It was not surprising then to hear many members speak critically of Board experiences they’ve had while at the same time say “but I really like my Board.” In the course of the discussion, a number of themes emerged:

• The Board by law manages the company but is not involved in the day to day. The CEO’s job is to figure things out and tell the Board to support what he or she wants to do, not to ask what he or she should do. At the same time, having a good relationship with individual Board members to sound ideas is a good thing.
• At times of pivot, the Board is not a source of creativity. If a CEO has to ask his or her Board for ideas about what to do next, that CEO’s days are numbered. The Board hired the CEO to drive the business, not to ask for the directions…
• Board meetings are a significant strain on a small company’s resources. Yet, many members felt they were a good thing as they forced the management team to step back, re-examine what they were doing and have to justify their actions.
• Companies may need different types of Board members over their lifecycle. Ideally, a Board would evolve in line with the company’s progress to address its evolving needs. This may in fact happen in the Angel to VC transition phase but rarely happens later.
• First time CEOs or inexperienced ones don’t know how to select their investors based on the quality of the Board members that would join the company. But if possible, CEOs should create a market for their equity to allow themselves a choice of Board members, and favor those firms that would put members with industry expertise, previous experience in the field or with similar companies and industry contacts on the Board. Unfortunately, this does not happen as often as it should, with the Board seat going to the sourcing partner instead of the person in the firm with the most relevant experience.
• Independent board members are often a valuable addition to a Board, and help add a disinterested viewpoint to the Board discussions.
• Strategic investors are often less concerned with value creation as with the ability of the firm to provide a good service that meets their needs. This is a source of conflicts.
• There are differences between how East Coast and West Coast investors operate and thus act as Board members. East Coast Board members are more operations/number oriented, while West Coast Board members are more “big picture” and strategy oriented. It was posited that this may be related to the observed fact that there are more below-the-radar, profitable mid-market companies in East Coast portfolios (more single and doubles, less zeroes and home runs), while West Coast portfolios are littered with failures and home runs.

Building Strategic Partnerships

The second NetForum meeting took place on December 6^th, 2012. It was dedicated to understanding how to effectively and efficiently build strategic partnerships. How do two companies align their interests to pursue a common goal? What makes an agreement a strategic partnership and not a garden variety commercial agreement? Should they be coupled with an investment?  These difficult questions were tackled as members discussed examples of strategic partnerships that worked and those that did not.  Five main insights were generated from the lively discussion.

1. Partnerships can't be manufactured. They must evolve over time. Many of our members are on the receiving end of "strategic partnership" proposals. These proposals are treated immediately with suspicion. Often, they are viewed as a way to get something without paying for it. Or they are deemed a distraction from the business objectives that have already been set and are already being pursued by the company. Yet, unsolicited partnership ideas are treated with a lot more seriousness when filtered by an insider -- the best insider referral is NOT from someone way up but from a corp dev person whose job is to filter incoming deals, or from a mid-level operating person who is familiar with the real needs of his/her colleagues.

2. The partnership offers that will get the most attention are those who are farther away from the core business of the company being approached. If the idea will yield an incremental improvement to the recipient's business, it is less likely to be pursued as the company will naturally believe they can do it on their own. Ideas that fill a material gap in a business line or that allow a company to enter new business lines faster will be seriously considered. Yet, companies do not broadcast their strategic gaps, so figuring these out is a guessing game with lots of misses. (Here's the value that intermediaries fill -- discrete sharing of needs. The NetForum can also help here.)

3. Partnerships with technology enablers will be looked upon favorably because of the difficulty that big companies have in developing new products and technology. So will partnerships that enable companies to extend their assets (usually their brands) into new markets or platforms. Small companies continue to make the mistake that by doing a deal with a big company they will have "access" to the marketing power of a big company.

4. Money needs to flow to make a partnership work. Both parties need to see a path to new revenues that did not exist before. The cash is better than the PR value.

5. Having an equity stake in the partner is not essential but it often creates a structure that is a prelude to an acquisition. Companies often enter into strategic partnerships to try before they buy.

It has never been easier to start a business on the Web, never harder to scale one

The inaugural NetForum meeting was on October 18^th, 2012 on the subject of “It has never been easier to start a business on the Web, never harder to scale one.” The subject of the meeting was right on point, as evidenced by the lively discussion that took place. There was strong support for the fact that the lowering of barriers of entry made it even more important that companies have a strong value proposition. Participants noted that funding rounds are getting smaller because overcapitalizing unbaked ideas did not make sense. It was brought out that not all companies should scale, and won't, and that's probably natural. The ceilings and watershed moments for companies are changing, there is seemingly a new cap where b2c media companies get to $100M and then can’t get to the next level. In b2b that too happens and the bar is probably lower, around $5M. Participants noted that some of the companies that max out are good targets to plug into a traffic funnel. There is also an incredibly important time element -- companies often don't have time to succeed as things are changing quicker every day. There are also major challenges of fighting big entrenched incumbents. Companies are employing all sorts of scaling strategies, some NYC startups are attempting to scale by importing talent from Silicon Valley.  In summary, although the challenges of scaling a business are numerous, there are still industries where the incumbents have been slow to change and these are the places that nimble challengers can still create a big business, even today.

Evolution of NetForum

As we prepare for our 6th event, I feel it's time to share how NetForum has evolved over the course of the last nine months. It started as nothing more than a hypothesis. Back in September we thought there was a market need for NetForum and said, "There is no TechStars for expansion stage Web companies. All the attention is focused on the new start-ups.  But the challenges to scale from early stage to later stage are enormous." NetForum tried to fill this need by bringing together in a roundtable format a small group (20-30 people) of C-level executives of expansion stage Web companies and Strategy/Corporate Development executives from leading public and private companies.  We decided that at the NetForum there would be no admission cost, no presentations, no pitches and all attendees would be expected to contribute to the discussion. We wanted to generate though-provoking and engaging discussions in a "friendly" and confidential setting. In the beginning we had no idea if this would actually work. Over the last nine months our hypothesis has been resoundingly confirmed. We have had breakfast sponsors such as the NYSE, Bank of America/Merrill Lynch, Willkie Farr & Gallagher and Duane Morris. Participants include senior executives from a wide-range of companies such as The Street.com, Virgin, Reuters, XO Group, EdVentures, Sony, Bank of America Merrill Lynch, and numerous rising web companies. We will post brief summaries of our first five events below and in the future start posting event descriptions prior to and summaries after events.

Introducing The NetForum Digital Executives Breakfasts

The NetForum gathers senior Digital executives from Expansion Stage Internet companies and senior Strategy and Corporate Development executives from large media, technology, finance, retail and services companies.  Our group meets about every 6 weeks for breakfast to discuss a topic of interest and of relevance to senior executives of companies that have left the start-up stage and are now in expansion mode -- a category of companies that is largely left out of the limelight accorded to the 4-person startups.  It is a forum for honest, candid sharing of experiences -- accelerated learning from peers.  We have from time to time invited experts to share their expertise with the group.

Attendance is limited to less than 25 people per breakfast.  The NetForum attendance is by invitation only and free of charge.  To date, the breakfasts have been held in NYC.  If you would like to be invited to join the NetForum membership, please email laurent@parkviewventures.com or fill out the contact form on the home page.