As someone who floats between the worlds of private equity, VC and public markets I have a fairly broad perspective on how the quality of boards can vary. I have long been a fan of what Chris Norton is doing with Starboard which I will summarise as ‘make boards better’ and which a less caffeinated version of me would refer to as ‘provide some actual value’. They just released a very good set of board principles for startups but which I think scales beyond that. I suggest you make everyone on your board read them.
Some of you will probably be mean and say something like ‘America focuses on capital and growth, China focuses on growth and rare earth minerals and Europe rearranges its boards’. This kind of criticism probably doesn’t understand the friction to growth that bad boards can produce. Bad boards are very, very bad for economies. I have been on them, I know. Europe needs better boards, there is a fairly direct line of sight to improved economic growth.
It’s also worth pointing out that at some level of early stage growth, the best board is almost certainly no board. Don’t waste time with corporate governance until you have a defined corporate thing to govern. I’m always surprised by the number of founders who ping me to ask about being chairman (not even NED!) and they haven’t even figured out who their customer is. Stop wasting your own time. Just build. Then add some (useful) structure.
The point of this post is not just to improve boards (everywhere), it’s because I’m genuinely concerned about some of the things I see slipping through. Very few people reading this will have paid attention to the First Brands bankruptcy but you should-I’m willing to bet several high quality lunches that we will see some kind of similar off-balance sheet debacle across the startup space (most likely data centre) over the next few years.
A role which the Starboard principles doesn’t suggest boards should do but which I am absolutely adamant about is that directors should understand, and indeed interrogate, the revenue recognition policies of their companies. I have written [in other posts] about the widespread ARR fraud which is becoming endemic in founding and investing circles. Jason Lemkin won yet another place in my heart for making the (historically extremely heretical) statement that founders should go to jail for misrepresenting revenue:
This may sound a bit crazy at first — but I wish a few more founders would go to jail. What do I mean? Look when you invest, you take risk. That’s part of the game. Some work out, some don’t. It’s OK in and of itself. You have a loss ratio to accomodate that. But what’s picked up the past few years is fraud from founders. That, combined with highly accelerated investing paces — hot deals are often now done just on a Saturday — gives investors almost no time to do proper diligence. And that’s OK, as long as everyone is honest. But making up ARR numbers? Claiming pilots are annual contracts? Accelerating contracts and ‘recognizing’ all the revenue in month one to raise capital? Claiming customers that disappear weeks after a round closed? If founders though they might go to jail if they did this — everyone would slow down with the B.S. numbers and metrics just a little. The best ones would all get funded, it doesn’t matter. But maybe, folks would slow down before they just basically make things up. That would benefit the entire ecosystem. Every VC I know has a $20m-$100m+ loss coming in their portfolio from one of these deals. Often, several.
There is a long and interesting discussion to be had about the spectrum of optimistic thinking which goes from leadership (‘we landed another customer-amazing!’) to selling to investors (‘we landed another customer-they might buy more!’) to outright lying (‘we landed a customer and they are now in a multi-year contract thus this is ARR!’). At this stage of the movie, I would expect any startup with external investors to have diligenced a sample of the company’s contracts and any startup with external directors to have interrogated the company’s revenue recognition policy. I suspect I am being optimistic.
Other reading
Modern Times Group (where I am on the board) ran an excellent (imho) Capital Markets Day last week to lay out the updated strategy for the company. Although this is a public markets event, I actually think it’s quite a good exercise for many private companies of a certain scale to go through for their shareholders.
I’m very bullish on Discord as a platform and our holding company has been investing here for a while now. Unsurprisingly, as the ecosystem grows in importance for brands, developers and everyone else, Discord architects are becoming a thing. I kind of told you so.
For Secret New Thing reasons, I am deeply immersed in Jeffrey Yost’s comprehensive history of IT services from the 1950s until reasonably recently. It’s remarkable how similar the patterns are with different waves of computing.