Founders, VCs and Values – Thoughts on a Critical Moment
What happens when a founder’s interests are not aligned with those of the company and its shareholders?
Rolfe Winkler at the Wall Street Journal recently wrote an article titled: For WeWork Investor Benchmark, a Struggle to Balance Board Duties With Founder Support.
He shines a spotlight on an important topic — governance. And more specifically, the role of venture investors and board members.
“In a world awash in capital, founders of hot companies often have the leverage to pick their investors, meaning venture capitalists have to play ball in boardrooms lest they get a reputation for being too tough on entrepreneurs and lose out on promising future deals.”
And Bill Gurley from Benchmark added:
“In a competitive VC market, ‘too many people’ worry about whether they have a buddy-buddy relationship with the founder.”
The article describes Benchmark partners confronting Adam Neumann (WeWork founder) around the topic of selling millions of dollars worth of his personal shares — enriching himself before other team members and shareholders.
Albert Wenger from Union Square Ventures puts a finer point on this in a recent post about leadership and values. He states:
“…we are surrounded today by leaders who do not have values or whose only values are to get rich personally or to be powerful (or both). Tech investors have been especially guilty of enabling charismatic leaders, and sometimes even non-charismatic but wildly successful ones, who are fundamentally hollow and without values.”
Aside from Bill Gurley, Albert Wenger and a handful of others, we’re noticing that a lot of VCs are tiptoeing around the answer to one specific question: what happens when a founder’s interests and actions are not aligned with the best interest of the company and its shareholders?
Our own experience highlights the interesting dynamic that underpins this question. Good corporate governance serves to answer this question and others where there might be misalignment between self-interest and the company’s interest. In the case of Collaborative, we’ve always treated our duty to our investors as primary – this is a core value of our firm. And we believe the founders of our portfolio companies should echo similar fiduciary standards.
As Collaborative has grown over the last 9 years, our positions in portfolio companies are now substantial enough to merit a board seat – a fantastic development that gives us greater influence on company trajectories. We welcome this greater responsibility, yet internally we still struggle on questions concerning how we should best handle board decisions when matters arise where we see a schism between the interest of the business and the interest of the founder. Why?
Because it is tough to navigate in a world where capital is free-flowing and investors are competing to be “buddy buddy,” as Gurley puts it. Either align with the company against a founder and risk not seeing the next hot deal, or align with the founder against the company – a step that likely creates its own set of issues down the road. I only know what I’ve read in the press about WeWork, but ultimately it appears the lack of governance enabled poor management and a lack of accountability – which contributed to a massive amount of value destruction.
Given the timeliness of these recent events as well as things we’ve seen in Collaborative’s portfolio, it seemed like a good moment to crystalize our position internally as a team. Now that we’ve done that, I wanted to publish this post so founders can get a sense of our approach to partnership. Three important principles stand out:
Company first. No CEO is bigger than the employees, customers, suppliers, brand, and mission that make up the company he/she leads.
Accountability. Support and encouragement from investors must be balanced with having the hard, transparent conversations when things take a wrong turn.
Ethics. We value doing what’s right when it’s hard – especially when it’s hard.
When reflecting on what we seek out in founders, many common themes were compelling, but one in particular stands out in this context: we look for a shared belief that the business and the mission is something above and beyond a single individual. We look for founders who want us committed to that broader vision and opportunity.
This may sound obvious and easy, but it isn’t. Everyone loves a cheerleader! And very few actually like pushback, criticism, and accountability from their board.
These are our principles around governance. We are proud of them and proud to share. We hope that stating these principles serve as a beacon to attract like-minded entrepreneurs and investors. And we are excited to partner with founders who embrace a company-first mentality.