Top Five Mistakes First-Time CEOs Make
#1 Managing a Venture-Backed Board
The road to becoming a highly effective CEO is long, mostly uphill, full of potholes and there’s no shortage of hairpin curves.
Even after you’ve financed the business; even after you’ve created a product or service that meets a market need; even after you’ve recruited and hired a motivated team to take on the competition; even after you’ve planted the seeds for a strong sustainable culture, the most arduous task still lies ahead.
In my 11 years as a CEO of three software companies and now as an advisor or board member at 12 companies, I know first-hand that there is something even more difficult for a CEO to do, particularly a first-time CEO: manage a venture capital board of directors.
Why is this so hard?
First, unlike “general management skills” which can be learned and honed as a vice president of a function in a company, learning how to skillfully manage a VC board really is the ultimate boot camp experience for the first-time CEO.
You may be asking why life doesn’t get easier when you bring capital into a business. With more capital you can hire more people, investments more in the product and in go-to-market initiatives to accelerate sales and growth. Shouldn’t increased capital give you more degrees of freedom?
Here’s the rub.
When you decide to raise venture capital rather than continue to bootstrap the company and grow through profitability, you essentially agree to put what you think of as ‘your baby’ – the company you lead - ‘up for adoption’ and agree that from here on running the company will be a ‘co-parenting’ effort.
This means that when you want to make new investments, raise more capital, hire new people, grant more stock options in your company, etc., you have to get approval from your venture capital board.
It takes time, patience and persistence to learn how to work with and negotiate with your board. First, not all board members are created equal. VC’s get board seats when they invest in a company. In addition, VCs also like to get non-voting board observers – members of the VC firm that can go attend meetings. The other type of board members are independent board members, members that are not affiliated with the VC firms. Independent board members get stock options and often invest in the company as well.
Although independent members have a board vote, they seldom own the large chunks of the company that venture capitalist do. Simply put, board members don’t really have as much influence as venture board members because they own far less of the company than venture capitalists do.
So how should the CEO handle this situation?
First, be patient.
Recognize that it takes time to get good at managing a board. You probably won’t be good at it at first. You’ll likely to be very surprised by the kinds of questions you get in the board meeting. As a CEO you spend so much time focused “on” the business – developing products, keeping your customers and sales partners happy, hiring and managing a great team. Boards members are often focused on other priorities and understanding those priorities will flatten the learning curve more quickly.
Second, block off chunks of time on your calendar between board meetings to put yourself in the investor’s shoes. I used to refer to this as my time to think about the company as a venture investor would.
What might make them nervous about the business? Are we growing fast enough? Are we churning too many customers? Are we spending too much money to acquire each new customer?
Finally, get a really good independent board member or two who’ve been CEOs and know how hard your job is. Avoid bringing on board members who are seat warmers focused on burnishing their resumes.
Find experienced leaders who’ve been on the firing line, who can help you learn what it takes to balance multiple constituencies and understand the perspectives of all the people on your board. Most importantly find someone who will level with you and tell you the truth.
Harry Truman is credited with saying “If you want a friend in Washington, get a dog.” This quote is very relevant to the issue of managing a board.
As CEO, everyone you interact with will be lobbying you for something: a promotion, recognition, an increased budget for their department etc. In many respects even your spouse is not objective. He or she wants the best for you and may not be honest with you about how they think you are doing as CEO.
Experienced, strong independent board members are invaluable and effective because they are 100% objective. They represent all the shareholders of the company. They can be your ‘truth tellers’ and can be counted upon to level with you on what is and is not working with your board.
I was extremely fortunate to have three truly great independent board members when I was CEO at Black Duck Software - Mark Fusco, Tom Bogan and Dan Keshian. All were successful CEOs of tech companies, both private and public, and really understood their role in coaching and advising CEOs.
Seek out a “Mark, a “Tom” or a “Dan.
Best CEO move you will ever make.