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Watch for Red Flags Around Boards of Investors

Watch for Red Flags Around Boards of Investors
By Vin Narayanan
Date April 19, 2022

Those of you who follow me on Twitter (you can follow me @vinistic) know that I’m obsessed with Elon Musk’s bid to buy Twitter and take it private. In case you missed this story, here’s a quick timeline:

Will Musk be successful in his bid to buy Twitter? Can Musk run Tesla, SpaceX and Twitter at the same time? Will the SEC come after Musk for not disclosing his purchase of Twitter shares in a timely fashion? What will Twitter be like if Musk successfully acquires it? I have no idea. But pass the popcorn. I’m here to watch the drama.

The Twitter saga has also brought an interesting element of startup investing to the forefront — boards of investors.

Noted VC Garry Tan took to Twitter Saturday to share his thoughts on boards of investors.

Tan should know. He was an early employee at Palantir Technologies. He went on to become a partner at Y Combinator before starting his own VC firm, Initialized Capital. And he’s been an early investor in several unicorns, including Instacart, Flexport and Coinbase.

So when Tan says a bad board member can sink a startup, investors should listen.

The discussion that followed Tan’s response was robust. One person quoted Stride.VC founder Fred Destin’s take on boards.

What I do know for sure is that this old Silicon Valley proverb is grounded in age-old wisdom that still applies today: Good boards don’t create good companies, but a bad board will kill a company every time.

That tweet prompted Jack Dorsey, Twitter’s co-founder and former CEO, to jump into the conversation.

A startup’s board is clearly a risk factor. Some boards can add a lot of value. Some can eliminate value. 

So as startup investors, how should we evaluate boards?

I like the red flag approach. For example, former military leaders comprising most of the board of a cutting-edge biotech firm doesn’t make sense. That should have raised all sorts of red flags about Theranos. Theranos’ board was so out of its depth that it enabled one of the biggest scams in investment history to go unchecked for years. Otherwise smart investors ignored the red flags and lost a ton of money.

A common complaint about the Twitter board is that it owns so little stock in the company, its economic interests are not aligned with the company’s. I worry about this far more with public companies than private companies — and even then, I don’t worry about it that much.

What I worry about with startups is whether the values and philosophies of board members are in alignment with the founders’. Board members are supposed to add value to startups. Whether it’s giving advice or opening up their network to the founders, board members should be working with the founders toward a common vision and goals. But if those goals and vision aren’t in alignment, founders find themselves dealing with board issues or heading off in directions they don’t want to go in instead of building the company they want. And that’s devastating for a startup.

Screening for this red flag isn’t easy. There isn’t an easy check or test you can run to figure this out. Most founders will tell you their board is great. And a quick LinkedIn check isn’t going to reveal philosophical differences or a tendency to meddle. To get that type of insight, you need to spend years hanging out with founders and investors, talking to them and building up your own personal database of insights. That’s time most of us (including professional investors) don’t have.

The best you — and most investors — can do is take a quick glance and see if you spot any red flags. Maybe a startup has advisors or investors you don’t like or who have reputations for meddling. Steer clear of those startups. And definitely stay away from startups where the board doesn’t have the knowledge or the experience to oversee a startup in a particular sector. That’s just asking for trouble.

But outside of the obvious red flags, don’t spend too much time worrying about board members. Instead, focus on things like product-market fit, go-to-market strategies, growth, differentiation, defensibility and the myriad of other factors where you should have enough information to make a discerning decision. If you get that stuff right, you’ll do fine as a startup investor.

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