58. Startup Boards, Part 2 (Mahendra Ramsinghani)

The Full Ratchet Podcast on iTunesNick Moran Angel List

Mahendra Ramsinghani joins Nick to cover Startup Boards, Part 2. We will address questions including:

  • Mahendra_Ramsinghani_Startup_Boards_Part_2What cadence/frequency should Board meetings occur?
  • Can you talk about the board meeting itself and how the best meetings operate?
  • How does the startup board’s makeup and responsibilities evolve over the course of a startups growth?
  • What are the most common missteps and issues that you’ve seen with boards?
  • How do board seat transitions occur?
  • What’s your current investment focus area?

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The Business of Venture Capital Book Ramsinghani_Startup Boards by Mahendra Ramsinghani & Brad FeldGuest Links:


Key Takeaways:


1- Early group of mentors

Mahendra’s position is that one doesn’t need a formal board early-on. But he does advocate assembling a group of mentors to guide the business and help make sure the entrepreneur doesn’t waste a lot of time. Just having to report on status once a month, to an outsider, forces one to measure, show progress and think about the business from the perspective of an outsider. It makes the entrepreneur do things in a disciplined manor that they would otherwise not do. And it also allows the founder to learn how to articulate both the wins and losses. This can serve as great practice for the standard reporting and also the storytelling that will come when the founder goes through a fundraise.


2- Meeting Dynamics & Expectations

On cadence… Mahendra advised to set the meetings upfront, upon closing the investment. Agree together on what the right meeting frequency is, for the next twelve months, and get everything on the calendar. He also suggested to build the board meeting around a meal. And the purpose of the meal is not just the entrepreneur-investor relationship, it’s about the relationship between investors. One doesn’t want a board of individuals trying to one-up or impress each-other. The goal is to assemble a board of people that are comfortable and friendly enough with one-another to put their own agendas aside and focus on their fiduciary responsiblity to the sharehodlers.


3- Board Roles & Responsibilities

Mahendra discussed how the board’s role shifts between the early phase and the growth financing phase. After the first professional round of capital the focus should be on product development and financing. He mentioned two, critical KPI’s to measure:

1) Launch timing:  When is the development phase complete and what does the launch cycle look like?

2) Cash timing:  How much cash is in the bank and how many months of life does that give us?

Then we discussed how at the second stage there is a shift from managing for launch to managing for growth. Here the board should be focused on sales. When seats are awarded, the founder and existing board should be looking for people w/ growth expertise or customer relationships. And the number of board members, typically an odd number, may increase from 3 to 5 to 7 as the startup progresses from pre-product, to growth to scale and more shareholders are introduced.

And, from a functional standpoint, we covered the decisions that are within board jurisdiction vs. those that are not. The simple rule for a founder is to ask, is this an operational decision or an equity decision? Anything that effects the financing or cap table is a board decision. Everything else is the founding team’s decision. And Mahendra’s one caveat here is that while major operational or business decisions are the responsibility of the startup, it’s always good to keep the board aware of these decisions and get their blessing. When Tom Tunguz was on the program, he discussed his role as a decision auditor. If one thinks of their board as a strategic consulting group that serves as an experienced and insightful sounding board, that can be a major asset to the business.

Tip of the Week:    The Board Meeting Update

*Please excuse any errors in the below transcript

Nick: So, if a founder were to need to pivot for some reason, a pivot of orthogonal nature, would that be sort of a board approval level decision whereas a pivot maybe of a tangential nature is more in the operational room and in the Founder kind of makes that call themselves?

Mahendra: That’s a great question Nick because this is exactly the kind of question which does not have a black and white and it sort of falls into this gray area and you know, we all know that there were almost expected in any startups trajectory. In fact, in the venture capital book I talk about the PayPal team. As soon as the line was closed, the first board meeting that come to the board with a completely different idea and that point the board did not have a choice to do anything and I have no idea how easy that conversation was or how difficult that was for people like #Max Levchin and #Peter Thiel and others but I think we all know that they were out of the norm. Part of the learning is for investors as well to not sort of totally afraid or go off on a tangent when an entrepreneur walks and suggesting a pivot but it’s just sort of making sure that the way this discussion occurs is healthy. So, you want to see the discipline from the entrepreneurs of the rationale for the pivot and you want the board on the message to be supportive of the pivot because obviously this is going to impact the launch of the product. It is going to impact the expenditures because you want to spend probably six more months now on the development mode. That’s going to involve maybe possibilities in a small round or you used in the same capital but in a more efficient way. These are harder to challenge is that you start to see at the border level but on the entrepreneur side I would say, show the discipline of, you’ve taught this through , you’ve looked at multiple different angles and then concluded that the pay what in this direction is going to increase the value of this company for themselves as founders, for the shareholders and then the learning for the shareholders and the board members here is very important is to be emotionally very supportive of this process because it’s not going to help anybody if we throw a fit and go down this tangent and but we still have to be disciplined in asking… continuing to ask the questions to make sure that decisions are being made the right way.

Nick: So, you’ve had exposure to a number of different board’s probably effective ones and ineffective. Can you talk about the cadence in the frequency with which the board meetings occur with some of the more effective ones that you’ve seen?


Mahendra: Yeah, Nick. The one discipline entrepreneurs need to build in is as soon as there is around and even if a small run. Even if it’s one hundred thousand dollars coming in, if I am the startup C.E.O. I would want to set the annual cadence right off the back to say, “Nick, you as a valid board member are a busy guy. I would love if we can just block the calendar off for the next twelve months and two hours maybe three every third person of every month okay and ideally I encourage entrepreneurs to say do it around a meal and this is #Brad’s you know, philosophy of building the board dynamics around a meal is very important because you know crazy stuff starts to happen you know? You may not know the other board member and that other board member may try do things to impress you and all of this crazy stuff starts to happen which is very wrong. Our goal is to serve the C.E.O. So the first thing the C.E.O. need to do is set the annual calendar, and then do it around a meal or something informal initially where the other board members get to know each other, they get to respect each other, like each other because that’s a family itself that needs to dance with each other. The goal should be not to show each other how smart they are, their goal should be to serve the C.E.O. better. Now, it may not be a crazy competition where everybody’s going abroad Cirque but it is in a subtle way we all want to make sure that we’re here to serve the C.E.O. and not to prove anything to each other and sometimes you start to see the dynamic where one board member will try to prove some things to other board members and you know, that it’s just creates this negative vortex of energy and does not help.

Nick: Is just part of the reason… I know you can’t speak for Brad that but is this part of the reason why he is may be not a huge fan of observers cause you get these extended boards of many people and many non-voting observer members that are maybe trying to one up or impress some of the director level folks?

Mahendra: I’m sure Brad has own experiences. You know, generally I’ve seen that we seeds have some amount of observer dynamic if it’s sort of starts to take a life of its own. I’ve seen a lot of these obscene a lot of V.C’s get restless about that. You know, I committed my own example; my first board meeting I was an observer and I was clearly out of line in trying to jump in, trying to do things that were completely unexpected of observers and when I look back, it’s like, “Gosh!” you know, “I’m glad the V.C.S. who are the former board members were kind to me and let me learn as I went along…” but I was creating a lot of destruction in the room. I was being a pain in the ass of the C.E.O. and when I think about all that, part of that was the motivation to start by the little forming your own self but write a book to say bad behavior can come from any side. It could come from an observer, it could come from a V.C, it could come from a C.E.O.

I feel like there is absolutely no challenge with observers. I’ve known some observers to actually be more valuable than the board members and if #Tim Peterson was with arboretum ventures, he described a case study to me with one of the companies, one of their portfolio companies… they had a small investment in this company and Tim was the observer but over the years he contributed so much to the company that the C.E.O. would treat him as a confidant. That company eventually went public and their huge outcome and I feel like having an observer label does not mean anything to me these days because I just look at the person and say, “Is this person doing what is expected of them? Are they engaging with the other board members to ask if this is the right way to hug the C.E.O.? Are they are asking good questions of the C.E.O. in an intelligent manner?” and that’s what it was when I was 6:42 (unclear).

Nick: Going to ask you to get in the weeds for a second here but Mahendra, can you talk about the board meeting itself in how sort of the best board meetings operate?

Mahendra: I can speak to the earlier stages of the board meetings and share some of my own experience having that as the quarter and the top leader around the book was critical because he had seen this full arc of companies going through growth stage is. You know, one of their companies just went public Fitbit and when boards reach that level where it’s a pre I.P.O. company or now a public company, that is a lot of things that change but I think a good board meeting and earliest stages which is where I’ve had a lot of experience, if I can sort of boil it down to two or three different pieces, it boils down to very good communication so everybody’s aware of what is going on. The second step of that piece is that the C.E.O. is making sure the board is aware of two critical metrics. I mean, I can produce forty five K.P.Is but at the start up stage some of that is unnecessary. The only two K.P.I. as a startup C.E.O. that I want to take the board is; when is my development phase going to be completed and what did the launch cycle look like? Okay. So we’re going to launch November 1st and the first five enterprise software customers are going to be beta and this is how we’re going to approach that. So, I know what the critical milestone is. The second critical metric is my cash position. Producing elaborate balance sheets, income statements when there is no income or cash flow is good, it’s healthy but really what the board… If I flip myself back to the board side of the investor side, all I want to know is how much cash is there in the bank and how many months of life that gives us, you know? Eight months of cash, we have nine months of cash. Good because the next stage of this company is going to be revenues as even the product launch follows the same sort of predicted milestone and the next stage of the financial side of it is going to be raising the next one. So, those are the two key metrics that a startup C.E.O. should make sure the board is aware so communication and awareness around that is very, very important. I think the second part of the emotionally dynamic, the board members of the investors need to know that this is going to be a very choppy ride; things fall apart; startup C.E.O.’s sometimes get exhausted; Marcus don’t pan out; it always takes twice as longer and twice as much. So having the emotional construct that they are going to be a lot of mess ups along this way. We’re all in the small boat that a thirty foot waves; there is going to be vomit; there is going to be screaming but all of us have to keep rowing, not yell at each other but keep looking at that island we are going to, keep rowing and see if we can support the captain and that sort of the emotional concept everybody needs to have. So, I think of those two things exist; good communication and good emotional balance, no matter how big those waves may be, we’ll have fun.

Nick: Great. Yeah, you talk about in the book some of the key roles and responsibilities of the board. Can you talk now about how the startup boards make up and how those responsibilities may evolve over the course of growth in over the course of the fund raising stages?

Mahendra: Yeah great question. Nick. I think the evolution of the board in the early stages is sort of product development and financing as we just discussed but then the second stage, let’s say you start to grow into sales but in the first twelve months of post launch or just tracking number of customers, starting to track some possible break even gross margins maybe if you’re lucky, you know. Gross margins don’t come into play for quite some time but just focusing on growth initially and just being aware of what the cost structure looks like. So, now the board is to shift that thinking from largely emotional because you know, that’s the first phase of the journey and I could sort of almost correlated this to the parenting role right. The kids are very young, largely emotionally sort of cuddling them; helping them walk; helping them ride their bicycles. You know, sort of throwing K.P. eyes and eyes at them but once they’d go out and start to make money, let’s say that graduated now they start to make money , at that time you might say, “Oh, by the way the minimum wage and this much.” How are you comparing with back metric, right? Or your peers, all of them who graduated from such as at school are all doing this kind of work making this much money, how are you comparing to that universe of companies? How are you comparing to managing your costs?
So, I think now the discipline part starts to take over and this is where you have the board which is a lot more operationally tuned in. They also start to ask harder questions around the financials. So, now the shift is managing for growth versus managing for launch. Even the concert of the board sometimes changes you know. I deeply admire two gentlemen who are with this fund and Kalamazoo called #T. Gap Ventures; Peter Farner and Jack Ahrens. Both of them have been in this business for about thirty years and what Jack told me was fascinating. He said look, “I don’t see us as a fund having a board seat for the entire arc of the company’s life cycle. I see me stepping in…” Jack stepping in, “…for one phase of the company’s growth then I see Pete stepping in because he’s very good at doing these things.” And so I think the board also is somewhat of a evolving board where they’re stepping in with this different stages of this is relay race and saying, “The relay baton that you’re carrying is becoming heavier, it’s becoming more complex and so this is how we need to help you to make sure that the next set of milestones can be tackled effectively. And so when you look at the final stage, so if you take Fitbit which is just one public, the board is subject to regulatory legal public company boards as a very visible board subject to lawsuits, subject to all kinds of exposure. So, now that board is behaving in a very, very different manner compared to the three member board that the journey started with. It’s just being aware that this is a constantly evolving a phase and the best way a startup C.E.O. can look at the board and say, “Is this a group of people that can help me meet my milestones over the next twelve to twenty four months?”

Nick: And do the number of seats change as well over that time period?

Mahendra: Yes, yes. The number it certainly, at a startup stage if you have let’s say three, I would say public boards tend to be nine possibly bigger and so you have three, from three you jump to five, from five you’ll jump to maybe seven and so on and then of course as the multiple rounds of financing occurs, you have different investors who express interest in taking a board seat. So the most current C.Ds in the lead investor will end up being probably the chairperson but then you have some of the previous investors and somebody who maybe the independent helping at the board level, so yes. It’s sort of classic evolution of these odd numbers in a three, five, seven, nine and onward.

Nick: What are some of the most common missteps and issues that you’ve seen with boards?
Mahendra: Ah! So many of them.

Nick: How much time do we have?

Mahendra: Exactly! How much time do we have? Can we do a separate pod cast only on the board 13:55 (unclear).  But no, I think the one misstep that occurs is that because this is such a rapidly evolving mini universe, the continuity is often lost. So, if I step off of a board and the next person that comes in, you know they’re coming in cold. They don’t know what has happened, they don’t know the size of the board, they don’t know where the holds are, who’s vomit where, what experiments have already been done and so this continuity board members themselves need to invest time in making sure that when they’re vacating a chair to somebody else, they need to take that member out for glass of wine or dinner or something and make sure that in a video objectively, not using their personal biases because that C.E.O. you know, “He never return my calls or we never heard my opinions when I was expressing my views accept…” They’re to be in a very objective seat and say, “In the past twelve months, these are the great things that have happened to the company, In the next twelve months, here are the five challenges are three critical points that need to be solved for and I’m handing my baby to you so that you can help them solve these problems.”

Nick: Seems like a lot of this still comes down to relationships. Building that relationship and understanding each other is pretty important as you evolve across the startups growth.

Mahendra: That’s very true Nick. You know a lot of the dynamics tend to be mostly tranSsactional around a very logical framework which is, “Look, I’m stepping of the board the new guys is stepping in. Let them figure this out. I need to go and attend to my next board meeting or my next opportunity or next thing.” I think what we fail to realize in this process is that, that abrupt handoff does not do justice to the entrepreneur. So if I’m committed to the entrepreneur, my commitment should last till the day the company shuts down or the companies of sold and possibly beyond because this is a personal relationship. We’re somewhat of a family that’s come together around a common purpose and so what I’ve seen good board members do instead of keep their cognizant approach that… Even though I’m stepping off the board and my duty is… my form of duty as a board member are over effective this date, my emotional duties to this company and the C.E.O. will last for a very long time. Just because my daughter goes to school doesn’t mean that I’m completely checked out. Yes, four or five hours in a day, the teacher becomes the defector parent if you will and when I go to drop my daughter to school, I’ll tell her you know, last night our daughter slept a little less and so today she might be need be a little more attention at school, you know and one of the teacher has a reference point. She knows exactly how to deal with her and then if I’m picking it up and she says, “Yeah, the kids were playing today and she fell off this bicycle and so I see the bruised knee and then I can be a little more caring for my daughter, you know. Over the next twenty four hours16:56 (unclear) we are not even being aware that there was something that happened. So it’s just being cognizant of the fact that our duties don’t end very abruptly. I still check in with company I have no formal relationship with and this is been like two three years I’ve stepped off from the boards. Just good, health behavior to maintain these relationships because entrepreneurs are fighting a very hard battle.

Nick: Just to wrap up here Mahendra, can you talk about where you’re currently most focused on?

Mahendra: So cybersecurity is this one area that fascinates me completely now and I’m immersing myself into it. I’m just sort of you know, drinking from the fire hose, learning from all the experts, surrounding myself with people who are very, very savvy technically and learning about what opportunities are evolving in the space. The interesting part about this vertigo Nick, as you know is that you have hackers or adversities that are becoming very, very sophisticated and their motivations have changed dramatically. Their motivations already are would be to show their peer group how technically smart I am, right? You know when you’re a nineteen year old breaking into a network of federal government network or someplace where they’re not necessarily allowed they would then show their peers, “Hey look, I got in. By the way, I found this sort of that way into this network.” but today you have the nation states. So, political motivations, you have intellectual property theft. Those motivations sort of fall into a completely different category of pure financial motivations. Steal information and sell it in the open market. So you probably also read about the fact that there was some hacker that would steal public company information and then sell it to hedge fund guys.

Nick: Yep!

Mahendra: That is sort of these kinds of scenarios that start to play out. Now you’re starting to see the frontiers of cyber activity at a different level where the Russian hikers are trying to take down NASDAQ or the Chinese hackers are collaborating with some other groups to attack certain countries in a certain way; U.S. and North Korea. So I see this becoming the next generation dance that we were due and if you want to build a Lockheed Martin in this space, then the time is now. That’s my selfish motivation is to say, “Look, Cybersecurity is going to change because it’s already changed. It is going to become a lot more specific around health care verticals, around critical information, critical Infrastructure, verticals  our data is floating everywhere; how do you protect those nuggets? and so that is where I’m spending a lot of my time and thankfully found some very good people to guide me along the way and that’s where that is potentially room for creating something I’ve sure done as well.

Nick: If we could address any topic inventor, what topic do you think should be addressed and who’d you like to hear speak about it?

Mahendra: So, I think that if you look at a venture investment vehicle, I firmly believe that we are still operating with not as much data and not as much logic and process. A lot of investments are made in a very sporadic somewhat emotional, somewhat impulsive manner and I feel like there is so much room for us to drink our own Kool Aid. So, when I meet an entrepreneur, I want to see all the data, I want to see the logic, I want to see their customer discovery. Blah, blah, blah but when I look at the L.P. assessing funds, of the eighty six companies I’ve invested in Nick I know there will be at least thirty of them are going to die. Those are thirty case story of saving potentially thirty or more million dollars down the road from other investors, right? And so this post Marta in the in the latest edition of the book I talk about an example from the medical industry where if a patient dies, all the doctors get together and they talk about this case and they it’s a non-threatening environment. They talk with each other about how this could have become a different outcome. Okay. So that’s sort of the one aspect of the process. On the front end of the process, I’m sure that it could be a little more sort of a discipline and we take this example from pilots, you know. They follow this checklists and that’s the reason why they’re able to fly these machines with several hundred people on board without killing them.

Nick: Right.

Mahendra: And so, we feel like oh we’re not killing anybody but really we’re killing the entrepreneur psyche and their emotions if we don’t pay proper attention. We’re killing Lps enthusiasm. We’re wasting their money right. I feel like that is a lot of improvement in this whole adventure asset class cycle if you will that could be done. Nobody is taking the time to do it, the effort to do it. I know, you know Brad Feld is somebody I deeply admire. He has several example of that he shared with me and some of his blogs of how they do some of this had found a group. I have been fortunate enough to spend some time at #Andreessen and Horowitz in an informal way to see how they operate and that’s another forum that is changing the way we do things but I feel like there is a lot more to be done and that’s one topic that continues to both baffle me and surprise me that nobody is doing much about that.

Nick: And finally here Mahendra, what’s the best way for listeners to connect with you.

Mahendra: I follow Brad’s philosophy. I keep an open door. My linked In Twitter… My email address is mahen.r@gmail and I try to help as many as I can and do my best to make the entrepreneurial journey easier because at one point we all were in those shoes and we all got kicked around so, yes I’d love to be of any help to entrepreneurs. Especially if they’re cybersecurity ones, then that is a more selfish way that I engage where we help in a more formal way but informally, I get a lot of entrepreneurs reaching out and do my best to help each one of them.

Nick: Well. People often ask me how I come up with question sets for the show and I can confidently say that your book The Business of venture capital has provided the foundation for my V.C. knowledge and has driven the majority of the questions on the program. So, just want to say a big thanks for writing the book and for sharing your time today.

Mahendra: And a big thank you to you as well make for being so thoughtful in framing your questions and doing all this homework. I hope it benefits your audience and thank you once again.