investor Value Add & Engagement
in this episode of Matrix Moments, we deep dive into the relationship dynamics between a founder and his/her board. Specifically for first time founders, board room etiquette is an unknown area and thus we decided to put together an episode that covers all queries founders may have on this subject. From setting the right rules of engagement to knowing how to deal with a difference in opinion in the board room, Avnish Bajaj, Founder & MD, Matrix Partners india shares his views on the best practices to keep in mind when dealing with a board of investors.
Salonie: Hi and welcome to Matrix Moments. This is Salonie and i am here with Avnish Bajaj, Founder and Managing Director of Matrix Partners india. Today we are going to talking about investor value add and engagement. As an entrepreneur who is fund raising for the first time, this can be quite a daunting task when it comes to navigating through the Fundraising process as well as knowing how to strike the right engagement or rules of engagement with their investors.
Avnish, focusing on the funding part, if a founder has multiple VCs who are interested in investing, how should they pick the right VC for their business? And how should they go through or what are the factors they should keep in mind when making this decision?
Avnish: Sure. Thank you for having me back, Salonie. First, starting off on a lighter note, investors talk a lot about value addition. And my point of view is, of course, i think the best investors add value. But the reality is the best value your investor is adding is by giving the money to the founder. And i think sometimes we get too wrapped up in this. And i joke with the founders that if i have to add value to you, i am probably making the wrong investment because you hopefully know a lot more about your business and how to build it than i do.
But that said, i think the good news is that india is now maturing to a stage where founders do have - not, well, some of the best ones are probably spoilt for choice. And that’s a good thing. And they can therefore measure the indian VCs and choose them on criteria similar to what’s been going on globally for awhile.
So let me give you in terms of choosing the best investor for yourself. i would say first let me give you kind of the physics of it which is - and some of the links* you had also shared with me which talks about do you want an investor for their knowhow which generally means domain expert. What you are doing with let’s say SaaS or enterprise and this person has done that before. They have been a founder before. And i want to come a little bit to the myth around founder VCs.
Knowhow was the first. Who they know is the second, which is network. in the U.S. this has been very critical. And, it’s largely been for enterprise SaaS kind of businesses. Somebody who is able to open their network to you, get you a number of business leads can be very critical. As a quick aside, we talked about this founder turned VC versus VCs who haven’t been founders. And there is a general tendency of founders - now i am a founder turned VC, so it’s very convenient for me to say that go for that. But that’s not the data. The data is that two thirds of the best investors in the world were not founders before. They may have had operating background John Doerr and some of them - i think Bill Gurley, but they were not founders before. So, i think setting the bar to say founder based VC is best for me, i don’t think that’s necessarily the case. in fact, a founder VC may be actually too operatively involved and maybe a challenge.
Avnish: So i would say domain, network, but also you are signing up for a journey together. Now, almost like an abbreviated version of a marriage. So really going through scenarios with each other saying what happens in this scenario. What happens if i am missing budget. By the way, the VC should be asking this to the founders. What should i expect from you? What should i expect in this relationship? What happens if you are 50% behind plan? Are you going to keep spending money at the same rate? So, i think getting that kind of alignment with each other is important. Asking the VC for their commitment. What is their sense of commitment to it. No VC will tell you what internally how many people were in favor and how many were not, but you will get a sense over multiple interactions what is their commitment to it. So, that’s what i kind call the physics of it. But i think it comes down to chemistry, not physics.
All of these things being true or not true, who do you feel the most comfortable with? There is this VC who said this to me that i have red button or green button founders. When on an iPhone the phone is ringing, are you going to take the call or you not going to take the call? Fortunately, my phone is always on DND, so i don’t have to - i only chat on the phone late in the evening. But, all my founders are green button founders for me. i have always thought about it that way in some ways maybe not in this harsh a way, but the fact that would i enjoy working with this person. i think this is the destination one is trying to jointly come to ie going to come from a journey. That journey is very very important. And i think the journey is very important for the founders as well.
Very early and we had recorded this episode on term sheets where there are multiple opportunities whether it is a negotiation on the valuation, whether it’s the negotiation of the terms where you kind of get to stress test the relationship a little bit and see how transparent is it. How honest is it. But ultimately - and we have said this before i think Tarun did this podcast on Extreme Referencing, we have always said when you are Hiring somebody, please go and reference them so well from sources that they may not even know of, such that you know the real person - credible reference checking. i think founder should be doing that on the VCs. Now there is enough track record where founders should be checking with other founders what it is like to work with that VC. And to me, ultimately this chemistry, the test of that chemistry is going to be on two fronts. A) One is how do you feel sitting across them. B) How do they reference check? And assuming those two make sense or get you excited i would probably pick that over the other criteria - objective criteria that we laid out.
Salonie: Okay, so then moving a little forward and going into the rules of engagement that a VC and a founder should have between them. What would you say is the right cadence or the frequency in terms of email updates, calls, meetings? Or even if it comes to board meetings, how should those be structured in your opinion?
Avnish: Yes. So this is very much a personal preference. it is my personal views not necessarily Matrix because everybody has a different approach. Even within Matrix everybody has a different approach. i have over a period of time having been on the other side as well where i had VCs that invested in Bazee and i was engaging with them. And what i learnt and picked on what some of them did well and others that maybe should have been done differently. My view is if you step back in any Company building, there is stuff that is tactical and there is stuff that is strategic.
The tactical stuff is generally how do i do something. The strategic stuff is what do i do. if you ask me, the best partnerships i have with founders is when they have transcended over to the strategic. But, it doesn’t start like that. Typically, it starts with let’s say Hiring, recruiting is somewhere in between. it’s very strategic for the company. So let’s put it somewhere in between because it also involves people evaluation, calibration, what kind of people would work best. But over a period of time, my engagement with companies or what the way i have seen it go is from the tactical to the strategic.
if i can be a thought partner to a founder when they have the biggest dilemmas, that’s when i think the relationship works best. But, that’s not how Company building works. Company building is not just strategic stuff. So the what and the why is strategic. The how is tactical. And i think some level of engagement on both fronts actually works best.
For the tactical stuff - and again like i am saying it’s a personal preference, typically somebody - let’s say i am working with one of the investment professionals at Matrix, typically the tactical engagement they would probably have with the founder would be on a weekly or a fortnightly basis. i would definitely have a monthly catch-up. The monthly catch-up would be typically us as Matrix and the founder. Because if there are co-investors and all of that, it’s a little bit of a tricky balance because then for the founder it’s effectively a board meeting. So i want the guard to be down, but at the same time not increase the overhead for the founders. in some cases, we have those monthly updates with co-investors.
Typically, and i tell our investment team as well, the engagement should be a pull engagement, not a push engagement. The founder has enough going on. if you are going to keep calling them with some question or the other or how did business do yesterday, i think it’s annoying. But, you have to earn the pull. So, you have to demonstrate enough value addition along the way such that they pickup the phone and you become what we call the first port of call and specially if it’s a tricky situation or bad news.
i would say typical tactical engagement could be weekly, fortnightly, whenever there is a problem pick up the phone and call. But that should not substitute for the strategic engagement. This is the classic urgent versus important. The urgent stuff will always be there. The important stuff one needs to set aside time for. That could be a monthly update. it could be a quarterly update. it could also be sometimes the best ones are setup separately as a strategy discussion. And you can either do it offsite or onsite. But, separate carved out couple of hours on some particular topic.
i would say the best engagements i have seen are a combination of this tactical and strategic. And as companies grow typically, their engagement obviously by definition moves a little bit more from tactical to strategic. in terms of the board meetings, it’s a little bit of a pet peeve i have seen it in the past. Sometimes i think companies confuse operating reviews and board meetings, and the level of detail, the length of the meeting all of that. So, in my view a board meeting is strategic. it is an update, but it is a strategic event. And if there is a real operating review style deep dive required that should be outside of a board meeting.
A good board meeting depending on the stage of the company, is two to three hours. Let’s say one to three hours. Anything beyond three hours, i frankly can’t even focus and concentrate, and people start getting distracted. They start getting on their phones and stuff like that.
So to me, board meeting cadence has to be quarterly. Can sometimes be twice a quarter. Could be four - five times a year. Something in that range. Obviously minimum quarterly, but depending on the stage, the earlier the stage, the greater the frequency.
Then, the best way to conduct a board meeting? Send out the information at least 48 hours. if possible, 72 to four days in advance of the board meeting. Board meetings are not for information dissemination. They are for discussion. if the information is going to be disseminated at that time and people are absorbing that information, there is going to be no discussion unless it’s strategic and the founder is trying to do that. So my view, send it out in advance. Typically the best format like i said three hours would be perfect if you have sent out the so-called material.
in my view best board meetings have the founder starting maybe with half an hour without the rest of the team in the room with the board laying out the hits and the misses and kind of the executive summary. And maybe the next two hours, function wise updates with the team in the room. And the team should be presenting. That’s also the team’s opportunity - i think it’s actually very strategic for the founder to get accountability as well as showcase the team for them to present to the board.
And post that, again what is called a closed-door session. Sometimes there are observers, there are other people. Closed door session is only the board. in really later stage companies, closed-door sessions also happen without the founders. i have been on public company boards where actually the closed-door session is without the founders. i think founders are as much a part of the board. But, some kind of a closed-door session where there is real view, real discussion, i think is pretty important.
Salonie: What is your take on disagreements and difference in opinions because that’s obviously something that happens. it’s normal. it’s common. And some would even say that it is healthy between a founder and their board. But how can this be tackled or done in a way wherein it doesn’t demotivate the founder as well as make them risk averse for future?
Avnish: Yes. i will come that. i missed a couple of points on the previous question, so let me just finish that. i think a board meeting should typically and maybe it can be in the closed-door session, but even with the team typically end with any helped required from the board which often founders don’t ask. A lot of the U.S. founders ask. And there should ideally be a board dinner which has the key management team present because i think it’s a great opportunity to bond. For all of this to work, most people have very busy calendars. i think these need to be scheduled like a full year in advance so that everybody knows, and everybody can plan, they come for the meeting and they come for the board dinners and stuff.
Coming to your question, should disagreements be voiced. This is very tricky. So i think the easy answer is, of course, disagreement should be voiced. There is this quote i don’t know by whom which is that a man is wise if he learns with their experience. But he is wiser still if they learn from other people’s experience. There is a wonderful opportunity for the founder to learn from your experience. Now - and i have seen this with myself when i was a founder, you end up still wanting to make your own mistakes because the power of a founder is that courage of conviction, that gut feeling that i can make it happen. And i think on balance that’s where i come out which is they will ultimately make their own mistakes. But, can you give enough input early enough such that they have those red lights flashing and they can reverse.
So, there are very few bet the company kind of decisions, very few. So, most of the decisions are actually fixable - even if there is a mistake, it’s fixable or reversible. But, it can cost time, money whatever. i think the best a VC can do is to say i have seen this story before. i think it’s a mistake, but if you are convinced, you should do it. Never ever ever mandate that they don’t do it. i mean that’s where the risk aversion comes in, and you just kill the founder spirit. They will do it anyway. And you will kill their spirit. Give enough input as to what are the milestones that will decide whether this is working or not working. And then have an intellectually honest discussion that if those milestones are not working, we have to go reverse this. i have found almost 100% of the time that works.
Mistake happen, still happens. But reversal happens fast enough. And to me, that’s kind of the via media or the compromise. Also, sometimes you can make mistakes on a smaller scale. So, then i focus more on whether i should be worried about this decision or mistake, or can i change the scale at which it will happen. So, for example, you do a pilot project. if there is something you are going to launch in 50 cities, launch in one city and test it out. And i think if you put this kind of framework together, i think most of it works.
Also, ultimately my view is we discussed this right at the start of this question, the best lesson are learnt experientially, not by osmosis. i would also focus assuming a mistake has happened without i told you so, is how do you create culture and encourage, and encourage the founder to take away the right learnings from that mistake. That we actually do quite often. Let’s say there is a failed acquisition and stuff like that. We may have been against that acquisition in the first place. We will say, okay, what did we learn? And how do we make sure we don’t let it happen again? So, i would say mistakes happen. The same mistake twice is not a good idea. Our job is to try to make sure that that doesn’t happen.
Salonie: Great. Thanks Avnish.
Avnish: Thank you.
Salonie: Thank you for tuning in. And you can find the transcribed version of this podcast on matrixpartners.in. You can also follow us on Twitter and Linkedin for more updates.
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