VC Boarding School

The last time I discussed VC industry guidelines was in 2004, when a group proposed standardized portfolio valuation/performance metrics and best practices. It was a well-meaning effort, but ultimately toothless because not even its designers – both GPs and LPs – would commit to adoption.

So it was with a healthy dose of skepticism yesterday that I spoke with venture capitalist Pascal Levensohn, chair of a group that today released a whitepaper about the basic responsibilities of VC-backed company directors: ASimpleGuideReleaseVersion.pdf

The paper’s basic premise is that VC-backed boards are particularly prone to dysfunction, due to: (1) Conflicting interests; (2) The regular addition of new board members following financing rounds; and (3) The likely presence of inexperienced members like first-time entrepreneurs, junior VCs or independent directors with strong domain knowledge but no background on VC-backed boards. Moreover, what happens if one high-profile VC is on a board with a bunch of lower-profile VCs. Does the high-profile guy always get his way, because the others don’t want to lose out on the opportunity to continue co-investing?

The whitepaper addresses these issues in broad strokes, with the understanding that each company is different (it also acknowledges that its recommendations are most applicable for expansion-to-later stage companies). But the general guidelines are as follows: First, the board should designate a member responsible for educating new and existing directors about their responsibilities and for implementing the guidelines. This can be a VC or someone else. Those general responsibilities are detailed in the whitepaper (basics like attendance, confidentiality, not using PDAs, etc.), and should be distributed to new directors before their initial board meeting.

The next two strokes are more interesting, because they both involve evaluation. The first evaluation is a self-review, where board members should annually fill out answers to a set of questions set out in the white paper (should be a formal board agenda item). Examples of questions include: “Consistently read the material in advance of the meeting?” and “Communicated with fellow directors as needed regarding alignment of interests?” A review of the prior year’s self-review also is recommended. Next, the board is encouraged to engage in a thorough peer review process, which also is laid out in the whitepaper. The idea here is to generate feedback and to possibly provide a safe forum for the airing of grievances.

All in all, a good framework. But back to my initial skepticism. Is anyone actually going to implement them?

The preliminary answer, thankfully, seems to be “yes.” Every firm represented on the board is actively advocating that their expansion-to-later-stage portfolio company boards adopt the guidelines, with some already having done so. Levensohn, for example, says that portfolio company ReconNex already has approved the measures, while both Veraz Networks and Ubicom will vote on them in upcoming meetings. Veraz approval is a sure bet, given that its board also includes working group members Kleiner Perkins and Norwest Venture Partners. (Update: KP is not on the Veraz board, but is an investor).

The paper also has been endorsed by the Western Association of Venture Capitalists, the Israel Venture Association and the Women’s Technology Cluster. The NVCA has been actively observing the initiative – and “wholeheartedly supported its formation – but with withhold endorsement until seeing what happens when the guidelines are actually implemented.