The Elephant in the Room

Posted December 10th, 2020 by Philip Astley-Sparke, in Boards and governance, From The Trenches, Leadership

By Philip Astley-Sparke, CEO of Replimune, as part of the From The Trenches feature of LifeSciVC.

One of the biggest elephants in the room regarding starting and scaling young companies is the tension, often healthy but sometimes detrimental, that exist between CEOs and venture capital firms.

While I may not have a truly unique perspective on the issue, it is a relatively well rounded one having been both a venture partner at a VC firm for nearly a decade and in the C-suite running multiple companies for two decades. Beyond my own experiences as a CEO, I have worked closely with eight other CEOs (in various capacities) and over 20 venture capital firms (that have invested in companies I have led). The perspectives below are meant to be constructive in maximizing the chances of harmony in what is THE key relationship to the success of any private company venture.

CEOs by definition are key decision makers driving business strategy to maximize value. The buck should always stop with the CEO. To be successful, top tier CEO’s want to have quite a lot of decision-making leeway and autonomy. Thus if a VC wants to retain a high level of control in the management of their investments, they should consider whether they are going to attract and retain a top-notch CEO. I can attest that a good CEO doesn’t want the bus driven from the back. This raises the obvious question for VCs: do we want the “A team” or someone who is just going to “crank the handle” as a manager? But it’s more complicated than that.

If the relationship is to be harmonious in an early stage private company, the CEO needs to view board management and especially the management of investor directors (VC’s) on the board as their number one priority.  A CEO cannot see it as a peripheral part of the job. The investor representatives on the board must have faith in you. Without it, running the company is challenging. The VC investors will often only have a perception of the issues and dynamics within the company. There will be times when the CEO has to get a decision through that at first blush may seem non sensical. For instance, the firing of an executive who gives amazing board presentations but isn’t performing in other ways. The board has to trust the CEO’s judgement. If this isn’t the case, the CEO cannot be effective in their role and push through actions necessary to sustain company performance. I have seen many cases where the VCs lose faith in the CEO and try and run the company from the outside with the best intentions. Unfortunately, I have never seen that work out. If a CEO cannot effectively and productively influence a VC-controlled board, they should step down. It is only a matter of time before the rest of the C-suite recognizes the emperor has no clothes.  You cannot run the company, and VCs should not wait to instigate change, if the CEO has not self-reflected on the issue and come to the right conclusion (which is quite) rare. Otherwise, disharmony and therefore dysfunction reigns.

Being a CEO is a balance, you constantly tread a fine line between taking direction and giving direction; on being flexible and open to feedback while making sure you are not blown off course on high conviction issues where you need to influence proceedings. If you are not listening the trust dynamic is broken – see above. The CEO has failed in their priority task of gaining the trust of the VC-dominated board (which is the case for all private companies and most early public ones). However, if the CEO does not establish a level of authority and ownership of decision-making, the VCs may well (in the worst case) drive the company into the ground as the CEO cedes to their wishes despite misgivings. The VCs are unlikely to have the holistic understanding of the business that the CEO does or appreciate all the nuances involved. Much of the advice offered by VCs is well intentioned and on the face of it sensible but just not grounded in the reality of what could practically be implemented. Further, different VCs will have different perspectives – often in opposition to one another.  The CEO needs to understand the power dynamics at play as well as listen, digest, and then decide what input to integrate and what to set aside.

In a private company, the unspoken truth is that real governance control is typically at the level of the preferred stock investment agreement, not the board. The board may have independent Directors, but CEOs should not make the mistake of trying to align the independents against your investor (VC) board directors if you have a disagreement. Generally, that is a waste of energy. The VCs have the gold, and whoever has the gold makes the rules. If a CEO wants to avoid this dynamic with a better balance of power between management and the board, where independents are properly in the ascendancy, running a more mature public company is a more appropriate fit. At one private company I worked for, the incoming VC’s cleared out all the independent board members (who the VC’s were concerned would side with management) lock, stock, and barrel.

This leads to the key question that I’ve reflected on frequently through the years. What makes a good CEO? Firstly a good CEO drives strategy and communicates it effectively internally and externally.  As a non-executive board member I often find CEO’s present really well worked up options on key strategic topics but the “management recommendation” is absent. CEO’s should always strive to make a recommendation and provide the rationale for it. That is leadership and it is the management team who will have spent the most time examining the issue at hand and best placed to reach a conclusion.  Secondly, good CEOs hire the right people, for the right role at the right time. They have a talent spotting nose and are not scared to embrace those that are equally as or more capable then they are. This frees the CEO’s time to manage strategy and the board! Good CEOs lead and do not worry about their position being usurped. Not hiring top talent as a CEO because you worry about being usurped is actually counter-productive to retaining your job. Top talent does not however necessarily mean star power. Too many VC’s are “brand” obsessed. Prima donna’s break small companies.  The ability to be a trusted member of a team is more important than outright technical competence or having some kind of “halo” aura. Management is a jigsaw puzzle which needs to fit together – the picture when complete is more impactful than the individual pieces. VC’s tend to go for the sugar rush. A world leading name in the management team (or on the board) doesn’t create long term value (or in most cases even short term) by itself. A well-known name is not synonymous with hiring the best. The right blend of hard and soft skills is more important.

As different VCs have different models for making money (time to exit, hype versus substance), it makes sense to pair CEOs and like-minded investors where possible. For example, if you’re a VC and you have a “sell the dream and sell out quickly” business model, don’t hire a serious-minded scientist as CEO and expect them to arm wave their way through to the highest B round valuation of the year. Many CEO relationships with their VC’s suffer when the CEO is put under undue pressure to make a valuation threshold because another portfolio company managed it or a company run by another VC did so.  Relationships always suffer if one party believes the others’ expectations are unreasonable. The CEO scientist might not deliver the best B round ever but might deliver the top M&A exit of the decade after hard data is available two years down the road. I have always been lucky to work with patient money for which I will be eternally grateful.

The above perspective assumes a VC firm has majority control, or the company is controlled by a VC grouping that thinks the same. To that note, regardless of how much stock a VC owns, I would counsel against having multiple board members from one VC firm on the board. Instead of challenging a VC colleague, the tendency is just to become an echo chamber ramping up the pressure on the CEO, rather than presenting different perspectives to resolve the issues at hand.

As a company matures, the shareholder base may become very diverse and have opposing opinions.  When one VC has been in the stock for 6 months and one for 10 years, it may be impossible for a CEO to keep harmony. As CEO, it may be best to keep your head down and let the two factions fight it out unless it can’t be resolved, or unless factions start behaving at odds with their fiduciary duties to all shareholders or otherwise employ unethical tactics, all of which can occur. But this is weighty topic worthy of a whole additional blog;  stay tuned.

Good CEO’s work in lock step with their key investors and vice versa in a relationship where the power dynamic is balanced, and respect is mutual. When this dynamic gets out of balance, energy is spent on emotions rather than value creation, the metric by which a CEO is ultimately judged. The secret to success is the same as in any relationship. Over communicate, imagine walking a mile in the other’s shoes, and recognize even if you are the cleverest person in the room, acting like it rarely does you any favors.


Thanks to Pamela Esposito, Rob Coffin, Arleen Goldenberg and Bruce Booth for reading drafts of this post

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