VC Confidential

How to Manage Your Board

JB Pritzker sent this over to me recently. Shades of reality but tons of humor in this...

How to manage your company’s board of directors:

1. Meet by phone whenever possible. Most of them will be doing their email or goosing their admin or something and not paying any attention at all. They’ll just vote when you ask’em to.

2. Never distribute anything in advance; they might read it and get themselves all confused. Just present it all: gets you through most of the meeting.

3. Never number the pages of what you are presenting. Lots of time can be used constructively figuring out what page everybody is on. If you email the material (preferably just after the start of the meeting), send lots of separate files. Turkeys’ll never know what to look at. Bonus suggestion: send slightly different copies of files with different pagination to everyone; it’s a lotta work but it’s worth it.

4. Have your CFO present numbers, lots of numbers. Make sure they get a chance to go over variances in the pencil budget.

5. If you have to meet in person – it is gonna happen sometime – use food. Any discussion you don’t want input on should be right after lunch. No one’s gonna be awake then.

6. Speaking of lunch, you can play this for lots of time. Have your dumbest admin take orders off some huge takeout menu. Get what type of bread they want, dressing, meat, lettuce, all that. Then have a smart admin shuffle the list so NO order is right. Wrong bread with wrong filling etc. No veggies for vegetarians (they tend to be nitpickers anyway). Kills lots of time and helps make sure they meet on the phone next time. BTW, they’ll pay no attention to anything between when lunch is ordered and when it comes so minimum of an hour.

7. Do bring up board comp and director’s liability insurance. Sure to get their attention and won’t interfere with the real business of the company.

8. Have a nine person board with three insiders, four VCs and two people who don’t have a clue. Just four VCs alone should guarantee gridlock.

9. Every meeting should run way over schedule. You control the agenda: presentations up front; substance in the third overtime period.

10. If they’ve gotta discuss something, get’em down in the weeds. Color of the office; words for the new ad campaign; what bank to deposit tax payments in. That keeps everybody out of trouble.

11. If you’re public and their questions are going where you don’t want to go, tell them you’d be glad to answer but that’ll make them insiders for the next two years. You can also tell by who squirms who was planning to sell.

Didn't They Learn from 2000?

Daniel Primack wrote a great piece on the continuing insanity in the buyout world. It is amazing that the writing is clearly on the wall and is nearly identical to the venture world in 2000 and yet the LP's and funds continue unabated. VC's kept raising massive funds even though it was clear that the liquidity engine (IPO's) had died. This capital festered in the funds and either a) was returned or b) was pumped mindlessly into misguided companies. With the credit markets down, the LBO world has lost its primary liquidity engine (dividend recaps, etc). So, I am amazed that LP's are going along with these funds doubling their size. More on the Venture cycle version of this soon...

Warburg Follows the Herd
Warburg Pincus yesterday announced that it has closed its tenth fund with $15 billion, or nearly twice what it secured for its ninth fund in 2005. It’s also $3 billion more than the firm was targeting when it began fundraising last May.

This certainly fits the recent mega-firm pattern, in which Bain, KKR and others have raised record amounts despite a paucity of new deal opportunities. Fee today, call-down in a few hundred tomorrows (unless they spot a problematic PIPE or cratering leveraged loan portfolio).

I had really wanted Warburg Pincus to help retard this trend, which skates the thin line between optimism and greed. Few other firms exude the same spirit of independent thinking – having been an early adopter of globalization and stubborn defender of transacting both massive LBOs and early-stage venture deals out of the same fund. If there was any firm willing to stand on objectivity, it would have been Warburg.

But, alas, it was not to be. Maybe I should have been stripped of my delusions when Warburg propped up MBIA, in a bid to replicate its long-ago success with Mellon Bank (Question: Did LPs who came in on the final close get some sort of discount?). I guess Warburg is willing to stand apart, but not too far apart.

So Blackstone is the now the only fundraising firm left with enough gravitas to help stem market overcapitalization, but looking to Blackstone for moderation is like looking to the Boston Bruins for a Game 7 goal. Sure a few big firms will claim fundraising sanity, but beware the difference of intentional and unintentional fundraising scale-back (yeah, I’m gazing toward Chicago)…

Warburg Pincus would likely respond that it has a flexibile enough investment strategy to handle macro-economic fluxuations, and that it’s investing for the long-term (Note: It declined to comment for this piece). Fine, but it's a specious argument.

How can any private equity firm claim that it requires the same amount of money today that it did in May 2007? Even if Warburg plans to do the exact same number of deals, many of them will require less cash due to decreased valuations. In fact, the only reason Warburg was raising more money in the first place was because the private equity targets were getting larger and more expensive. Doesn't what goes up also go down?

Finally, it’s worth emphasizing that LPs share much blame for this fool’s goldrush. I keep hearing investors complain about 2008 fund sizes and strategy drift, but then learn that Warburg got its highest-ever level of LP re-ups. If you don’t want mega-firms raising so much money, then don’t increase your commitments. It's just as simple as it sounds...