The WeWork trainwreck highlights the importance of good governance

It is easy to analyze the WeWork debacle and diagnose a case of certain investors mistaking a real estate business for a tech company. It is equally easy to point the finger at Adam Neuman, WeWork’s founder and ex-CEO, for bungling the market opportunity through his questionable decisions and cult-like approach to company-building. Both are accurate, but we also need to blame poor governance for all of the above. Poor governance is a combination of both limited power (entrepreneur-inflicted) and limited appetite (investor-inflicted).

The tech industry is deep in the midst of an era of systemic poor governance. This laissez-faire approach is closely tied to the cyclicality of our industry and the power balance between investors and entrepreneurs. When I started Romulus, power (and thus control) was heavily weighted on the side of investors. In the past few years we have clearly witnessed the opposite situation. In this saturated landscape, investors regularly need to cede control to the entrepreneurs they support in order to win deals in the first place. Entrepreneurs have successfully branded most non-economic terms as not “clean,” in which a clean term sheet focuses primarily on the dollars invested and the valuation attached (another way entrepreneurs have also dramatically shifted the balance to their own detriment—but more on that in a future post).

Control is Not a Zero-Sum Game

How do entrepreneurs look at boards today? They believe control is a zero-sum game and thus try to limit the board’s power as much as possible. In fact, most entrepreneurs resist having any kind of board for as long as they can. When they do appoint board members, they try to optimize for ‘friendlies’ who will simply agree with the founders/management or figureheads, who look good on the website and sound good at cocktail parties and in Twitter posts.

Investors gain board seats when they make major investments, but today most investor seats  are wasted. Investors in this era want to remain on founders’ good sides, regardless of the implication for company health. They either don’t know how or don’t want to expend the energy to help build an effective board that provides value to the company through industry expertise, functional experience, and diversity of thought.

Everyone forgets that it’s in all of their best interests – as shareholders of the company – to have good governance as it leads to the best outcomes!

The Value of a Strong Board

When founders and investors do figure out how to share control and leverage one another’s strengths, the experience is an incredible one. Founders are often amazed at how much value a great board can provide them, even if its assembly comes with a tradeoff (i.e., less absolute control over the direction of the companies they founded). A great board understands that founders will always have the deepest intuition for their business; investors who seek to sideline founders do so at their own peril. A great board also knows that founders are usually limited in experience and certainly do not have a third-party view on their failings and the challenges facing them.

I’ve learned some of these lessons the hard way. In my early years, I relied upon representatives from much larger firms who sat on the same boards. I assumed their experience meant they would know how to provide the right governance or at least determine the best practices. But I’ve been disappointed to find that the largest firms are usually too busy optimizing purely for deploying capital rather than for company-building. As such, we have an industry in which only a small fraction of investors are experienced, valuable company-builders.

Creating a Strong Board: When and How

In companies where I have more influence, I’ve tried to play a more direct role. I want the founders to bring on independent board members as soon as possible (post-Series A). I ask myself questions such as: Can we help bring on someone who has built analogous businesses before? Can we help find someone who can augment one of our most important functions? Can we lure a heavyweight from the industry who can connect us to any customer we want or provide the industry experience the existing board lacks? Are we getting a diverse set of opinions at the board level, and do they correspond to our customer base and shareholders? Does everyone appreciate the obligation to put in the time and also to dissent with each other in a constructive way, particularly when the management team is doing something value-destructive for the company? I have dreams about having perfect boards for each of my companies – a long way to go still! A lot of time is still wasted convincing entrepreneurs of the above.

So, coming back to WeWork: there is plenty of blame to go around, and Benchmark and Softbank must shoulder some of it. Both are exceptional firms in their own ways, but I’m sure they will be examining WeWork and Uber and wondering whether they should perhaps change their playbook, at least when it comes to these mega deals with founders who have mega personalities!