Heidi Roizen of Threshold Ventures joins Nick to discuss Secrets of a Serial Entrepreneur and VC: Fraudulent Founders, Radical Recaps, C-suite Shuffles, and Reviving Dysfunctional Boards. In this episode we cover:
- VCs’ Bad Behavior During Market Downturns, Self-Optimization for Short-Term Gain and Poor Treatment of Entrepreneurs
- Entrepreneurship, Investors, and Advisors with Tips for Founders
- Secondary Shares in VC Investments, with Focus on Founder and VC Perspectives
- Startup Funding, Board Dynamics, and Founder Liquidity
- Board Member Behavior and How to Address Negative Actions
- Gender Diversity in Venture Capital, Including Challenges Faced by Women in the Industry
- Entrepreneurship Program at Stanford with a Focus on Ethics and Social Impact
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0:18
Heidi Roizen joins us today from Woodside, California. Heidi has spent 40 years in the tech startup world, the first dozen years as an entrepreneur herself, and since then, 25 years as a venture capitalist. She’s served on over 40 boards, from seed stage to public companies. She also co-leads the Threshold Venture Fellows program at Stanford University and is a partner at Threshold Ventures. Heidi, welcome to the show.
0:45
Thanks so much for having me. I’m a fan.
0:50
It’s so rare to have somebody you know, with your experience, both building successful companies and serving on so many boards, public and private. So it’s just an extreme pleasure to have you today. But can you give us kind of your background in a nutshell, kind of the two minute backstory on how you became an entrepreneur and in a VC, if possible,
1:09
sir. Well, the problem with being this old is I have a long backstory, but I’ll keep it short and relevant points. I actually started my first entrepreneurial venture when I was 12 years old. Had an unusual start to entrepreneurship. Not at all in tech. I was I decided to do puppet shows for children’s birthday parties. How’s that for an unusual first job and, and I actually did that for from age 12 to about 19 or 20. When I finally decided I just couldn’t take it anymore. But I had I’d actually worked that business up by the time I was a junior senior in high school, that I could make as much money in a month. As I ended up in my first job after I graduated. So turns out, there’s money and stuff like that. But I think that got me off on the on the entrepreneurial foot. i My parents were immigrants. My mom was from Germany, my dad was from Moldova. My dad was one of those classic entrepreneurs, in fact said to me once, I don’t understand why people work for other people. So I had a very entrepreneurial family that accepted entrepreneurship, which I think was was really great. And then I had the good fortune to have two good fortune things. One is my parents settled in Silicon Valley. And my dad told me, he looked the world over and decided this was the best place to be. And that was in the in the mid 50s. So he was prescient in his thinking. And and then they happen to have two other children, one of whom is a brilliant programmer. And so I had the good fortune of having a sibling who was a brilliant programmer, right at the dawn of the personal computer age late 70s, early 80s. So we started a company together. So that’s kind of the history.
2:56
Amazing It was that was that the company that you ultimately exited.
3:01
haymaker, so started in sort of 82 I was a I was a student at Stanford Business School, but I sort of was in the classic form of students today, I was spending a lot of time working on startup. I ran that until it was acquired by Deluxe Corporation in 1994. Ran it relax. Another year and a half. I went to Apple for a year I was VP of worldwide developer relations in a very crazy time in Apple’s history 96 to 97, which was Scalia or I’ll write my my Romano not romantic clef, my my Psycho thriller at some point about that. And then I left Apple and I started doing board service. I was recruited to a board, actually, interestingly, I was recruited by Doug Burgum, to his board, a great plains software. And I joined his board right before before they went public. And I decided board work was really fun, because it it allowed me to be like an entrepreneur, think about entrepreneurial things, work with a team be there for a long time. But they weren’t my problems, right? I didn’t have to stay up all night worrying about what was going on once in a while you do when you’re on board, but most of the time, it’s management’s problem. It’s the CEOs problem, and you’re sort of more like the grandparent. So I did that for a number of years. And then in 99, I got recruited into venture first at Softbank venture capital and ultimately now at threshold ventures. So amazing and what in five years in venture Yikes.
4:30
Perfect. And then what is the thesis at threshold? You know,
4:33
we really are a small focus team at the current fund. We have a $375 million main fund and a 75 opportunity fund. We have a little over a billion assets under management and we are focused at the series A we really believe that that we are best when you have a small team and you have the genesis of an idea that has shown some product market fit, but you have not started your leverage. In fact threshold we feel like you’re at your threshold moment. And that we are a team of people with a lot of venture experience a lot of operating experience very personally involved to help help the companies grow. And we’re focused on areas that are that we have deep domain expertise in enterprise, SAS, and healthcare are the two primary areas for four threshold.
5:21
Perfect. So as you mentioned, you’ve been a VC for over 25 years, since the last millennium, what would you say is different in what is the same?
5:30
Well, there’s lots of things that are different. But let me start with the thing. That’s the same. And your Alexa Von Tobel said this in her in her interview with you is people haven’t changed. And I think that’s the that’s a foundational element of my ability to continue to operate. In the venture world. And in the tech, I’ve been in the tech world now for over 40 years. Text change, technology changes all the time, right. And it’s, and it is rapidly changing more now than I’ve ever seen it change before. And that pace will continue to accelerate. But people haven’t changed. They’re, they’re wonderful, they’re creative, they’re messy, they’re complicated. They have conflict, they hit, they hit impediments, they have personal lives that mess up their work lives. They have work lives that mess up their personal lives. And so helping people navigate how to, to get through on the entrepreneurial journey is a really, I mean, I find it fun and exciting. I mean, in the warped I am this work that sometimes I even find conflict fun and interesting, which, which is, which I don’t I don’t gravitate towards conflict, trust me, I would really like people not to have conflict, particularly when they’re co founders. And it’s evitable. And sorting it and finding the way through it and being better for it at the end is I think, a very interesting intellectual challenge. And I, I just greatly greatly enjoy doing that. So people people have not changed. I think the other thing that in a way has not changed is, to a certain extent, what it is you’re trying to do, has not changed use you are, you know, I say that the fundamental great pitch is this, there is a huge problem. I know how to solve that problem, and people will pay me a lot of money to solve that problem is basically the great pitches. And to me, there are so many problems that need solving right now, there are so many new innovations we can throw at trying to solve those problems. And, and there are so many great people out there. And again, Silicon Valley doesn’t have the lock on it. But we do tend to be an epicenter for people who are willing to take the kind of risks that it takes to build these world changing companies. And we are still the epicenter of the capital it takes to do that as well. So it’s a, it’s a it’s a fun place to be. But But again, by no means the the only place to do this. But I really think that those elements have not changed. And the ideas that underlie the business models have lot of the biggest winners don’t change the winner take all markets, the winner take most markets, the super capital efficient markets, the the kinds of barriers to entry that have worked in the past have the you know, the, the the those general ideas still have a lot of value and a lot of validity to them. And so I just think there’s a lot that’s the same. And and I think that the challenge, I think for any of us, and maybe it’s why a lot of us former operators get moved, join the dark side and go to venture is because when you’re an entrepreneur, you have to actually come up with those ideas, you have to actually understand super well, the technologies, you have to understand the market super well, when you’re a VC, you just have to understand who understands. And and yeah, I mean, you do have to have I think you have to have some basic thesis around where things are going, what is the current state of the world? What are the macro conditions? What are the what are the things that are trending? Yes, you have to have a lot of understanding. But at the end of the day, we’re not inventing companies, I don’t believe we should be entrepreneurs or inventing companies and we just have to have a good sense to know which ones to to, to back.
9:26
That’s right. I recently had frank Rottman on the show, and he made the comment. He’s like, Yeah, as a seed investor, you’re effectively a talent scout gonna play in the right spaces and stuff, your talent scout, and I thought it was just a very succinct way of describing the job, which I tend to agree with. Absolutely. But Heidi, you know, you mentioned challenges and down markets bring out bad behavior. Yeah, we’ve been in kind of flux, you know, stage for venture recently the graduation rates have collapsed from the day and a to b, we’ve seen the data. What are some of the bad behavior you seen from entrepreneurs in from VCs. And, you know, what would you recommend? What do you think should be done about it?
10:06
Well, I’ll give you the answer first. And the thing that should be done about it is it’s going to come out, it’s going to come out what is very rare that you can have bad behavior, bad behavior and get away with it. Because our markets are very transparent. At this point, our industries are very transparent, are very connected. And reputations are still very important. And so I think that first of all, in a VC it for VCs, there’s, I hate to say this, because we all like to think we are unique, but at the end of the day, we’re all selling the same thing, in a way we’re selling money. It’s kind of worth the dollars worth $1. And we’re selling help. And so take the money away. Money is what the entrepreneurs after first, but they also the smart ones are after who’s going to help me get to the get to the next level. And so VCs that self optimize for near term gain, and particularly near term paper gain, that is worrying about things like preserving markups, over doing the right things for companies, when companies should be doing things like taking recaps, or down rounds, or things like that. VCs who do that will not will not be around for a long time, because this market will sort itself out. And those entrepreneurs will go on and they will say I don’t want to work with that person anymore. And you shouldn’t work with that person either. Because they screwed me, they optimized for themselves over over doing the right thing for the company. And so you see a lot of that kind of bad behavior. You see a lot of people, for example, not wanting to do or not wanting to do a fundraiser that the company desperately needs because they don’t want to take a write down and instead doing sort of bridges to nowhere with heinous terms, and, and just aberrant behavior, just to keep companies from from taking the paper loss in essence that they’re going to take. Yep, I think that you’ve worked term has had a long term thing. Yeah, I know short term, you said a long term thinking as a VC that is just not, that’s not a good look, that’s not gonna that’s not going to that’s not going to do you Well, and that’s not our business. No, it’s not our business. Exactly. And then on the entrepreneur side, I think that the problem there is, and I actually, I did a podcast on my podcast about this. And the point of it is being I know, I know, a fair number of entrepreneurs that are now in trouble with the law, a few of whom are in prison. And I can tell you, for sure, none of those entrepreneurs set out to be criminals. They did not. They set out to be entrepreneurs, but they fell in love with the idea of their company. And they convinced themselves in many cases that they were going to serve the greater good by having their companies be successful. And therefore a little bit of fudging around the edges was okay. And then a little bit of fudging got to being a little bit more fudging and got to being a little bit more fudging. And before you know it, they entered the zone of criminality, and they got caught. And I think that for an entrepreneur, you are so driven to keep your company successful, right. I remember when I was an entrepreneur, I’d walk in every day and we had our ups and downs. And during those downtimes, I would count the cars in the parking lot, I would think about those car payments, I would think about the mortgage payments, I would think about all these people that were dependent on our company surviving. And that makes you I mean, in a way that makes you do a lot of what I’ll call heroic acts, because you will do you will do virtually anything to keep your company alive. But when I say you’ll do virtually anything, there are some lines you shouldn’t cross and lying about information is one of those lines you shouldn’t cross is one of those lines. Yeah. And so I think that for an entrepreneur, you know, how can you avoid that? One of the things is good governance. You know, I think it’s interesting in up markets, there are certain funds that that promoted the idea of, well, we’ll write you a check and just call us when you need more money. We won’t we won’t bother you. Like governance is a bother and having a board is is is old school and all that kind of proper governance can actually help a company because it can help an entrepreneur catch problems before they become bigger problems. And it can help force entrepreneurs and keep them honest. Right. And I know for myself, because for many years, we ran our company without venture we actually ran for a number of years before we raised our first round. We raised our first round from Hummer Winblad and when
14:54
kidding, Winblad on in the first episode her
14:57
first company isn’t how long ago it was 1989. And we close that round the same week as the San Francisco earthquake. So that’s when I got engaged that week. So a whole lot happened that week. But anyway, you know, I learned a tremendous amount from an I am a huge fan of ANZ. And she’s very close friend of mine. And we’ve remained friends for all these many, many years. She held my feet to the fire, there were a number of times, at the end of a board meeting, she said to me, Look, this is your job, and you need to do this, right, you need to be tougher on this, you need to put that person in a box, you need to make a decision about this line, this line doesn’t have longevity, and you’re, you’re not, you’re not making the hard decisions, because you like the people, she could see things that I was doing that, you know, she didn’t say, go on telling you to do this. But she said, if you let this continue, here’s the result that’s going to happen. And and she really helped me make some some very big decisions that change the course positively, for my company. Now once in a while I disagreed whether and I would then we would have a disagreement. But for the most part, she you know, she had been the CEO of a company for those who don’t know where she’s she started a company in the 70s in the accounting software space, and she’s a software engineer. And so she had many years of entrepreneurship on me. And she’d seen some things that I hadn’t seen and turned out that was that was super, super helpful to me.
16:28
Amazing what a mentor, we did have an on I think the first 10 episodes of the show. She is a legend. I did,
16:35
I did introduce her to the man who became her husband, so I feel I have paid her
16:41
for what she did for me. All right, well, she owes you big. Yeah, you know, it’s funny, like when you’re working with entrepreneurs, and I’ve found, especially young entrepreneurs, maybe an area that people in the audience can think about, you know, some young, inexperienced entrepreneurs, they may have grown up in an environment where you kind of hide the bad things, and you don’t have an open dialogue. And something that I work on with a lot of new entrepreneurs is bad news needs to travel fast. You know, like, get it out there first, you know, like, Don’t the bad stuff. And sometimes it takes a while to unlearn. You know, those habits, especially if you’re raised in an environment where there wasn’t, you know, open dialogues, maybe in your household are in your early
17:26
well, and also you’ve never been rewarded for bed. That is, yeah, it’s an interesting, I’ve been on anything nine public boards. And the interesting thing about public boards is you don’t get to hide bad news for very long. There are rules of reporting, there are things that as soon as they happen, you need to disclose them. There are all sorts of rules that you have to follow private company don’t have any of those rules, right? We can we I remember, when I was running my company, we one quarter we put out quarterly earnings, because we thought that would be cool. And because we’d had a good quarter, the next quarter, we didn’t have such a good quarter, I just didn’t put one out. I thought, Well, I’m not gonna point it, I’m not gonna draw any attention to our current sales trajectory. So companies do not have that amount. And so I, one of the problems is that, let’s face it, though, the way our industry works is people, they’re in pitch mode, they’re telling us the good news, they’re telling us the things they’re doing, they’re giving us the positive momentum. And we reward that by putting capital in. And I think entrepreneurs have to learn that you have to move from that pitching mode to more of a partnership mode, more of a relationship mode. And you have to make those other investors who are in your company, your partners, and have them help you solve problems. One of the things I think that’s happening right now, that is a manifestation of not doing that, is we’re seeing some recaps. And the interesting thing about recaps is recaps actually, I know that a lot of VCs feel differently about recaps, I don’t, I don’t think they’re bad things. At the end of the day, someone’s willing to give you more money. And often for the entrepreneur and the employees, you’re cleaning up a cap table that is too top heavy, you know, where the preference structure is just too vast for the value that’s been created so far. And you’re not going to bring in more capital any other way. So I look at it as like it’s a market. And when a recap is the way you can get money than you should. And as long as it’s done fairly and appropriately, and everyone’s given the opportunity to participate. I got no problem with recaps. And by the way, I’ve been both the crusher and the crushy. In Recap, sales, sometimes you believe and sometimes you don’t, that’s all fine. But for the entrepreneur, I think sometimes they never told their investors that things were not going well. And they did the sort of subjective I’m gonna put out a quarterly update, but I’m only going to put, you know, like, I think the more and more and more you start putting what the press says about you in your quarterly update, and the less and less and less you put about numbers that you’re actually achieving. That’s like a little red warning sign to me that’s like, well, you’re being selective and you’re not picking any app. tool underlying fundamental business information. And so the problem they have is they go to their investors now and they say, Guess what I need to have you give up your preferences. It’s like, well, wait a minute, you for the last 18 months, you’ve been sending me these rainbows and sweetness and light emails, like why? Why didn’t you let me know that things? Were not going? Well? Why didn’t you emotionally prepare me for the idea that I might have to put in more money or give up on my position? And so right, you get a lot of anger in situations like that, and I get it. It’s human nature, we all want to avoid pain, we don’t want to tell people the bad stuff. But I would argue if you actually were honest with your investors, and you kept them apprised, you’d probably be in a better situation to deal with. What are some big macro trends? I mean, it isn’t, it isn’t. There are a lot of companies dealing with this, right, we’re living in an in an interest rate environment that’s unlike anything, most entrepreneurs, you know, you’d have to be over your mid 30s, to remember when interest wasn’t, you know, when money wasn’t free. And so you’re you’re dealing with macro situations and global situations and interest rates situation, you’re dealing with a lot of stuff that is going to pound on almost all companies, it would just be better to be collaborative with your investors and be a partner to that instead of hiding the ball until you can’t hide it anymore. A lot of what we’re seeing right now, unfortunately,
21:27
and, and you would advise you take the recap, right? Because it’s, it’s giving the company and opportunities to survive the employees, etc. That’s better than adding a lot more structure. And it’s not
21:39
always the I mean, you should take whatever the best offer is for your company. Right times, that’s not taking money at all right? For some companies. And we saw a lot of this when the interest rates first went up and the and the market for sort of growth, you know, like failed and nothing. For a lot of capital efficient companies, a lot of software companies, you can turn the dial right between growth and profitability. And you can choose to slow your growth and not need capital. Because you can you can change your model sufficiently that you cut your burn rate, and you’ll last it out, right. Sometimes the right thing to do is wind down your company and buy the little glimmer of hope asset out of it and continue that on as a new company, spin it out. There are there are other methodologies beyond just a recap, for extracting value out of a of a company that can that is being crushed under the weight of its prior capital structure. Right? There are other things you can do. But I think recaps are very viable mechanisms for doing it. But they cause pain. And one of the problems about recaps is, you know, who that caused the most pain to they cause the most pain to the friends and families, friends and family who bought preferred shares in your first round? Yeah, because those people usually bet the farm, they can’t pay to play because they don’t have more capital. And they can’t treat some of your preferred shareholders differently than others. Because some of them are your parents. Right? I mean, that’s, that’s not okay. So that’s, I think the other thing about entrepreneurship that makes some of this stuff so hard, is yeah, you have a personal entanglement with some of your investors. And they’re the ones that are least able to weather things like down rounds and recaps. Yep.
23:31
Well, hopefully, the founders are, you know, getting their investors into the business with open eyes and like, you know, setting the expectation on on the risk profile on that they will likely get nothing back. Yeah. But you know, how do you you did mention that you host a podcast as well, the startup solution with Heidi Roizen. And on your show, you do break down a variety of these situations. You talked about the radical recap, right, you also discuss fraudulent founders, adding ace advisors, C suite shuffles, you know, like, I love the titles of your different podcasts, because he kind of did these case studies. So we talked about the recaps, how about advisors, you know, for founders that are adding, like an ace advisor, you know, how do you set that roll up for success? How do you think about economics? Do you have any best practices? Absolutely.
24:16
And I and you know, again, a lot of a lot of the way I walk it, so all of my episodes are about real things that really happened. But I disguise the identities I call it the entrepreneur prediction program. I, you know, I disguise the identities and I use voice actors to play the roles. So it’s a little bit like Forensic Files meets your prudence meets, I don’t know what I try to keep them short. I try to keep them 15 minutes or less and deal with a specific issue. And often what starts the issue is that somebody did it wrong. And so with advisors, here’s the wrong way to do it. You meet someone they have a really high profile, there may be there a professor who’s famous in the industry, or there’s somebody who Who is that they have a halo, they have a brand Halo. And you think I want a piece of that brand Halo. And so you say to them, I’m gonna give you shares in my startup, I’m going to list you as my advisory board, send me your headshot, and you don’t have to do anything. You don’t have to do any work at all, just, and a lot of times people are nice, or they like the lottery tickets, because usually pay him in equity. And they’re like, Okay, yeah, sure, I’ll do that. And then they’re on your slide deck, then they don’t know anything about your company. And then a number of things happen. First of all, some some investor who sees the deck calls them up and says, Hey, what do you think of so and so? And the advisor goes out, you know, I met them once. That is not a good look, right? That doesn’t work. What’s even worse about that is you the entrepreneur, because they’re on your slide deck, and you gave them some shares now think that they are going to do anything you ask them to do. And the first thing you usually ask them to do is be a reference or help them raise money, introduce them to investors. And a lot of the advisors are like, Oh, that’s, that’s not what I signed up for here. I don’t I don’t really understand your company, or I don’t really know you that well, I’m not I’m not vouching for you. I’m not, I’m not a reference for you. And so then you create this sort of negative relationship. So I think that I think advisors can be great, right? They’re effectively, they’re betting 100% on the equity of your company. And they often know a lot, you know, particularly, you know, the ones who’ve been around the ones who are experts in your industry, they can be super helpful. But you need to onboard them, you need to have a clear understanding with them. What are you going to do to help them help you? What are they going to do or not do, for example, you know, I always say there’s sort of multiple levels of, of a, of an advisors work, like one is just the brain, right, you’re going to use their brain, they’re going to help you, nobody needs to know. The second thing is you’re going to use their brand, right, you are going to claim that your company is shinier, because you have this shiny person. And in order to do that, that person has to be exposed with their identity attached to the company. That’s a whole nother level of involvement. And then I’d say the even higher one than that is you want to use their network. And I am I am a I’m a person who thinks a lot about networks of people and people and, and how to work with other people. And then we can I can talk ad infinitum about that. But what I would say in short, is, networks are very valuable things, people’s relationships are valuable things. And you cannot abuse those relationships, you can’t abuse them very much before people stop returning your your your calls. And so for an entrepreneur to think I’m going to give you some shares, and then I’m going to ask you to send my pitch to Bill Gates. No, that’s, that’s not, you know, that’s not going to be how relationships work. And so I think that when you are approaching an advisor, being super clear about I’m gonna use your brain, I’m gonna use your brand. I want to use your network, and what are you willing to do and not do? And how much should I pay for that? Just articulated clearly. And then I think advisors can be fantastic.
28:16
How do you let’s talk secondaries. Sometimes when VCs sell, it can frustrate the founders. And when founders sell it can frustrate the VCs, right? It cuts both ways. How can one limit the drama in the secondary situation and set up the process for happier wealthier and wiser steak? Well, it’s
28:38
always fascinating to me how emotional secondaries are, I was laughing at an entrepreneur, like, I cannot believe you want to sell my shares. I’m like, Okay, do you understand what VCs do? We have to eventually sell your shares. It’s actually how our business model works. I we’re in business. Yeah. And I and then and then VC is who don’t understand that, you know, an entrepreneur, they were working on a company five or six years, especially these long, capital intensive heavy r&d companies, they’ve got kids, their kids need to go to college, they need to buy a house, they’re they’re working, you know, they have no liquidity there were if you live in Silicon Valley, you know, you got to have millions of dollars to buy a house. I understand the need for for that. And so, there are a couple of foundational things about secondaries. First of all, no one should compete with the company for the cash. So my number one foundational point is if you’re selling secondaries, for example, in a round that’s not fully subscribed, that is, again, not a good look, right? Your company needs the money and you’re going to draw it away for yourself. Gotta be fully, okay. And likewise, if you’re a VC if you’re selling secondary, when the company also needs money and is willing to sell shares at that same price, or you know, me Maybe you’re undercutting the company. Now, again, there’s complexities here. So everything I say, you have to say, well, there’s exceptions, because preferred shares, different rights, different things like that, certain investors have time cycles, and they need to get out of stocks by a certain period of time. All that aside, the general point is, secondary shares should be sold when the markets are healthy for the equity of the company. And while that can always be the case, that should be as often as possible, and then I think the secondary sales should be right sized. I mean, they’re, you know, if you’re a startup and you’re raising, and you are, you are almost pre revenue, you’ve been in business for three years, and you suddenly want to sell 15 million of your own shares in a $20 million raise. That would be like a really big red flag for me, it’s like, you know, I mean, you, you should not be taking, I don’t believe entrepreneurs should be getting massive wealth, generational wealth off startups that haven’t proven themselves to be valuable. Right, it’s like call me old school, but I sort of feel like it, you know, there should be some proof that the company has value. But I mean,
31:11
I couldn’t agree with you more. But what is right size, right? Is there a rule of thumb on how much a founder should sell at? You know, it used to be BC D rounds, but I see people selling it a now too.
31:21
I mean, to me, it’s sort of, to me there is what is the, you know, number one, don’t be in competition with your own company for the money. And number two is, what is the need, that is causing you to sell? Right? And, and there are reasonable needs, put your kids through college, buy a house, you need to help your parents retire, you know, but, but I’m sorry, nobody needs $25 million.
31:47
Hey, just maybe just so you’re saying that McLaren isn’t a good
31:50
reason, you know, I just don’t to me, it’s a negative sign when somebody wants to sell, and hey, look, people do it. People around portfolio, do it. I’m not I am not God, I can’t tell people not to do it. But I just think that there is a healthy range, I think it’s a conversation with your board. And by the way, it should be allowed to other people, not just the CEO, I mean, I think that what we’ve seen in the past, I mean, I can use the WeWork situation, as a classic example is, somebody with big pockets goes to the founder and says, All by a bunch of your shares in the secondary to and I’ll put I’ll set aside this much money for the for the round and this much for you. It’s, it’s kind of like a bribe to me, where I think that if you recognize the need for you, as the founder to get some liquidity after five, six years, four years, whatever, you’ve got some employees that might be in the same situation. So figuring out what the right ratio is to allow anyone who’s been, you know, X years of service with 60%, or more invested or, you know, come up with your ways of saying, this is this is a reasonable amount, decide on it with your board, and then allocate it between the the founder and some of the other employees on a fair methodology. That to me makes sense, right, that, you know, I can justify that. Perfect.
33:16
So we’ve talked about the board quite a bit, or we talked around the board. Heidi, you know, in your estimation, what distinguishes a good board from a bad board?
33:25
What’s that line? All happy families at the same, but every dysfunctional family is dysfunctional in its own way, or whatever, that whatever that was Tolstoy, right, trying to remember? I should look, I should look, I think it’s Anna Karenina anyway, you know, all boards have a certain level of, I hate to call it dysfunctionality. Because we’re humans, we’re all like, fundamentally dysfunctional in some way or another. All boards have their dynamics. But I think that number one, first and foremost is everyone sitting around the board needs to understand their role. And their role is to do what’s right for the company. It’s not to do what’s right for themselves. It’s not to do what’s right for their fund. It’s not to do what’s right for their individual role in the company. It’s to do what’s right for the company. And so when you have people who, who understand the role of a board member, and then the second point is you are not I mean, yes, there are CEOs who are also on the board, but for the rest of the board members, you are not running the company, someone else is running the company, you are holding the company accountable, you are advising the company, you are trying to help the company, but you’re not running the company. And so I think that that is a really important thing for the non managerial board members to understand is what is my role and what is what is not my role. And so, there’s all sorts of ways to have bad board board behavior. I mean, I talked about it earlier about self optimizing. You know, I think the number one way to be a bad board member is to optimize your own position over what your what your fiduciary obligation is to the to the company, but I think there’s All sorts of you know, there’s all sorts of nuanced things, too is not doing the work not reading the deck not showing up not being prepared, needing to take more than your fair share of air in the room. Not understanding the EQ behind behind board meetings. I mean, one of the one things I said to the board have actually was the chairman of the board of the parent company, the Daily Mail, which I was on for 10 years. It’s a whole nother story there. But you know, one of the things I said to him once is, you know, the best work I do as a board member, if I do it really well, you’ll never know I did it. Because one of the things that I I was doing on that board, which was a super interesting company going, you know, 132 year old company, by the way, I was their first woman, board member, and 132 years, when I joined. And, and they were going through a lot of transformation, I mean, news 100, and something year newspaper, fundamentally newspaper business that was moving into tech and all sorts of things and had been doing that before I got there, mind you, but my my role was helping that transition and helping some of the realities and discovery and evolution and bringing an understanding of Silicon Valley there. If you come in, and you’re a sledge hammer, that’s, that’s not going to be effective. But if you come in, and you can just help people understand things that will help them do their jobs, they will do their jobs better as a result. And in many ways, your role as the board member will never be seen. Because you’re not, you’re not standing up and shouting in the boardroom, you’re working behind the scenes.
36:37
What do you do when you’re on a board that has some dysfunction? You know, let’s say there’s one board member in particular, that’s, you know, a sledgehammer or taking too much airtime or overly emotional, you know, you could either maybe do some sort of intervention, or maybe the founder could like, Is there something you do in that situation to see if you can get the board back on a healthier track?
37:03
Absolutely. And you should, because bad board behavior should not be allowed to continue? You know, it’s it’s, it’s just like bad managerial behavior, you shouldn’t let people continue to do that. I think one of the challenges, of course, is most of those board seats are, you know, ordained in the rounds of capital, and it’s harder to get rid of your VC board member than it is to get a divorce in many cases, I think. And so, that is hard. And there are there are ways to do it. And it’s complicated. And you’re always going to break some glass to get rid of a VC board member. But I think the first thing you should do is point out the problem to someone, sometimes it’s not healthy for the entrepreneur do it to do it. I think that’s really hard. I think in most boards, I think it’s very healthy to have, in essence, the role of lead director, which is somebody who’s been around who’s who’s, who’s going to give the CEO bad news, who’s going to collect the board information at the end of the meeting in an executive session, and go back and talk to the CEO who’s going to take responsibility for shepherding the board as a board. And I think very often that person needs to step up and call someone and say, Look, I know you mean, well. But when you come in, and you and you, and you whack the CEO, CEO repeatedly over the head in front of the rest of the board, it just makes that person defensive. And if you have some really negative comments to make, that you already decided on when you read the deck two days before, why don’t you pick up the phone and call them in advance? Or, gee, if you just hate this company, I mean, one of the things that just drives me crazy is, let’s face it, we are we are in a high risk, high reward business, and most of the companies we invest in will not fill the high reward part. Right? That is actually, you know, it’s the power law is what we do. Half of our math is the math Yeah, being angry with people for their companies failing is, in most, in most situations, just completely misguided. Now, once in a while, people do screw up people, that entrepreneurs exhibit bad behavior, they do bad things, you can be unhappy with that. But a lot of times it just, hey, we’re all good people, we tried hard, and we just didn’t win. But to be angry with people and to be mean, to be bitter in board meetings, and being an entrepreneur is hard enough. The last thing in the world you want is some negative person sitting on your board being an ass. And so I think sometimes you just have to call people on behavior. And and just kind of say, hey, look, you know, like, this is not helpful, but again, I think you have to do in a respectful way. If you you know, if I call someone out. I mean, I’ve been doing this a long time. And if I call someone up and say look, let me give you some advice about about boards, you know, please take this in the way it’s intended. I’m intending it because I’m trying To make everyone better off here, here’s some basics. Right? And I think, by the way, one of the things is interesting. I just had this one of our portfolio companies who’s raised a lot of money, then there are two founders on the board. No one had ever said to them, like, here’s how boards work. Here’s what you should do as a board member, I actually sent them Matt Blumberg of bolster has this really great handbooks. 50, some pages about startup boards. I said, just read this. Just Just so you understand that this is supposed to work, because I think, in a way, so one of the things maybe we’ve lost a little bit in being venture capitalists is we need to be coaches, we need to help them understand why would an entrepreneur understand how to run a board, when they’ve never run a board? Or even been on a board before? Why would we expect them to know how to do that? And those of us who’ve been on dozens of boards, why aren’t we helping them?
40:53
Love it? And then what if you get in a situation where there is a board member who’s arrogant, smug, they’re not a good listener? You know, you try and give some feedback. But it’s you’re you’re you’re speaking to a wall? What’s the advisement on unseating a board member? Yeah,
41:09
well, it’s really hard. I mean, if they’re the by the way, if they’re an independent, you can just say, thank you so much for your service, your term is up and we’re vesting your, your grant, it’s been great. So, you know, you might hurt some feelings, but you can, you can get rid of independent board members. If it is an investor, it’s really hard. I mean, I think the first thing you have to do is try to help them understand why they’re causing problems and try to get them somewhere better. You can go to their firm, because almost all board seats are not held by the individual, they’re held by the firm. And you can say, we were not this isn’t working. Now that is a that is a pretty that’s like throwing a hand grenade and you can be really sure you want to do that. But I would generally say super awful board members, a lot of times their partners kind of know. And and so if it’s really that bad going and and you know, you can, we can all come up with the nice words that sound better. Like GE, we really think this person’s domain expertise is not a fit with the, with what our challenges are, for the next level, you know, you can have fake speak about why you want the person to go, but you’re still telling him, could you have put someone else on the board, then the most typical thing that entrepreneurs do, and I, I think this is great is around every financing, right? New money usually dictates the new board. And you you know, you go to your new investor and say, by the way, it would be super helpful if that person was no longer in our on our board. And could you please design the term sheet to just sunset their board role and bring in some somebody else? I mean, there are there are polite ways to do it. There are honest ways to do it. Sometimes the polite way isn’t completely honest. But you’re, you know, at the end of the day, you’re saying, this is the board I need. And this is the board I have, and I need to swap some things out on this board. And you’re trying to get other people who care about the company to help you. And so I’ve often seen it work in in round, right in rounds, that’s where the horse trading happens.
43:17
How about like when the board is getting bloated? And you got observers hanging around? And it’s just like too many faces in the room? Do you just address that immediately rip the band aid? Or, you know, do you wait for financing? Depends
43:31
on the dynamic. I think that sometimes I haven’t been I haven’t had this too much lately. But I there was a period of time where it felt like there were a lot of observers in the board. And I think that observers are fine. You know, a lot of them are there because they’re, you know, it’s their funds or their their corporates, and they’re required to ask for an observer seat. But if they’re not adding value in the boardroom, then you have two sessions, you have the open session, and you have the Executive Session. And instead of having most of the board meeting, in an open session with 20 people in the room, you have a half hour of open session, and then you say thanks for coming. And you move to Executive Session, and then you only have your board members there. And I think that that again, so much of this is if you set up this hygiene from the very beginning. If you always have an executive session, then it’s not that odd when you suddenly start having executive sessions. So I think some of this is just planning for it in advance. But anytime you get more than you know, whatever it is a dozen people in the room, it’s it becomes a reporting session. It doesn’t become a productive problem solving session. And I think that it’s really I hate to put yet another thing on the entrepreneurial CEO but it’s really up to the CEO to kind of manage that and recognize when when you’re losing the room and who’s just sitting there taking notes because again, a lot of a lot of people, their their role and they’re told this by their bosses. You Your role is to sit in that room, take notes, and then report back to me what’s going on. And that’s just not helpful, that’s not productive, you can get that from, you can get that from the deck, right? You don’t need to sit in the room. And, and, and listen, you’re just, you’re just sucking oxygen out of the room when you do that. So
45:18
well, to that point, like the report part of the deck doesn’t need to be paged through right, if you send it out with enough advanced notice, you can say, here are the problems I’m trying to solve for that I’d like to discuss in this session.
45:31
This is another one of those things. It’s like, every time I get a deck, and it’s, you know, 200 pages long, and I get it at 11 o’clock at night, the day before the board meeting, I’m like, you know, like, send it out a number of days in advance, call your keyboard members and say, Tell them I’m going to call you a day of the head of the board meeting, please read the deck and let me know if there’s anything that’s problematic, or you want to talk about before the board meeting. Yeah, first of all, kind of is a nice way to force them to read the deck. And second of all, great. Like, don’t wait for that stuff to to happen in the format. And then another thing is goes back to think about bad news. A board deck is not the time that bad news should be introduced for the first time, if there is bad news, and you waited to a board to afford deck to tell your board that’s going to go back on you. And so when you have bad news, bad news needs to travel really fast, bad news needs to to you need to expose you there your board so they can they can digest it, and then they can be helpful to you. So I think a lot of this is just it’s extra work on the part of the entrepreneur to manage their board. But if you manage the board, you will have a better life as a result too. So for example, something as simple as making sure the decks out more than two days in advance, putting a mark on every page that you plan to discuss in the board meeting, and say the rest of its background reading, and we’re only going to talk about these particular, these particular things. Having a list somewhere in the deck about these are the things I want to discuss. And having a list about these are the after the board meeting, these are the follow up items that I want the board to help me with, or I want the board to do is specific. I’d want entrepreneur who after every board meeting, like we literally got an email with our assignments that came out of the board meeting, I thought that’s great, hey, this entrepreneur understands we are free help. So use us. So you know, but again, it’s there is a vast difference of how boards are managed. That,
47:29
that we won’t I love your advice about the pre call, like you can do a pre call with the members before and defuse the bomb. As you said, like I saw this in practice many years ago, when I was an Operator, Senior Executives before strap planning, I saw one out of 30 that did the short calls with his entire audience before he delivered his plan. And he was able to deal with all the difficult conversations. And then he had a bunch of allies by the time he he actually delivered the report, I thought it was a smart move.
47:59
Well, I just this is one of the things that if you view there is a view some entrepreneurs have of venture capitalists, which is like we are we are ogres and we’re sitting on a bridge and there’s a giant pile of money in a bag behind us. And you have to say the magic words that unlock us. And then we let you buy and you grab the money and you run away and we are remain overs on the bridge. And, and some VCs desert deserve that reputation. But I think, again, if you go back to the idea that we are in partnership with you, yeah, managing your board is important. And and, and that doesn’t mean necessarily manipulating your board. But there is sort of an element of like, like, it’s not that different from being a parent, right? Don’t bring your, your children choices that you’re not willing to live by if they choose them. Right. Don’t bring things to your board, that you know, if you’re gonna give them a choice, don’t give them a choice of something that you don’t want to do make these decisions ahead of time. I think this is one of those things that the classic example In fact, I’m thinking of doing a podcast about this one is co founders who end up in a fight to the death and come to the board to resolve it. Like let me tell you something you should resolve wrong for wrong place for co founder you should make every effort as co founders to figure out how to solve the problem without bringing it to the board because asking your board to choose is a really bad plan of action. But you know, but these these things happen so I do think that understanding managing your board making them your partners and not making them just an over oversight and a last minute thought and a sort of a pain in the ass to be dealt with. You might be surprised what you get out of them if you actually put some work into them.
49:51
Totally. You know before we move on from boards, any anything notable anything different with public boards versus pro I noticed, I recall, you mentioned the reporting requirements. But from a board standpoint,
50:05
you know, in so many ways they’re the same. And I mean, I think the most interesting thing is that the companies are much, much bigger, the problems tend to be the same. And in fact, often they’re harder in a way because because it’s it’s turning, it’s turning an ocean liner. Right? A big companies are just they’re harder, you have to be much more careful about what you publicly say, or publicly disclose. I mean, I sort of have this rule about any board I’m on is I am not the spokesperson for this company. I do not talk about companies outside of the board. If the entrepreneur asks me to talk about a company, I’m going to do it, but I’m not just going to going to talk about the company outs outside of the the board. It’s not my role as a board member, you know, public boards, I think, again, I think there is more focus on some of the committee, Work Comp Committee, audit committee, that kind of stuff. There’s a tremendous amount of material that any American public company has to put out into market. And so there is a level of sort of there that you read a lot more fine print on a public company board. But I think the fundamental concepts of what a board is and what we should be doing, they’re pretty much the same between public boards and private boards. And by the way, I’ve seen dysfunctional public boards and I’ve seen dysfunctional private boards. So it’s just again, just because they’re big, doesn’t mean they’re well run.
51:22
So Heidi, you are a woman entrepreneur, and a woman VC long before this was Colin Right. Like and is one of the Great’s we talked about her, but I remember in the early years of the show there, there weren’t nearly as many women VCs to call on. Yeah. For interviews, you know, I’d love to hear, you know, and in what ways has the industry changed? Is it easier for women now to be VCs? You know, I’d love to hear some of your thoughts on I do think
51:51
it’s changed. I do think I mean, we were I can just tell you that when I first became a VC, I went there was an investment banker, I won’t name which one, they had a dinner for VCs and entrepreneurs. I went to the dinner, there were 100 people there. I was the only woman and the the chairman of the firm got got up and he said, okay, and for this dinner, we’re gonna do something different. We’re going to seat we’re going to seat ourselves boy, girl, boy, girl, how do you sit next to me? Oh, we’re out of girls. I am not kidding. That was the opening line that was calling people to dinner. So luckily, things have changed. And we’re not in that situation anymore. I think there are amazing women coming up through the ranks. My I am, I am such a benefit to work with a number of women on our investment team led by the wonderful Emily Melton, who was the chairman of the NVCA board year before last. So, you know, very, very senior, very recognized and chaired the nbca and amazing, amazing woman who you should have on this podcast sometime. So So I I see more women, there are more women around, I used to be so accustomed to being the only woman on a board. I am now on all the boards I’ve been on in the last at least three years, I have not been the only woman on the board. And very often there are the in a few of the companies, there are more women on the board than men. So things have changed, things have changed. I think it I think there is I think there are still some places I mean, and this is I’m gonna be a little biased, but thresholds really good about this, right? I mean, it’s one of the reasons I’m there am Emily, Megan, Lisa, Katie, we have a number of the but we actually I think at this point, we do have more women on the investment team than men. So So I don’t I don’t face that problem. And by the way, I think the person on our on our investment team who has backed the most women is Josh Stein, actually, you know, that LaunchDarkly founded by a woman front founded by a woman, I mean, again, it’s it’s I’m very lucky, because I’m not in that place. I mentor a lot of young women VCs, and I still hear a lot of not great stuff. And it’s shocking to me that here we are in 2024. And they’re still dealing with, with sort of things I would have hoped we’d be over by now. And that’s unfortunate. And it’s going to be unfortunate for those firms. Because the women who work at those firms and can’t get ahead, they’re going to leave and they’re going to go start their own or they’re going to go do other things or they’re going to go come to firms like mine, and it’s gonna be a loss for those places. So you know, I will I own a I’m not going to name names because I want to maintain my my mentor and confidentiality with people. But it’s not. It’s not it’s not where it is off yet. It’s not result. No. So I would say as a woman, if you want to be in venture pick very carefully. If you’re in venture if you want to be in venture and you’re interviewing in a firm and there are no women on the investment team, you might want to think about why that’s
54:58
a great inside and extensively entrepreneurs till I mean, we saw a situation where there was a woman running a company. And the man was CEO and Chairman. And I started asking why. And they said, well, the the VC that funded us previously required that he be CEO. So we had to flip titles. And I was just in shock. So, you know, I had to fly out there, we had to fix the cap table, we had to, you know, realign the roles and stuff. But for that to still happen in this day and age is, ya know, it’s crazy.
55:35
And I mean, I had an experience that happened long, a long time ago, but somebody recently told me they had a similar experiences. I raised my second round, when I was five months pregnant, I was visibly pregnant. And one VC just point blank said to me, Well, how do we know that you’re not going to just focus on your baby once you have a baby? And I said, well, because even after you invest, I’m gonna own a bigger percent of the company than you do. Don’t you think I’m going to be motivated? I mean, I couldn’t believe I was. I was enraged after that meeting. But you know, there are no rules about what a VC can say. I don’t think I mean, it’s not like, like being an employer. And so I hope you had another idea that I did. Well, Hummer Winblad, you know, so yeah. But yeah, I still hear about stuff like that. I still hear about women who are noticeably pregnant. And and feel like they can’t go out and fundraise. Because, because because of how they, because of the obvious sign, it sends a message it seems to send to some people to shame. Yeah.
56:40
Heidi, I wanted to talk about your fellowship. So you have a fellowship at Stanford is highly competitive only for grad students, and it’s focused on entrepreneurship. What are those next generation of leaders focused on? And what have they taught you? Wow.
56:56
Well, I am, I’m so lucky to get to do this. And I’m so grateful to threshold for for sponsoring this program and to Stanford for actually Stanford approached me about about this idea in the very beginning, which is to build a community in the graduate in among graduate students, primarily engineering students, although not always all engineering students, so that they would have a community and focus around entrepreneurship. And so we have this program, 12 fellows a year, we’re just about to enter our 10th year, and they come from all over the world, they come from every demographic they are I’ve been gender balanced every year since after the first year, they are the most amazing people. And it is just such a gift to get to know these people. And I really become friends with many of them that the relationship is intense. And the relationship among them is intense. And across the years because they also agree to mentor, when they graduate from the program, they come back as mentors to the to the next generation. And so it’s really something that that I’m very proud of. And the students are really amazing. And what’s really great about it is I think Stanford has been in the news recently for some kind of not good reasons around entrepreneurship and coloring outside those lines to put it kindly in some situations. In the last number of years, I’ve seen Stanford turn towards a deeper focus on ethics. And I’m making sure that people have exposure to discussions around ethics and responsibility and you know, unintended consequences of technology, and all of these sorts of things. And what I’ve seen in the 10 years that I’ve taught, is the students are turning, first of all, they’re trying to solve bigger and bigger problems, right? I mean, I am super thrilled that I don’t have yet another sorry, another NFT, or a new crypto coin or something, you know, in my things, and they’re trying to solve issues around energy. They’re trying to solve issues around housing, they’re trying to solve issues. Interestingly, a number of them have been focused on elder care, because it’s a big growing demographic. There, they’re interested in solving big problems. And they’re there. They’re trying to do things that will actually benefit the world, as opposed to just make a buck. And not to say that you can’t make a buck Hey, I mean, we’re VCs, right? We have to we, our LPS actually expect us to make money. That’s why they gave us their money in the first place. So it’s not that I am not for creating profit. But I certainly like to believe in a world where you can do good and do well, at the same time. And so many of these students, and by the way, I would say close to half of them are not US citizens, and they many of them go back to their home countries. And for example, many of them have come from African countries. I’ve had a number of students from Nigeria, who go back to Nigeria and work on the entrepreneurial community there and make real change. And so I’m just I’m kind of in awe of them. They’re they’re really amazing. And a number of them. Two of them this year have raised have raised over 100 million with our startup. So yeah, so so they also some of them have gone on to build some quite substantial, substantial companies. So
1:00:23
awesome. Heidi, what book article or video would you recommend to listeners?
1:00:29
So there’s a there’s a book I read a couple years ago, and I now follow his podcast and guy named Peter Zion, and the book is called the end of the world is just the beginning. Which that sounds really depressing, doesn’t it. And there are elements of the book that are depressing, but he’s actually a great writer. And so he even makes the depressing stuff, kind of fun. But the book for me was, was super interesting, because it goes back, it kind of starts with sort of the end of World War Two and the Bretton Woods Agreement and explains, you know, the US dominance of naval, you know, the waterways and why all of that enabled global trade at a level that the world had never seen before, and then why that may be changing now. And then what that means is a whole lot about the human demographics, country, by country, it’s a lot about the natural resources, country, by country, not only natural resources in the ways of minerals, and oil, or energy, or that sort of thing. But even things like waterways and coastlines and things that I have to admit I, I didn’t really ever spend a lot of time thinking about any of that stuff. And so for me, it was it was a real eye opener, to think about how how the world is changing now and how we can prepare for that. And some of the changes that, frankly, I’d never thought about the changing demographic, it’s it’s something that I think gets a lot of attention now. But even two years ago, was anybody really talking about birth rates by country? And what? What’s going to happen to economies as a result of that? I think it’s fascinating stuff.
1:02:02
Have you stuff fascinating. Heidi, do you have any habits, tactics or behaviors that are a force multiplier?
1:02:08
Well, you know, I’ve been doing this a long time. So I have a couple of things. One is I try not to overfill my calendar, because I need to have time to process I think a lot of successful people, they, they fill their calendars with interaction, and they don’t leave time to process. And so I am a zero inbox person. And the only way you can be a zero and box person is allow yourself the time to actually process. I already talked about relationships over transactions, I think that one is super, super important. And and the last one is, and again, I’m older than most of the people listening to this. And so I’ll tell you, the warranty starts to run out a certain you know, at a certain age. So taking care of your health becomes a lot more important. So I get really good sleep, I get exercise. I’m you know that I I don’t know until they have a body replacement company startup, I only got this one. And so I try to take good care of myself, and turns out that as of some pretty positive benefits, but it also requires time and energy.
1:03:06
Well, I can tell you look, you look very youthful. And then finally here, Heidi, what is the best way for listeners to connect with you and follow along with threshold? Well,
1:03:15
I’m heidi@threshold.dc. So feel free to email me and of course, I got a plug the startup solution, my podcast, so you can go to threshold.vc/podcast or find it on your favorite podcast app.
1:03:30
This is one I highly recommend you check it out. She is Heidi Roizen. The podcast is the startup solution, and the firm is threshold. Heidi, thanks for the masterclass today, I can’t wait to do this again. It’s like so many lessons packed into one session. Wow, this
1:03:48
was such a pleasure. And it’s so fun to talk to a fellow experts. So you know, like, I The answers are only as good as the question. So thank you for that.
1:03:58
Thank you, Heidi. Appreciate it.
1:04:06
All right, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social or shoot them an email, let them know what particularly resonated with you. I can’t tell you how much I appreciate that some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same accomplishment goes a long way. Okay, that’s a wrap for today. Until next time, remember to over prepare, choose carefully and invest confidently thanks so much for listening
