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Show & Tell: The Value of Neverending Diligence

May 19, 2011

Brad Svrluga

I was in Los Angeles yesterday for a board meeting at WhoSay, an incredibly exciting company that I introduced here last week. These guys are doing great things, and have a terrific amount of momentum. It’s one of the most fun companies I’ve had the pleasure of being around.

After the board meeting, CEO Steve Ellis invited me to stick around and sit in on a pitch he was giving to a prospective client. I enthusiastically took him up on the offer, and boy am I glad I did.

The board had been sitting in a conference room for three hours prior, talking in great detail about the business, but there is absolutely no question that I learned more in the 40 minutes of that sales pitch than I did in the board meeting. I saw a live product demo, heard in living color how the company’s value proposition had evolved and how it was tuned for presentation to a specific type of client, and had the opportunity to watch a real live prospect react and respond to the pitch (fortunately quite positively!).

There is an odd dynamic that emerges in venture deals, where we do an enormous amount of due diligence prior to investing, getting to understand a company and its marketplace in excruciating detail. In fact, it’s not unheard of at the end of a diligence process for the investors to better understand certain elements of a company’s marketplace than the company does, at least for a brief period. But then, consistently, we take our eye off the ball, shifting to a simple reliance on management’s reporting to us.

With so many of our companies changing course along the way, sometimes dramatically, we lose touch. We no doubt had a deep understanding of the company’s value proposition on the day the deal closed, but unless we work at it, we simply cannot effectively maintain that understanding over time. I know I frequently do not.

If our visceral understanding of what a company does and how it does it wanes over time, how can we expect to be great board members? We pay attention to the metrics and the financials, sure, but if we lose our feel for product and market, we’ll be cursed with blind spots that might come back to bite us, and which will almost certainly be annoying to our CEO.

Preventing those blind spots takes more than just sitting in on a sales pitch, of course (constant reading, attending industry conferences, etc. are all important), but that’s not a bad place to start, and it offers an experience for which there is no substitute. If you’re an investor board member, I encourage you to ask your portfolio company CEOs to find an opportunity for you to sit as a silent observer in a sales pitch once in awhile.  And if you’re a CEO, make it a requirement that your board members join you for a pitch once a year, at least.

The mutual understanding of how a company is evolving and telling its story will provide a better context for the shared decision-making of the board. And hearing the pitch made directly by the company’s best salesman (the CEO should always be the best salesman at an early stage company) will help board members become more effective evangelists for the company.

It will take a little planning and effort, but if your experience is anything like the one I had yesterday, both CEO and board member will find it enormously valuable.

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