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What I Learned From My First Board Meeting

/ Nathan Guo / Leave a comment

Recently, I had the pleasure of attending my first board meetings ever. Thanks to Bilal Zuberi, Partner at Lux Capital, for having me along and answering all of my questions about board dynamics and effective leadership – your continued advice and support are really appreciated and invaluable.

The following are my takeaways from observing multiple meetings between investors and entrepreneurs. The Interpersonal dynamics between CEO/board members and between individual board members can be very telling – they provide an indication of how much thought has gone into the strategic leadership of the firm, and whether the group can work well as a team. Note that board dynamics will look very different between startup, private equity, and public companies. This post will focus on startup boards, which are typically made up of investors and some advisers.

A healthy level of tension helps a board and management team think critically about a startup’s direction

Startups are in a constant fight for survival. Startups that are not facing any tension are not thinking critically about the problems that they need to resolve in order to survive. At the other extreme, if there is too much tension the leadership and company becomes dysfunctional resulting in the death of the company.

Thus, it is the leaders’ job to maintain a healthy level of tension. Boards must be able to have honest, objective discussions about the strategic direction and decisions a company will make, and the leader of the board (the CEO and/or the Chairman) is responsible for facilitating this discussion. This is accomplished in a few ways:

    1. Agenda Setting: Leadership teams have many important things to worry about day-to-day to execute on a strategy, and a limited amount of time should be spent in high-level strategic meetings. Prioritization of important topics of discussion is key. Deciding what to discuss and what not to discuss should be the result of careful deliberation, and not left to open-ended discussion.
    1. Socialization: Board meetings should not be the only time that a leadership team communicates with its board members. Important news should be spread ahead of time such that an appropriate discussion can be had. If you wait until a meeting to drop a bomb, board members will not have had the opportunity to do their homework. The resulting discussion will be much lower level and informative rather than deliberative.
  1. Selecting the Right Team: Because a variety of skills are needed to build a company, leadership teams and boards should be made up of people who bring different perspectives to the table. However, it’s going to be difficult to get mileage out of a board if they don’t understand the business and industry dynamics. Entrepreneurs should do substantial diligence on a potential investor by asking other entrepreneurs that they’ve invested in about the investor’s knowledge of the industry, accessibility, and overall ability to add value.From a people perspective, boards should have members that provide dissenting opinions. This doesn’t mean that every board meeting needs to be a bitter argument, but a board filled with “yes-men” provides no value either. A good investor on a board acts as both a coach that provides critical feedback and as a support team to provide the leadership team with resources it needs to succeed.

At the end of the day, a board’s purpose is to serve the company – they have a fiduciary responsibility to the shareholders of the firm including common shareholders and employees. If you are the CEO, it’s up to you to design your board and board meetings to maximize the value you get from it.

The relationship between the investor and entrepreneur is what you make of it

There are two extremes that an investor-entrepreneur relationship can look like:

  • Investor disengagement: Investor might not even show up for board meetings, or shows up to meetings and gives weak advice. The investor is not invested emotionally in the success of the entrepreneur or the business.
  • Investor partnership: Investor is deeply engaged in the business, and is at the company multiple times a month. The investor and entrepreneur can both see that the other party wants what is best for the business, and a partnership is built based on trust.

A good investor is plugged into the business and actively engaged in coaching the management team and offering advice. This investor engagement can be extremely valuable if the relationship develops into a true partnership and can help align the incentives of the investor and entrepreneur. On the other hand, the development of personal relationships between investor and entrepreneur can complicate the relationship dramatically, making it more difficult to give honest, objective feedback. It is up to both the investor and entrepreneur to optimize for what is best for the business, and to build their relationship thoughtfully. If an entrepreneur doesn’t put effort into choosing an investor who they can partner with and doesn’t work to build that partnership, the default is to have a useless investor relationship.

Entrepreneurs must manage a fine line between confidence and arrogance

Aaron Harris of YC recently published a great blog post on I and we. While the discussion is focused on the relationship between an entrepreneur and their employees, but this discussion of ego is also applicable to the investor-entrepreneur relationship. Generally speaking, the investor is not in the trenches in the portfolio company’s industry. As a result, the entrepreneur has more detail and information from the day-to-day operations than the investor, and thus has a higher knowledge base for making decisions. On the other hand, it’s harder for the entrepreneur to evaluate firm strategy objectively due to their involvement in the day-to-day running of the firm, and because of human factors that cloud the passing of information.

Assuming the entrepreneur and investor have a good relationship (which is not always the case), an entrepreneur must manage their ego to effectively leverage their investor. This does not mean that the entrepreneur should blindly follow every single piece of advice given by the investor. Rather, they should remain objective by communicating the rationale of their decisions based on data. The entrepreneur should remain open to reevaluating their decisions based on new pieces of data that investors may bring to the table.

While the entrepreneur-investor relationship can be very complex due to the boards’ role in deciding to support or replace the management team of a firm, I believe that investors can add value to portfolio companies. Much of this value can be captured only through thoughtful building and maintenance of the board. Although many leaders strive to make decisions based on thoughtful data analysis, the reality is that effective decision making and leadership require effective management of people. Investors and entrepreneurs alike would be wise to think just as carefully about personal dynamics as they think about the business situation itself.

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Hong Kong protests and their implications for business in Greater China

/ Nathan Guo / Leave a comment

For many, the magnitude and impact of the protests in Hong Kong are difficult to understand. Some may see the protests as an extension of the 1989 Tiananmen uprising and a general revolt against an oppressive one-party regime. Others may see a movement that looks similar to Occupy Wall Street, with streets filled with young idealistic activists. While certainly there are some similarities to these historical protests, the truth is a bit more nuanced. To start, an understanding of Hong Kong’s historical significance is necessary.

Hong Kong’s Historical Significance

  1. Hong Kong as a gateway for unwanted change

    Even prior to the United Kingdom handover of Hong Kong to China in 1997, Hong Kong has long been a region of experimentation. From the mid-1700s, the greater Guangzhou region (the area surrounding Hong Kong, also known as Canton) was the only point of trade and contact with the Western world under the Canton System. This system was meant to not only limit the perceived commercial threat posed by foreigners, but also to limit a perceived political threat from abroad as well. Following the First Opium War, the UK seized Hong Kong as part of the Treaty of Nanking in 1842, forcefully opening more points of free trade. One of the goals of this war was to rectify a trade balance, wherein the West was purchasing large amounts of Chinese goods but were limited from selling products to the Chinese mainland. What resulted however, was the forced trade of opium into China. This was the first of many unequal treaties, in which China was subjected to the whims of the Western powers during what Chinese historian’s describe as the “Century of National Humiliation.” After a Second Opium War and years of forced opium trade, 27% of China’s male adult population regularly used opium by 1906. From a historical perspective, Hong Kong and the greater Guangzhou region represented an entry point for physical poisons.

  2. Hong Kong as a gateway for controlled experimentation

    Since the United Kingdom handed Hong Kong back to China in 1997, Hong Kong has existed as a Special Administrative Region (SAR), with a different set of rules and regulations than the rest of the Mainland. Under this system, Hong Kong was granted a high degree of autonomy with a separate political system and economy described by Deng Xiaoping as “One country, two systems.” In particular, Hong Kong maintained its own currency, economy, and most importantly, government. The establishment of neighboring Shenzhen as a Special Economic Zone served as an experiment for market capitalism under the system of “socialism with Chinese characteristics.” The investment of large international firms like Foxconn, resulted in large economic successes that drove the rapid acceptance of market capitalism throughout the rest of China.

As a result of Hong Kong’s history, there is a subtle but important cultural gap between Hong Kong and the Mainland. Rightly or wrongly, many Hong Kong citizens see themselves as superior to Mainlanders. Nevertheless, China has continued to allow Hong Kong special privileges not afforded to the rest of China in maintaining Hong Kong as a place for economic experimentation. Given its special status in China, changes in Hong Kong have major implications on business in Greater China

Implications for Business in Greater China

Given this historical perspective on Hong Kong, there are a few key questions that businesspeople need to examine in the wake of these protests:

  1. Will China allow Hong Kong’s historical role as a gateway into China extend beyond an experiment in economics into an experiment in politics?

    What started these protests was that Beijing proposed a change that would limit the existing democratic election process, by effectively limiting the chief executive candidates to those handpicked by the mainland government. Thus, the results of these protests have very specific implications for the future of democracy in Hong Kong, and by proxy democracy in China. Although democracy in China is unlikely at this point, any steps towards or away from democracy in Hong Kong will likely effect the political discourse in greater China.As any who have worked in China know, it is very necessary to have relationships or guanxi (關係) in order to do business there. As market capitalism has spread through China from Hong Kong, business reform has also spread. Thus, the political discourse in China will likely have a long-term impact on the way business in China is done.

  2. Will these protests lead to more severe unrest in Hong Kong and Greater China?

    This is a key question with the potential for more severe short-term financial implications. Since the start of the protests, the Hang Seng Index has already plummeted over 6.4% as investors pull money out of Hong Kong. Certainly, these investors are afraid that extended unrest in Hong Kong will negatively impact business potential in Hong Kong.In addition to the effect of unrest on Hong Kong, one must also consider the impact of unrest in Hong Kong on greater China. Instagram has been blocked in China since Sunday, and other social media and search sites are being actively censored by the government. If the unrest contagion spreads to greater China, it is likely that the PRC will clamp down in a much more extreme manner, but this is dangerous territory. Images of protestors being met by police armed with tear gas and riot shields are likely to evoke memories of Tiananmen, even in China where this event is actively censored. China must tread very lightly, as a violent clampdown of prospects in Hong Kong would likely crush the future of Hong Kong as an international business center.

  3. How will this impact cross-strait relations and the prospect of Taiwan joining greater China?

    China has extended to Taiwan the offer of rejoining China as a special administrative region similar to Hong Kong. Given Taiwan’s status as one of the “Four Asian Tigers,” this certainly has large implications for business, especially for the information technology and high tech manufacturing industries. Since the election of Ma Ying-Jeou (馬英九) as president of Taiwan in 2008, cross-strait relations between China and Taiwan have improved dramatically, resulting in substantial Taiwanese investment and emigration to China.In recent years, one of the simpler ways for foreigners to invest in Chinese growth was to invest in Taiwanese firms investing in China such as Foxconn. How things play out in Hong Kong will have a substantial impact on the future of cross-strait relations and continued Taiwanese investment in China.

The PRC has a very delicate task ahead in figuring out how to address these protests. Extended protests and backing away from previous moves will certainly cause the PRC to “lose face,” but violent clampdowns would have very dramatic repercussions. For businesspeople, it is important to understand that these events could radically change the future prospects of doing business in greater China and Asia Pacific.

The 100 Year Anniversary of the Republic of China and Sino-US Relationship Trends

/ Nathan Guo / Leave a comment

Today marks the 100 year anniversary of the Republic of China, known to most of the western world as Taiwan. October 10th, 1911 marked the end of traditional imperial rule in China, and the first attempt at democracy. Below is a promotional video from the event (Chinese), primarily discussing the history of the ROC and associating past figures and events with the freedom and prosperity seen in Taiwan today.

Prior to the 1970’s, the US recognized the Republic of China as the legitimate government of China, and actively worked to prevent the People’s Republic of China (PRC) from claiming a seat in the United Nations. At the height of the Cold War, the PRC were active combatants in the Korean and Vietnam wars. Nonetheless, in 1972, just 2 years after the end of the Vietnam War, President Nixon made a famous trip to China to normalize relations with the PRC.

PRC-US relationship normalization culminated in the Joint Communique on the Establishment of Diplomatic Relations in 1979, beginning US recognition of the PRC as the legitimate government of China in lieu of the ROC. At the same time, the US passed the Taiwan Relations Act, allowing for de facto diplomatic relations to continue with Taiwan.

While the Taiwanese economy far outpaced the PRC’s from the 60’s to the 90’s, the shift of PRC policy to the socialist market economy in 1978 has allowed the PRC to excel in recent years. With World Trade Organization acceptance of China in 2001, offshoring of American jobs to China have propelled the Chinese economy.

With the recent US economic struggles, many Americans have become increasing frustrated with perceived trade imbalances between the US and China. While have speculated about the resurgence of a red scare in response to economic pressures, others have been more vocal about denouncing China. However, the use of patriotism as thinly veiled racism is nothing new. Nonetheless, American policymakers have begun to combat aggressive Chinese economic policies with constructs like the recent China currency bill. At the same time, many US companies like Merck continue to move jobs overseas to China.

While relationships between the US, China, and Taiwan continue to be rocky, American corporations have tied the US to the hip with China. As the largest US bondholder, China has expressed concerns in US economic performance. Ultimately, US foreign and economic policy are supporting the continued shifting of jobs from the US to China. Measures like the China currency bill are too little, too late in the struggle to maintain US economic dominance. The wheels were set in motion when Nixon first visited China nearly 40 years ago.

While obviously, it is not beneficial for the US to normalize relations with Taiwan at this point in time, this is a stunning reminder of how US political rhetoric is often markedly different from US policy.