Sunday, August 18, 2002

Risk-Averse Venture Capitalists

I recently discovered Venture Blog: A Random Walk Down Sand Hill Road, which is maintained by three venture capitalists with August Capital. (Gee, I guess VCs aren't as busy as they were in the late 1990s?) It is a smart-looking site with good insights on the world of Silicon Valley startups.

A recent post by Andrew caught my eye. He contends that Sarbanes-Oxley (SOX) will help startups by "increas[ing] conservatism in corporate decision making." I respectfully disagree.

Andrew falls into the common trap of assuming that boards of directors of large companies participate in strategic decisions. While this is a common board function among startup companies, boards of publicly traded companies are increasingly unlikely to play this role, except in fundamental transactions such as mergers and acquisitions. Instead, the emphasis in modern corporate governance is on the board as a policeman. SOX exemplifies this. Shareholders (particularly pension funds) now attempt to participate directly in policy decisions (often through informal mechanisms, but also through shareholder votes) and are looking to the board primarily to prevent fraud.

So who is determining strategy? In large companies, that task falls to the senior executive officers, who have many incentives to take risks. In startup companies, by contrast, strategy typically is shaped by the board of directors, some of whom are substantial investors. I don't mean to imply that startups will not take risks -- after all, that is the whole game -- but my hunch is that startup boards may be less eager to roll the dice than public-company CEOs. For an example of the latter in Silicon Valley, consider Carly Fiorina and HP's bold takeover of Compaq. On risk-averse VCs, see