Archive for the ‘Venture Capital’ Category

Equity Traders Acknowledge that Structural Issues Are Crippling U.S. IPO’s

globe in handsIncreasing numbers of professionals in a position to foment meaningful change in the capital markets are recognizing that structural issues underlie the IPO drought for emerging companies with market capitalizations below $1 billion.  This must become a widely held point of view before any meaningful structural reform can take place, setting aside the legislative delays we can continue to expect from the partisan divisions that have rendered our elected leaders ineffective.

I’ve made this structural argument for over three years on this blog and in public speeches.  Again, I urge readers to make their voices heard on this topic.  On November 24, 2008 I wrote A Case Study in the Unintended Consequences of Financial Regulation:  The Death of the U.S. Small Cap IPO? and invited anyone with constructive, practical ideas on how to revitalize IPO’s in the United States to contact me so that I could pass along their ideas to my colleagues at the National Venture Capital Association. In this post, I made a strong argument that structural market issues were the root cause of the death of the small capitalization IPO:

The lack of IPO’s in the U.S. has broad, negative implications for continued risk taking by U.S. venture capitalists. If we have no public market liquidity for emerging growth companies, there will be no next generation of American technology giants. The demise of the technology IPO has also contributed to the structural breakdown in the broader cycle of research and development that underlies the American innovation crisis…

This post followed my exposition of the argument that America would face an overall crisis in innovation, drawing on work by Judy Estrin and others, in September 2008: The Innovation Crisis Is Coming- Let’s Do Something About it Now!

Sadly, the veracity of these arguments is being proven over and over again, as the venture capital industry continues to shrink and the fallacy of an American jobless recovery becomes apparent.  Pointing to the success of several handfuls of social media companies as an index for the general health of innovation in the U.S. in 2011 is not statistically meaningful and irrelevant to the thousands of startups that are finding it impossible to reach the much greater critical mass necessary to access the public equity capital markets today.  To be clear, publicly traded household names that would not be able to go public today based on current IPO requirements include Dell, Intel, EMC, Yahoo!, Intuit, EA Sports, and many others.

access deniedIn an article published on October 6, 2011 in Traders Magazine.Com, conference remarks by several leading international stock exchange professionals show that they are coming around to understanding the downside to small companies of a trading market infrastructure that treats unknown emerging public companies the same way as multi-billion dollar liquid securities:

“Though trading costs have gone down, that isn’t necessarily a good thing, according to Steve Wunsch, head of corporate initiatives at the ISE Stock Exchange. He said low trading costs have made it difficult for anyone to make money trading smaller names, thus drying up markets for smaller companies.”

Joseph Hall, a partner with the law firm of Davis Polk & Wardell, said the government could have caused part of the problem by repealing the Glass-Steagall Act’s separation of investment banks and commercial banks. That allowed a lot of small brokers to be bought up by big banks, reducing niche trading, he said.

Grant Thornton’s [David] Weild placed more of the blame on Reg NMS, which he said homogenized the markets to the detriment of new issuers. He said a one-size-fits-all market structure does not support smaller, newer companies.

The good news, Weild said, is that Washington seems to be paying attention. …

In my view, the bad news is that it’s taken three years since the global financial crisis erupted for us to get an increasing number of influential people to pay attention.  Meanwhile, millions of jobs have been lost, and innovation in America continues to suffer.

<script type=”text/javascript”>
var _gaq = _gaq || [];
_gaq.push(['_setAccount', 'UA-27318873-1']);
(function() {
var ga = document.createElement(‘script’); ga.type = ‘text/javascript’; ga.async = true;
ga.src = (‘https:’ == document.location.protocol ? ‘https://ssl’ : ‘http://www’) + ‘’;
var s = document.getElementsByTagName(‘script’)[0]; s.parentNode.insertBefore(ga, s);

New Book by Professor Mannie Manhong Liu and Pascal Levensohn– Venture Capital: Theory and Practice, published by the University of International Business and Economics Press, Beijing

I never expected to have my first book published in China, much less in Mandarin, but that goes to show how much the world continues to change.  My contributions to this undergraduate textbook, Venture Capital: Theory & Practice, are the result of two important collaborations.  First, the body of collaborative work on corporate governance best practices that I have developed since 1999 with other venture capitalists and professional service providers to the venture industry; and, second, the direct collaboration on venture capital that resulted from meeting Professor Mannie Manhong Liu in the summer of 2007 at the  Symposium on Building the Financial System of the 21st Century between China and the US, sponsored by the Harvard Law School together with the CDRF (China Development Research Foundation) and PIFS (the Program on International Financial Systems).

Venture Capital started in China in 1985, when the first government-sponsored venture capital firm was established. The industry built slowly until a few years into the new century. In 2006, China’s total venture capital investment reached $1.78 B, becoming number two globally, next to the US; the US venture capital investment was $25.6B that year, accounting for 67.9% of the world total ($37.7b).  While China was far behind, accounting for about 4.7% of the total, nevertheless, China became number two and has kept that status ever since.

Venture Capital is a popular buzzword in China. Renmin University was among the first universities to create a venture capital major in the School of Finance and teach venture capital for undergraduates.  In recent years, many universities have followed, teaching venture capital as an elective course. In October 2010, our new textbook will become available.

Mannie and I share a strong interest in research in the field of venture capital and private equity. Mannie was working for Professor Josh Lerner at Harvard Business School before she returned to China to teach these subjects. The backbone for my contribution to our effort is the best practices work “for practitioners by practitioners” that I have developed in the area of venture capital through the multiple articles and three white papers that I’ve written.

Mannie was invited by a publisher in Beijing to write a textbook for undergraduate students in China; she in turn invited me to join her as the book’s co-author. Writing the book was a very intensive task, and both of us have worked on it for many months, with Mannie and her team translating my work and both of us discussing the context of the content for the Chinese audience.

Venture Capital: Theory and Practice, is in Chinese and is categorized as one of  “China’s National College Major Investment Textbook Series for the ‘Twelfth Five-Year Plan.’” The book has three parts and a total of 12 chapters. The Theory includes chapters on the venture capital concept, entrepreneurship, and a simple history; The Practice covers fundraising, business plan construction and analysis, investment due diligence, post investment monitoring and exit; and The Future emphasizes early stage investment, especially angel investment, as well as Cleantech VCs and socially responsible investment.  In the last chapter, Venture Capital in China, we explore the amazing development of China’s unique venture capital industry.

This textbook combines the strength of my Silicon Valley experiences as a venture capitalist and Mannie’s research as a professor, and it will help strengthen Chinese college-education programs in this particular field.  The book draws on and acknowledges important contributions from the members of the Working Group on Director Accountability and other experts in the field of venture capital.  I’ve donated all of my royalties from the book to the Society of Kauffman Fellows, which reported on the publication of this book in their July report.

Connecting the Dots: How New Job Creation, IPO’s, and Venture Capital in America Are Intimately Linked

Everybody agrees that, without meaningful job growth, America will not emerge from its current deep economic funk.  There is plenty of debate, however, over what drives that job creation engine in our country. I’ve recently read several interesting reports that touch on parts of the American job growth conundrum but do not tie them together.  Pooling some compelling statistics from these various sources, I believe that the following conclusions are correct and interrelated :

(1) Job growth drives GDP growth;

(2) New company formation drives job growth;

(3) New companies create the vast majority of new jobs after their Initial Public Offerings;

(4) Increased Initial Public Offerings are required to increase job growth;

(5) If the total annual number of Initial Public Offerings (IPO’s) in the U.S. does not exceed 500, which studies show is the level required to support 3% annual U.S. GDP growth, the U.S. will not generate the job growth necessary to rekindle meaningful sustainable GDP growth in the U.S.;

(6) The most efficient fuel for this IPO engine is venture capital.

The evidence:

(i) Startups are responsible for virtually all the new jobs created in the United States since 1977 (Source: Kauffman Foundation)

“The Importance of Startups in Job Creation and Job Destruction bases its findings on the Business Dynamics Statistics (BDS), a U.S. government dataset compiled by the U.S. Census Bureau. The BDS series tracks the annual number of new businesses (startups and new locations) from 1977 to 2005, and defines startups as firms younger than one year old.  The study reveals that, both on average and for all but seven years between 1977 and 2005, existing firms are net job destroyers, losing 1 million jobs net combined per year. By contrast, in their first year, new firms add an average of 3 million jobs.”

(ii) Clearing the backlog in the U.S. Patent Office (USPTO), could create 2.5mm new jobs over the next three years by contributing to startup formation.  Source:  New York Times Opinion article, Inventing Our Way Out of Joblessness by Hank Nothaft and Paul Michel, August 5, 2010 )

1.2 million patent applications are currently awaiting examination by the USPTO …. each new issued patent creates  between 3 and 10 jobs.  Historic rates of patent grants suggest clearing the backlog could create 2.5mm jobs over the next three years.”

(iii) “Roughly 600,000 new businesses (that employ others) are started each year in the U.S.”  . . .

(iv) “Roughly 1,000 businesses receive their first VC funding each year . . .This means that only 1/16th of 1% of new businesses obtain VC funding. . . .”

(v) “Since 1999, over 60% of IPOs have been VC-backed.  This is an extraordinary percentage considering that only 1/16th of 1% of all companies are VC-backed.” “… it is highly unlikely that a company that does not take venture capital ends up going public. … Consistent with this success, venture capital has fueled many of the most successful start-ups of the last thirty years. … Four of the twenty companies with the largest market capitalization in the U.S.—Microsft, Apple, Google, Cisco—have been funded by venture capital.”

Source of (iii), (iv), and (v): “It Ain’t Broke: The Past, Present, and Future of Venture Capital”, by Professor Steven N. Kaplan of the University of Chicago Business School and Professor Josh Lerner of Harvard Business School.

(vi) Going back to the 1970’s it has been documented that 92% of the job growth in venture-backed companies occurs AFTER their IPO:


(vii) IPO’s currently account for 13% or LESS than all liquidity events for venture backed companies, down from 56% during the period from 1992 -2000:


(viii) The current IPO backlog and, more importantly, the poor aftermarket performance for the 85 IPOs priced in 2010 YTD, are symptomatic of a broken IPO pipeline:

According to David Weidner, author of the Wall Street Journal’s MarketBeat Blog,Dealogic reports that the current 180-day backlog for IPOs now stands at 125 deals, a level three times higher than at the same point last year. The biggest industry waiting is computers and electronics with 23 deals seeking to raise as much as $4.8 billion, followed by finance, 19 deals, and healthcare, 17 deals. Private-equity and venture capital firms have been hard hit too. …While that door hasn’t closed, it has stalled, at least for the 125 issues waiting for the storm clouds to dissipate. So far, it’s been rough-going for most of the issuers who have taken the plunge. Of the 85 IPOs priced so far this year, only 28 are up. The total return for all issues combined is -1.97%, according to”

(ix) The U.S. capital markets for listed equities have been in systemic decline since 1997, while every other major international equity market has been growing.  This is due to systemic regulatory failure and the unintended consequences of ill-conceived regulation that disproportionately negatively impacts startups.



For the detailed study behind (ix) and the two slides above, read “Market Structure Is Causing the IPO Crisis– And More”, by David Weild and Edward Kim, published by Grant Thornton in June 2010.

Conclusion:  If we don’t fix the IPO problem in America, we will not fix the job problem in America.  Venture capital is an essential ingredient to this recipe for success.  I can’t understand why our legislators and policymakers don’t understand this. If they did, there would be no higher legislative priority than promoting regulatory and tax reform to stimulate new capital formation and venture capital in the U.S.  The fact that Singapore, Brazil, India, China, Chile, the U.K., and other countries have figured this out should serve as strong corroborating evidence to the accuracy of this conclusion.

In a Wall Street Journal editorial, Otellini’s Lament, dated August 27,2010, the editor quotes Intel CEO Paul Otellini’s recent comments: “…Otellini . . . warned a technology forum this week that without a change in U.S. government policy ‘thenext big thing will not be invented here.  Jobs will not be created here.  And wealth will not accrue here.  Ultimately, we will face an inevitable erosion and shift of wealth– much like we are witnessing today in Europe.’”

I agree with Mr. Otellini, and it is no coincidence that my first book, Venture Capital: Theory & Practice, which I co-authored with Professor Mannie Manhong Liu of Renmin University of China, is in Chinese and is being published in China in October.  For more on the book, see my next blog post.

Update on America’s Slipping Global Competitiveness– Implications for Intellectual Property Development of Senate Bill 515

ot_logoThis morning I gave the keynote speech at the ICAP Ocean Tomo IP auction in San Francisco.  My remarks explained the relationship between the long-term decline in America’s global competitiveness, the impact of the capital markets crisis on new investment in research and development, and specifically addressed Senate Bill 515, the pending U.S. legislation that will transform the U.S. patent system and broadly impact intellectual property rights in our country.  Some excerpts follow, and you can download the entire speech and slides by clicking at the bottom of this post:

“The absence of cohesion in American public policy can be seen in many areas—with cybersecurity coming immediately to mind.  Mike McConnell, former director of the National Security Agency, recently wrote an opinion piece in the Washington Post on why the U.S. is losing the cyber war, commenting that “The problem is not one of resources; even in our current fiscal straits, we can afford to upgrade our defenses. The problem is that we lack a cohesive strategy to meet this challenge.

This lack of cohesiveness comes from short-term thinking that has become prevalent in many aspects of American society.   The notion that “posterity doesn’t matter” has unfortunately taken root in our country, and this has led to fragmented approaches to public policy solutions across the board, corroded leadership among our elected representatives, and contributed to an entitlement culture and a lack of accountability that permeate much of American society.”

“The key obstacle to moving [patent] reform forward continues to be disagreement between several large high-tech companies, namely the group of Cisco, Microsoft, Hewlett Packard, and Intel, on the one hand, and life sciences organizations such as PhRma, BIO, MDMA, AdvaMed, Universities, several union groups, the NVCA, and others, on the other hand, over the idea of creating a new post-grant review procedure within the PTO and over the proposal on apportionment of damages in infringement cases.

As we consider the broad implications of this polarizing issue, we must first step back and remember that inventors and investors devote time, energy and risk capital to innovate new products and technologies.  Since the drafting of our country’s Constitution and even well prior to the establishment of the United States, it was understood that the greater good was served with a patent system that encourages this type of risk taking by protecting inventions resulting from innovation.  It is also understood, though in our country it appears to have been forgotten, that innovation, and job creation, come not just from large, well-funded enterprises, but in large part result from the efforts of small companies and individuals laboring to make a better mouse trap.

The core principles underlying the patent system have not changed.  We need to encourage and reward those that take risk to innovate new products, services and technologies.  Unfortunately, the patent system that served us so well for so long is under assault.  The cost of filing patents has increased dramatically.  The cost of enforcing patents has gone through the roof.  Injunctions have been taken away except for cases of head-to-head competition in the patented item.  Patents are now easier to invalidate after-the-fact.  A patent holder can no longer offer his/her patents for license without putting himself/herself at risk of litigation that he/she may not be able to afford.  Innovation involving patents has become a rich-man’s game, with an increasingly uncertain chance of return.

At a high level, we need to understand that anything that changes our patent system creates winners and losers.  In general, changes that weaken the patent system hurt inventors and innovators, while benefiting large companies with established market positions (e.g., monopolists) and low cost producers (e.g., offshore companies with lower labor costs, fixed currencies and weaker environmental standards).

Some argue for changes in the patent system based on a claim that non-practicing entities, often pejoratively called trolls, have too much power.  Some extraordinary examples, such as NTP seeking an injunction that would shut down Congress’ use of Blackberrys and some high dollar jury awards and settlements, have been cited by some as sufficient reason to argue for a radical restructuring of the way that patents are filed, challenged and enforced in court.

We need balance in this process, as changes may have the unintended affect of hurting those that we need now more than ever – inventors, entrepreneurs and investors that will innovate and create jobs here in the U.S.”

For a full transcript of the speech, including the slides, CLICK HERE.


VC Governance FAQ: (10) Are limited partner defaults on capital commitments triggering a wave of lawsuits in the venture industry?

images-11This is the last in our series of 10 frequently asked questions from investors in venture capital partnerships.

Susan Mangiero, CEO of Investment Governance’s Fiduciary X, asked me the following:

Question: I’ve read that some GPs are suing LPs for not making capital calls. The LPs claim that they are cash constrained and/or the VC fund has not performed. Why throw more money their way? Do you see a trend here of broken contracts?

Answer: First, it would appear that the reports of numerous LP  defaults exceed the reality. Based upon discussions with industry  participants, most institutional LPs have, in fact, met their  obligations to make capital calls. Second,  the decision of a GP to sue an LP over a default is most often the absolute  last resort. The GPs are not in business to institute litigation — this a  distraction for the GP and added publicity that neither GPs nor LPs desire.  When the LP Agreement is executed, all of the parties enter into a contract  with the expectation that both LPs and GPs will honor their respective  commitments. The GPs have committed their time, and have built an organization  to implement an investment strategy and program for the fund. They should be  entitled to rely on the contractual obligations of those sophisticated  investors who agreed to support this program over the long  term.

VC Governance FAQ: (9) Does an anemic IPO market deter VC investing?


This is the ninth in our series of ten frequently asked questions from investors in venture capital partnerships.

Susan Mangiero, CEO of Investment Governance’s Fiduciary X, asked me the following:

Question: Do you think than anemic IPO market will remain a deterrent to VC investing?

Yes I do.  I believe that an entire generation of American innovation is at risk as a result of the lack of IPO’s.  The statistics are overwhelming in support of my position, starting with the fact that over 90% of jobs created by VC-backed companies occur AFTER their IPO—and this has been the case for 40 years.  What concerns me the most about the IPO vacuum is that it is systemic and is the result of a “one size fits all mentality” when it comes to regulation of the securities industry.  A relatively unknown emerging growth public company with a $500 million market cap has different needs for research and trading support to provide liquidity for investors than IBM.  I remain surprised that this seems to be difficult for our policy makers to understand, but I am encouraged that the SEC has recently invited public comments for a 90 day period to address structural problems with the U.S. equity markets.

Specifically, the SEC wants to know if anyone from the public has thoughts on whether the current market structure is fundamentally fair to investors and supports capital raising functions for companies of various sizes, and whether intermarket linkages are adequate to provide a cohesive national market system”. The Commissioners expressed particular interest in receiving comments from a wide range of market participants. Comments on the Concept Release are due within 90 days after publication in the Federal Register.

For more on the SEC Concept Release, click HERE

I believe that the U.S. equity capital markets must be structured with the goal of promoting the growth of publicly held small businesses in America.  America had this structure in place prior to 1997, and we should take a hard look at what has changed to render the small company IPO extinct (contrary to popular belief, it first became an endangered species before the technology bubble).

images-15Compounding this problem is the fact that, with no IPO options, the consideration paid for companies in trade sales—acquisition by larger companies—has been declining.  Why should venture capitalists take the risks associated with starting up a new company, working through all of the difficulties with multiple financing rounds and executive changes over a six-to-eight or even ten-year period, only to get backed into a corner by a large multinational that dominates the sales channel and can wait them out?

The biggest problem the VC industry has today is that, absent access to public market capital, there are too few VC-backed companies that are self sustaining cashflow generators.  The biggest problem that the U.S. economy has today is unemployment.  You would think that maybe the stewards of the U.S. economy, our legislators, could make some structural changes to our small company capital markets regulations to fuel the greatest job creation engine in America—the entrepreneur driving an emerging growth company.  This problem goes way beyond venture capital—as 47% of all IPO’s since 1991 were backed by neither VC’s or private equity firms—this is an American problem.

VC Governance FAQ: (8) How can a limited partner exit from a VC fund?

images-16This is the eighth in our series of ten frequently asked questions from investors in venture capital partnerships.

Susan Mangiero, CEO of Investment Governance’s Fiduciary X, asked me the following:

Question: What happens if an LP wants to exit a VC fund? What are their rights?

Answer: The options here are limited, and they are (1) the LP can try to sell their interest, including the obligation to fund future capital calls, to a fund that acquires secondary interests.  The good news is that a robust market exists for such interests in venture capital partnerships today; or (2) default.  If you do wish to sell, the GP needs to approve the transfer, and the standard partnership agreement language leaves this decision in the “sole discretion” of the GP.  There is no free lunch if you change your mind several years into a 10-year-plus partnership participation. And there shouldn’t be, which also means that either the secondary market buyer will take their pound of flesh by buying the LP’s interest at a substantial discount, or the GP will by offering the interest and its economic value on a discounted basis to the other LP’s.  It is far less disruptive to the GP and to the GP-LP relationship for the exiting partner to sell to a secondary buyer, but these buyers are totally financially driven and are going to get the best deal possible for themselves.

VC Governance FAQ: (7) How should institutional investors contact VC funds?


This is the seventh in our series of ten frequently asked questions from investors in venture capital partnerships.

Susan Mangiero, CEO of Investment Governance’s Fiduciary X, asked me the following:

Question; How should institutional investors contact VC funds? Directly or via an investment consultant? Do the traditional investment consultants have the background to conduct due diligence on the VC fund(s)?

Answer: First, nothing beats direct contact with managers.  I think the VC industry conferences in specific industry sectors provide a great forum for institutional investors to meet directly with VC funds.  Historically the two largest conferences have been sponsored by IBF and DowJones.  There are also sector specialty conferences, such as the IT Security Entrepreneurs Forum held annually on the Stanford campus, the bring out domain experts.I think that it also makes sense for institutional investors who don’t have the resources to do a full search to work with consultants—however, I will say that, in my experience, many consultants become gatherers of statistics and information—meaning paper pushers—and few of them actually bother to have a deep and current understanding of what is really going on in the market. I’ve actually been shocked at how clueless some consultants are about what is really going in the VC industry. I think the evidence supporting this point is in the fact that, because of the long term nature of the VC business, consultants will choose to back a certain fund and then assume that they can sit back and wait for five or ten years to see if they made the right choice.  This is a big mistake, and one of the root causes is because there is a low probability that the same analyst or partner in the firm that made the original “commit” decision is still going to be at the consultant even four years after the original decision to recommend the fund was made.  So I am suggesting that a lot of the “standard” recommendations by the consultants in VC are stale.  So you need to do research on the consultant’s process as well as directly meet with the venture firms.  Any venture firm that won’t meet with you probably doesn’t need your money and won’t give you the kind of respect in a relationship that you should expect, so that’s a great first cut in your process.images-13

VC Governance FAQ: (6) Are contract terms in partnership agreements shifting in favor of institutional Limited Partners?

images-10This is the sixth in our series of ten frequently asked questions from investors in venture capital partnerships.

Susan Mangiero, CEO of Investment Governance’s Fiduciary X, asked me the following:

Question: You had some thoughts about contract terms. Do you think the trend is shifting in favor of institutional LPs to receive better terms?

Answer: Certainly as the sources of capital have become more  selective and scarce, the GPs have had to become more aware of LP concerns over terms. While  the GPs in top tier funds will still be able to maintain favorable terms (and  LPs will always want to get into their funds), even these GPs have made some  concessions to maintain a supportive investor base. For example, recent press  reports have indicated that at least two prominent funds had lowered their  “premium” carry structures, and made the payment of a 30% carry rate subject  to the return of a multiple of the investors’ capital. For those other funds  that are not oversubscribed, there will undoubtedly be some pressure on  terms. Though there has been a lot of talk about the terms suggested in the  recent guidelines published by the ILPA, these guidelines have not fully  caught hold (and some proposed terms –like joint and several liability  on clawbacks — may be seen as too extreme). Still, in the current fundraising  environment, there will certainly be some movement to provide an  alignment of interests between LPs and GPs, while trying to maintain the  appropriate incentives for the GPs.

VC Governance FAQ: (5) How are VC funds governed differently from the governance standards applied to their portfolio companies?

images-8This is the fifth in our series of ten frequently asked questions from investors in venture capital partnerships.

Susan Mangiero, CEO of Investment Governance’s Fiduciary X, asked me the following:

Question: Please differentiate between the governance of a VC fund versus the governance of companies in a VC fund’s portfolio? Is one more important than the other?

Answer: This is a very important question, and it starts with recognizing that VC funds, as partnerships, are governed very differently from portfolio companies, which are corporations.  The VC fund may have one managing partner that sets the tone and controls the entire firm, or it may have a collegial distribution of governance among several senior partners.  The best way to understand how a VC fund is governed begins with an analysis of the fund’s investment committee, its deal due diligence process, and the specific allocation of the fund’s investment capital among the individual partners.  An important question to ask is, do the partners evaluate themselves and each other on an annual basis or at all? You might be surprised to learn that many VC funds lack an internal feedback loop, that the partners may not communicate openly among each other, and that the partners themselves may lack a formal measure of accountability among each other, even though the economics are divided formally in the management company agreement.images-9

Turning to portfolio companies, the board of directors is responsible for the governance of the company, and here we have a very interesting dynamic which often leads to board dysfunction—the VC directors have inherent conflicts of interest as representatives of their funds and as fiduciaries who must act in the best interests of all of the shareholders.  In addition there is a major tension and conflict between the management team and the VC directors—the management wants more share ownership, and the common equity is at the bottom of the seniority stack behind the various series of preferred equity rounds.  The VCs want capital efficiency, which means they want management to do more with less.  Compounding the complexity is the fact that most VC-backed companies replace their CEOs twice between the founding and the liquidity event.  So you can imagine that the VC boardroom governance equation is very complex and rife with opportunities for problems.