Ride It to the Sky

I was extremely lucky to have had an excellent Board of Directors at Fundera. I generally believe that most boards are relatively useless, which is at least better than boards that are harmful. So when I found myself surrounded by people who genuinely cared about our business and its people, even while knowing that the company was not a power-law-fund-returner, I knew I was one of the lucky entrepreneurs. Here are some things that our board did (and some other examples that I’ve seen other boards do) that I’ll always be grateful for and have helped me learn what being a supportive and excellent director looks like:

Good board members are truth-tellers. They are not trying to win popularity contests or pander to a founder/CEO/exec team’s emotions. They aren’t trying to impress other board members either. They tell it how they see it. A good example of this was when Scott Feldman embarked on a difficult journey to teach me how to properly manage the finances of a company. I came from the world of the consumer internet where I was trained to grow a service, burn cash, raise more money, and defer figuring out how to monetize and build something profitable. Scott came from Susquehanna group which primarily invests in software businesses based on their fundamentals. He and Frank Rotman (another Fundera director) were also on the board of Credit Karma, so they knew exactly how businesses like Fundera would ultimately be valued. I was being a poor steward of capital, ramping burn faster than revenue thinking we would always be able to raise capital to stay afloat. Scott told me during a board meeting that I was going to run the business into the ground and bankrupt it, and that it’s value was approximately jack shit. I hated him for it, but he was just providing honesty and tough love. I learned a lot from that experience, and finally familiarized myself with terms like trailing twelve months revenue and ebitda margins. He had the courage to tell the truth and that changed the trajectory of the business.

Good board members understand how to incentivize a team (especially during a crisis and even if it comes at their own short-term expense). When the pandemic began in March 2020, Fundera lost roughly 80% of its revenue overnight. We had to do a 25% RIF and immediately ensure we took care of the remaining team, helping them feel secure and motivated. One of the first things our board recommended was to conduct a new 409a and reprice every grant we had made to employees that was above our new 409a. Nobody would be underwater. Then we topped off everyone with a new and meaningful grant. Every single person. Incentives drive behavior, and if people were going to make it to the other side we needed to make sure the team was rewarded for doing so. Every step of the way, our board optimized for the Fundera team. While it may seem obvious that this was the right thing to do, most professional investors are not this friendly and greed gets the best of them. Most would view repricing options as a sign of weakness and bad optics, and many would oppose being unnecessarily diluted by tapping almost the entirety of an option pool in a time of crisis.

Good board members play the long game and derive joy from everyone winning. When Fundera was acquired by Nerdwallet a piece of the deal consideration was tied to achieving specific performance metrics. We had been through a lot getting the company to solid footing after weathering the pandemic-induced SMB credit meltdown, and Frank Rotman and Scott Feldman mutually proposed something that to this day I still find bafflingly kind. They suggested to the board and our investor base that a meaningful piece of the performance-based earn out go directly to common shareholders at the expense of preferred shareholders. Their logic was that since we were the ones doing the work to produce the results, we should be compensated for it. Every single preferred investors agreed to it and for that I remain forever grateful. In the grand scheme of things, that component of the payout would have been somewhat of a rounding error to our investors’ respective funds, but to common shareholders it meaningfully increased the size of the transaction. It was an unnecessary gesture that made a massive difference and energized the team to buckle down and keep going.

Good board members support founders and companies without needing peer-validation. More often than not things go wrong at startups. At the very least things never go as planned. Oftentimes teams don’t make the progress they need to make and require bridge financing or some type of internal round to come together. On many occasions I’ve seen an investor board member offer to put a round together, but only if others around the table contribute. Or they’ll make it contingent on finding an external investor to come in and match them as a validation point. I understand the logic here, but what really stands out is when someone stands up and offers to do it unconditionally. It’s an action that lacks external validation, but one that enables the company to stay focused in tough times. It’s also always nice when a board member doesn’t drag their feet when it comes to doing pro-rata. Compare and contrast these two scenarios: 1) I had to pull the teeth of one board member/investor to do just a small portion of their pro-rata as a show of support when we were raising an external round after receiving a lecture about how proud they were that they had a history of being able to avoid doing their pro-rata, versus 2) an investor I know proudly proclaimed that they were always there for portfolio companies and always did their pro-rata when an external firm or founder requested it to get the deal done – no questions asked. Scenario 1 is the norm. Scenario 2 is a truly special abnormality and welcome glitch in the system. I am always surprised and appreciative when I see someone behave this way, and I know other founders are, too.

Good board members are hands-on during inflection points. They shine when it comes to fundraising and M&A. Every round we raised after our seed at Fundera happened because Frank Rotman introduced us to someone who trusted him and he knew would be interested in what we were building. Ron Conway and SV Angel were instrumental in helping groupme raise our Series B from Khosla (he practically dragged David Weiden by the earlobe onto our board) and made the introduction to Skype that ultimately led to our acquisition. They were engaged every step of the way through these processes, pushing the ball forward alongside us.

Good board members, particularly independents, spend time with your team regularly. This may seem obvious, but a lot of board members don’t do this. The good ones form personal relationships with the people that are integral to your company’s success. They actively help recruit them, and they advise them on their biggest issues. They also know that not everyone stays at a company forever, and that helping them with your company may very well help them land a position as an advisor or executive at another one of their companies down the road. They’re not just there for the CEO, they’re there for the leadership team. I loved when people on our team would meet with our board members independently without my knowledge. Phillip Riese and Molly Graham were invaluable resources for so many people at Fundera, not just myself, and they always made themselves available to people at their beck and call.

Good board members teach you how to manage a board and run a good board meeting. When we started doing board meetings at Fundera they were useless. We ran through long decks that directors with very little context would ask questions about. It took hours and by the time we got to meaty issues the time was done. Phillip and Frank helped me and Cody Forrester learn how to conduct an effective board meeting which was almost identical to what Tom Loverro explains in this post (bonus accompanying video here). Board meetings are for discussion and debate, not presenting and updating. On a dime, board meetings flipped from something that felt like a tedious chore to a constructive and important time everyone looked forward to.

Good board members listen first, then talk. At tumblr there was a board member who would say virtually nothing for a majority of the meeting. They’d sit there and diligently listen. Then they would speak and the whole room would turn completely silent. They’d say approximately 3-4 sentences and it would be the most profound and impactful statement of the entire meeting. This doesn’t mean that everyone should do this. Most people can’t. Sometimes the conversation and debate helps you get to the root of an issue and you want everyone participating. But it does illustrate that loud and frequent voices (which are usually characteristic of the most junior board members who feel like they have to prove themselves) are not necessarily the most helpful ones.

This is a small sample of some of the characteristics of helpful boards. There are many more, and infinitely more examples of what makes for a bad director. But these are some of the ones that stand out most to me. Good boards can seldom make a company, but bad ones can definitely break a company. Helpful boards are a blessing and can truly help a leadership team level up to do their best work.

I’m a fan of trusting your gut. It has served me well over the years. I sometimes have a tendency to overthink things, and the way I overcome decision paralysis is by following my instincts. One of the most challenging times I’ve done this has been when deciding to sell GroupMe and Fundera.

Selling a company is an incredibly emotional process. The thing you’ve spent years dedicating your life to is going to end up in someone else’s hands, and the team you’ve grown to love and build things with has an impending timeline to disband. It’s hard for things to feel perfectly right.

With GroupMe, the decision to sell was a relatively easy and organic one. Steve and I never had a successful exit under our belt. The NYC tech ecosystem was just beginning to emerge and $50-100m acquisitions were far and few between and a Big Deal. We were also hemorrhaging money as we covered the cost of every text message sent (not all messaging was done in app) and our growth was bankrupting us. We were also young, the price was life changing, and we knew we had enough energy to build more companies. Skype made a compelling offer and we jumped on it.

People ask me all the time if I regret selling. GroupMe is exponentially more valuable today than it was when we sold. It’s arguably Microsoft’s most compelling mobile asset. But when we were acquired we had something like 1m total users (we had been around for roughly one year) and we weren’t growing as fast as we wanted. I don’t regret it. Of course it would have been nice to have sold for more money, but it was the right thing for all of our constituents: investors, the team, and us individually as founders.

Fundera was a more complex story. We built the business to a profitable $30m annual revenue company with decent ebitda margins while growing 75% a year (and ultimately grew to over $100m in annual revenue with excellent ebitda margins post-acquisition). There were many times when I was absolutely certain that if we kept plugging away we would have built many hundreds of millions of dollars of enterprise value strictly based on the fundamentals of the business. Maybe even a unicorn one day. But we got absolutely wrecked by Covid (all small businesses and smb lending temporarily shut down). We managed to survive and come out the other side in a strong position, but it was a taxing and exhausting experience for the team (as it was for many companies whose businesses were adversely impacted by the pandemic).

Our team was facing what was effectively a total reset, both in market conditions for our industry and our own collective energy as leaders. Did we have it in us to buckle down again for another 5+ years and commit to seeing the business through to its potential? In my gut, I knew my answer was No. I simply didn’t want to. It was time to close a chapter and move onto my next adventure, and after a grueling year I no longer has the same fire and passion within. I had a series of hard and honest conversations with the leadership team and it became clear that we were all on the same page. It was time to find a new home.

In some ways I felt like a coward – it is a founder’s job to inspire people and see things through. Was this abandoning ship and a dereliction of duty? We always read and are told that whenever we take money from investors we are signing up for what is a decade-plus long commitment. That it’s a roller coaster and it’s on us to have the grit to ride it to the very end, wherever and whenever that may be. After selling groupme I once had a VC tell me he didn’t know if I had the courage to build a great company since we sold so quickly. These stories and interactions compound and create an illusion of the characteristics we are supposed to have and the iconic people we are supposed to emulate.

But fuck that. My take is so long as you always value and treat your team, investors and customers well, you’re okay. And if you can make everyone money along the way all the better. When you know you know. And sometimes it’s just over and you’re ready to move on and that’s perfectly okay. No excuses necessary. So when I hear founders say they are ready to sell their company or move on as CEO, there’s no judgment, only support, so long as they’re doing it the right way. No shame in building something while being honest with yourself. Only pride.

In my experience building and selling companies, the time between signing an LOI and closing the deal were some of the most emotionally turbulent moments of my life. It’s an extraordinarily stressful period. One of the things Emil Michael taught me early in my career is that time kills all deals, and that you need to diligently compress the time between signing a term sheet and closing as much as humanly possible. One of the reasons is that as more time elapses you increase the likelihood that things can fall apart. In my opinion an equally important reason is that you need to minimize the mental anguish the process imposes on yourself and the team.

Pre-LOI you experience a honeymoon period. You fall in absolute love with your counterpart. Your shared vision is going to take over the world. You’ll manifest your mission in a way you never dreamed of before. Teammates you care about deeply are going to make life-changing amounts of money (including yourself and your family). And all of the hard work everyone has put in over the previous years is going to be rewarded.

Then you sign a term sheet and everything changes on a dime. As they always do, incentives explain part of the story. As a seller, you want to make sure you quickly realize the terms in the LOI you happily signed. But as a buyer, you need to make sure you know precisely what you are getting and that you’re mitigating any unnecessary risk. Even though both parties want to close, their respective priorities are inherently in conflict with one another. This creates a tremendous amount of emotional volatility. In many instances, things that seem impossibly small and insignificant in retrospect come dangerously close to blowing up a deal. Esoteric indemnity clauses that protect against .001% catastrophic scenarios feel completely insurmountable.

The feelings of love, respect, and excitement that emerge between buyer and seller in the pre-LOI process are promptly thrown to the wayside and things can become an irrational zero-sum game. It becomes difficult to differentiate between what is subjectively desirable versus what is objectively important. Ideally, you have a relationship with the counterparty CEO, but you can’t escalate everything because it erodes goodwill and time kills all deals, so you choose your battles wisely (hopefully!) in belief that both sides can compromise along the way.

This is where counsel is important. Normally, your lawyer won’t ruin your company unless they are flat-out dumb and do something egregious along the way. But in M&A the difference between good and bad counsel can make or break a deal. I’ve worked with people I consider to be good, and some I will never work with again. Every deal has its own dynamics, and sometimes outside counsel is not sensitive to your unique context. Sometimes they’re sharks, other times they may be trying new techniques and tactics with you unwillingly volunteering as their first case study. Reference the living hell out of whomever you select because the last thing you need is a shitty lawyer derailing something special and driving you crazy. Choose wisely.

If you’re not working with a banker, the other counsel you have is your board. Most entrepreneurs are not in tune with the incentives and experience of individual board members. For some, your company may be their first exit and they’re super eager to put a point up on the board. For others, your acquisition may be a rounding error for their fund and your process is met with abject indifference. Some board members have been part of countless acquisitions on both sides, and others have done zero. You’ll get conflicting advice. Some may say some terms are “off market” and that your counterparts corp dev team are a bunch of idiots. But they might be totally wrong because they don’t have enough data points to actually pull from. As much as you may want to treat every board member the same, their respective sets of experience are not all equal. Consult them appropriately and hone in on whose advice actually holds the most credence. If not, conflicting advice across the table can spin you up into a tornado of confusion.

Another source of emotional tranquility or discontent comes from the acquirers corp dev team. I’ve sat across from people that I trust completely who know exactly how to run a good and fair process. They know what’s important and what is bullshit and they’ll explain to you why it’s important in a respectful and objective way while thoughtfully listening to your reaction. I’ve also worked with people who are just not good at this role. Once again experience and incentives matter here. If the acquirer is early in their M&A journey, they likely have no idea what they are doing. Their corp dev person is probably junior, or its their first time in the lead seat, and their personal incentive is to make themselves look good. You are their training ground and they don’t really care about you or your relationship. They’re likely optimizing for making it appear like the company got a good deal and aren’t giving much thought to the fact that you will have to constructively work together to make the deal successful over the upcoming years. Being treated disrespectfully by these people will make you downright livid. You will want to lash out but the only thing you can really do is complain to your colleagues. You have to play the shitty hand your dealt to the best of your ability and not let it get to you. I have profound appreciation for great corp dev people after having worked with some not great ones. They are unique in their ability to understand why people feel and react the way they do while not letting their own emotions impact their ability to get things done effectively for all parties.

The source of the most feelings, both overwhelmingly wonderful and not wonderful, is how your teammates react along the way. Some other important advice I got from Emil early on is to keep the circle of who knows about a deal as small as possible. Seldom does anything good happen when word gets around that a company is being bought or sold. The more people that are involved and aware of the process just means more avenues for things to leak. People grow excited. And concerned. The last thing you want is a company were everyone is super excited about an acquisition that subsequently unravels and you’re left with a despondent employee base. Morale takes a long time to build, and it can take a day to evaporate. This reality in and of itself is a heavy anchor of stress.

Unless an acquisition is a life changing home-run for everyone involved (it seldom is), people start thinking about themselves. This is totally understandable and appropriate. Teammates spend years of energy investing in your company. They chose to join it and they chose to stay there. An acquisition is something that they do not choose, but you likely want them to continue along for the ride. I’ve seen a spectrum of reactions ranging from absolute euphoria to people lawyering up and insinuating or threatening to hold up a deal. Emotions run high for everyone involved and people process things their own way. David Weiden once told me that every team gets the jitters at the final yard line, and if you fail to make the play the game always unravels. Some of my strongest emotions in company building have taken place at these junctures. I’ve been both blown away by selflessness and astounded by selfishness. It’s an experience that illuminates who you want to work with forever.

You learn (and feel) a lot at the finish line.

Several years ago I was listening to a podcast where someone mentioned how change happens slowly, and then all at once. The phrase has stuck with me. I looked it up and the quote is attributed to John Green by way of Ernest Hemingway’s The Sun Also Rises where he wrote, “Gradually, then suddenly” as an answer to the question, “How did you go bankrupt?”

I think about this concept a lot with regards to how we experience things. Within technology, we are beginning to see how AI is permeating our daily lives in small ways. Search results are changing with Google Bard, auto-complete populates our emails and documents, recommendations about what content to watch or read are surfaced to us in every nook and cranny of the internet, and we are beginning to engage with new chatbots to ask questions, get answers, do work, save time and get inspired. These changes have been happening for a while, but they are beginning to compound and rapidly accelerate, becoming omnipresent in our lives.

It feels something like an exponential curve.

More than ever, it seems we are experiencing this type of change across so many different vectors.

• The social networks that defined our digital lives over the early 2000’s and 2010’s have morphed into algorithmically controlled media channels. It happened slowly, and now it’s pervasive.
• Adoption of electric vehicles was a slow slog for decades and has now hit an inflection point.
• Solar power was a blip on the energy map and now is a leading form of energy production.
• The erosion of democratic norms and personal freedoms happened slowly, and now these issues dominate the agendas of state legislatures across the country and the Supreme Court.
• The climate crisis went from something some people experienced and talked about to something everyone experiences through widespread floods, heatwaves, and fires.

The list goes on and on, and the pace of change in our world continues to accelerate. These are changes that are hard to recognize in the moment, but are always abundantly clear as they inflect and in retrospect. The thing that’s helped me most in navigating these times is practicing mindfulness (I really like the Waking Up app by Sam Harris) and finding the time to slow down and observe things as they are. When it comes to building and changing things, a nice complement to “Gradually, then suddenly” is the Bill Gates quote: “people overestimate what they can do in one year and underestimate what they can do in 10 years.” It’s hard to change the way things work quickly, but grit pays off in the long run.

Facebook launched when I was in high school and I remember my older friends who were graduating and going to college telling me about it. They were joining an exclusive new university network. It was unclear what they could really do on the network then, but it quickly became evident that they were participating in the early stages of the mainstreaming of social media. Social media was all about being able to easily share things on the internet: photographs, links to articles, text, video, etc.

You could also befriend people you knew in real life or had never met before and consume the media they shared in a chronologically organized newsfeed. And soon networks emerged where you could follow anyone on the service and see all the things they shared. Then you could interact with that media, liking, commenting, and resharing it. This content was social media, and it was accessed via social networks.

The world of social media has changed a lot since then. Things have become less about the network and more about the media. Ben Thompson just wrote an excellent essay about this evolution. This image in particular stood out to me which highlights the transition from networks that organized media in timeline of people you proactively selected to follow to a platform that algorithmically presents user generated content from the entire corpus of contributors.

We all experience this now whether we are cognizant of it or not. The networks we used to visit for the content from our friends and people we were interested in are now loaded with media generated by people we don’t follow. The algorithm controls the experience and content we are surfaced, not the network. This transition has happened for one simple reason: platforms are incentivized to make as much money as they can, and that only happens when people spend as much time as possible consuming content so more ads can be served. Incentives drive behavior, so this is a rational evolution. The algorithmic feed is not social media or a social network, it is the product of a global media company that uses AI to capture your attention so you continue to consume content created by everyone else but the company itself.

But just because this is a rational evolution of social networks does not mean it is good. The incremental monetization that a platform gets by prioritizing addiction to its experience generally comes at the expense of the wellbeing of its users and the integrity of the network itself. I personally dislike how these incentives influence the behaviors of the network participants. I don’t know anyone who feels great after scrolling through these media platforms. Memes are fun and awesome, but the dopamine hits always end in a crash. Scrolling is the new smoking, and we collectively waste an inordinate amount of time consuming garbage. This isn’t a new phenomenon though. We’ve done it since the dawn of media proliferation. I can’t count the hours I sat glued in front of a television watching nonsense that rotted my brain. Digital media is just more pervasive and accessible than other mediums.

I like to think that we are on the precipice of change. People are waking up to the fact these experiences are bad for their mental health and they are experimenting with building new networked products that cater to our desires (ie creating, sharing, and consuming content from people we know and find interesting), but are packaged in more user-friendly ways. (GroupMe is an attempt at this – we thought it was a platform for people to manage their “close ties” networks. It is a network of small networks.) Unfortunately, any product that relies on networks sharing and consuming media will, like the incumbents before them, be a victim of its own success: their underlying business model incentivizes them to capture as much of your attention as possible.

It’s unclear to me what breaks this cycle. I don’t think consumers are going to pay for these services and eliminate the ad-based model. There is plenty of room for smaller networks that are oriented around specific interests, identities, cultures, etc. These will never achieve the economic scale of the biggest players, but they can potentially thrive as viable, important and good businesses so long as their founders and communities are strong-willed and okay with not taking over the world. Perhaps these have different corporate structures or profit-sharing models? I do believe (and am most excited that) web3 can ultimately create a new set of incentives and architecture that enables a social network/media to thrive, but we haven’t seen anything yet that has mainstream appeal. I am optimistic that enough people feel strongly enough about reorganizing the incentive structure and creating a suite of better experiences that we will begin to see antidotes and viable alternatives to the current crop of incumbents within this decade, and with that, perhaps the rebirth of social media and social networks.