DeNovo Ventures’ Managing Director Joe Mandato speaks with Jay Watkins, managing director of De Novo Ventures and Curation Capital.
I talked with Jay Watkins because he has served almost every board role there is—CEO and board member; independent board member; investor board member; chairman (of many companies); and executive chairman, and he has served on both public and private company boards. I initially met Jay when, as co-founder and board member of Origin Medsystems, he hired me to be CEO. That was the late 1980s, but no matter the era, Jay has always been reliably insightful and wise in the areas of innovation and governance.
Today, Jay is a lecturer at the Stanford University graduate school of business and at Stanford Biodesign, focusing on innovation in the life sciences, and he is a managing director of De Novo Ventures and Curation Capital. He has also served as an advisor and faculty member at the Kauffman Labs program, which educates founders. Previously, he was the founding CEO of Origin Medsystems and head of Compass, the Guidant ventures group formed after Eli Lilly & Co.’s acquisition of Origin.
Joe Mandato: What is your board style? I think it’s pretty distinctive, but can you elaborate?
Jay Watkins: [Laughs] I should probably ask you what my board style is. Boards are fascinating. You’re often dealing with a group of people who are self-taught in their roles; no board school exists. Often you have a mix of perspectives that come from each member’s approach to the position. My style is influenced by the belief that you should develop a deliberate organizational posture and position for the board so that directors understand their roles and responsibilities. I try to get the board to own its process so that it doesn’t think of its potential for impact in a limited way. The board should not think of its role as, “We coach and counsel the CEO, and provide feedback and resources, and hopefully keep the thing from going off a cliff.” That is not a recipe for sustainable and positive impact.
The chair or CEO should set those expectations. On the boards you’ve been on, does anyone ever sit down and say, “This is what we expect of you?”
Unfortunately, expectation-setting and role-definition don’t often happen on boards. Boards of start-ups are basically self-assembling. You end up with a smattering of investors who came in at different stages—an independent domain expert, a representative from mgmt., the CEO . . . The board rarely pauses to talk about its beliefs about its proper role and function. That is both the hardest thing to encourage and also the place where the biggest loss in impact can occur.
A lot of presumption and assumption characterize the way boards operate. For instance, I find it odd that we organize committees for compensation but we don’t organize a committee to define and organize the board. I’m interested in how, through experiences within the board, we can create ownership for the real roles and responsibilities of the board, which go beyond being a monitor and check on the CEO.
Recognize, though, that boards often contribute more than they realize, such as setting the tone and culture of a company. It’s an absolute truth that the board shouldn’t become management. The way in which the board asks management to interact with it and vice versa greatly affects the tone and culture of the company. The interaction between board and management is subtle but very important to cultivating the right behaviors and processes inside the company.
What strengths do you bring to the board?
I believe any board member, whether an investor, domain expert, independent, lawyer, or financial person, needs to listen. That’s really important. Board communications are brief and tend to be ‘packet’-type communications, so board members can miss messages easily if they don’t listen. I listen.
Good board decisions require broad participation within the group. It’s human nature that some board members will be quiet and others vocal. I try to make sure everyone around the table has a voice. That’s not always easy, but it’s important to hear everyone’s perspective.
Boards have an unbelievably strong bias to focus on near-term goals and to mistake activity for progress.
I’ll add a couple important strengths of yours. First, you have unvarnished honesty. You tell the absolute truth, which is critical. Second, you understand the market in which a company participates better than most, and you bring that understanding into the discussion early and often.
I’d like to voice what I see in a softer way, but I do voice things, whether or not the board or management is comfortable with it. You cannot function well at the board level without speaking the truth. We all have our perspectives and come at things from different angles, and the truth ultimately emerges. I respect and recognize that management shouldn’t let people off the hook from saying what they believe about where the company is, where it’s going, and what its needs are.
Regarding market perspective, boards have an unbelievably strong bias to focus on near-term goals and to mistake activity for progress. To that point, I believe boards are responsible for defining what success may look like and then working backwards from there. If success is a public offering, then the story starts with, “Okay, now let’s talk about what activities are taking place to get us there.”
I abundantly believe that you need to offer perspective early in the conversation. The board is responsible for its contribution to setting the long-term agenda. It does this in conjunction with management but for the benefit of the organization as a whole. We know we can do the short-term stuff and we can function easily on things that are next month or next quarter. The hard part is to make sure something this quarter will lead to something that should happen four quarters from now. That’s where a high-functioning board can have the greatest influence.
None of this can be done without strong communication with management. Board meetings once per quarter don’t work. We spend hours calendaring meetings, but what we don’t calendar often enough is what those meetings are going to be about, and how does the board think about things that rise up and loom in the longer term, i.e. how are we going to evolve the HR function, because over time our policy needs to evolve?
You might ask, “Is that a management or a board function?”
My response is that it becomes a board function when it relates to the question, “What are the philosophical underpinnings that the organization can sponsor at a higher level? Use the board calendar to signal what’s important from the board to communicate through the CEO to the organization.”
That is, the board chair or CEO should schedule deep dives to resolve issues and opportunities that can’t be resolved in quarterly meetings alone.
Yes, where I see things come off the track is when a board never quite gets to that level. It’s hard to do. At four meetings per year and three hours each, we’re talking about a 12-hour annual conversation that consists of too much housekeeping. The housekeeping requirements prevent the depth of conversation that needs to occur around strategy, what it looks like and how to think about it in the context of the organization. And so, if you can’t find a way to break through and co-invest with the CEO and leadership in a deeper conversation, it becomes progressively more difficult for boards to be impactful.
How would you describe the best venture-backed board you’ve sat on and the worst?
I am fortunate to have been part of good and active boards. By active, I don’t necessarily mean critical and demanding; I mean involved and supportive. I’ve been through a couple of board situations where companies had a variety of issues and for lots of reasons people could have abandoned the effort, yet they didn’t. Instead, they took time to understand where the company was and the landscape of risk and opportunity. Then they made informed, thoughtful decisions. The decisions offered no guarantee the company would succeed, but at least the decision-making was sound, and it was sound in part because the board invested time to make it sound. Much of that work was done outside the board meeting.
Where boards have functioned less well in my experience is where there has been less of a foundation laid for the harder decisions to be made at the board level, where the board’s process devolved to an operating update by a closed and defensive management team. This limited the ability of the board to surface, address, and debate issues and opportunities. You need engagement from participants around the board table to develop a company’s story. If you’re coming in, doing a quick pulse-check, and saying, “I agree,” or “I disagree,” you’re not going to be able to shape the story or react to adversity as high functioning boards do.
Your comments raise the question of founder-CEOs who are major shareholders and enjoy board control all-in-one. Do you see this? Can it work?
Yes. The frustrating paradox about entrepreneurship is that you need persistence and an unwavering belief that your perspective is right. Yet, as the organization grows and adds people and complexity, those traits morph into liabilities. Founders don’t intuitively recognize that they’re missing the traits required to be leaders of their now larger and more complex organizations.
As an organization grows, a founder loses control and must open up to influence, collecting information and feedback. These are things that are not intuitively the strongest attributes of someone who was probably told at some point in their evolution that their idea didn’t make any sense and they shouldn’t pursue it. So, when they find themselves in a complex organization, their instinct for control runs counter to some of the things they need to adopt and grow into their new size.
I recognize how hard it is to do both. I think history has proven it’s possible to do both, but one common thing we find in start-ups is the idea from founders, “I want to keep control,” and conversely, from the board, “What does that mean in the context of what this organization needs to do going forward?” Sometimes founding teams discover that control is not the most important attribute needed to be successful but not always, which is frustrating.
The chronic concern of anyone sitting on a board is about the question— “How do we get the real story?”
What’s your general impression of governance at venture-backed companies today? Obviously, with the Theranos, Tesla, and Uber governance failures, I come at the question from a vantage point of disappointment. I mean, gee whiz, where’s the board leadership? What’s your impression?
I have thought a lot about those things, especially in light of the fact that I now teach innovation. They are tough things to wrestle with, but I think the questions to answer in the situations you highlighted are things like, “What would you have done differently? Should you have structured the board differently? What was happening in board meetings? Should they have been run differently?”
With the boards I’m on, I constantly ask, “Alright, do I feel good about the people around the table? Have we asked all the questions that are important to ask? Have we asked them in the right way and in the right setting? Do we have a cultural foundation in place? Are we comfortable we’re getting honest and transparent answers?” The chronic concern of anyone sitting on a board is about the question—“How do we get the real story?”
It’s tough. One structural component is breaking up the chair and CEO role. That’s easier said than done, but to me it makes so much sense for venture-backed start-ups. Your thoughts?
I agree. That said, there are other simple structural things that are under-utilized and under-exploited. One example is the closed executive session, which is critically important. I’ve taken to expanding those sessions so they aren’t just five minutes at the end of the meeting, while people are packing their bags. They’re a good half hour where I go around the room and ask for individual feedback. I want to collect and assemble perspective in the absence of management.
Then, I want a consistent, clear feedback loop. After collecting feedback, I say to the board, “With your concurrence, I will aggregate these responses, sit down with the CEO, and discuss your feedback.”
This way, I don’t put board members on the spot, as they may want to be confidential. I’ve found that this mechanism has really helped. Having a separate chair and CEO ensures you have dialog at the right levels.
By the way, Joe, when you walk out and someone asks, “Was that a good meeting?” what’s the right answer to that? What constitutes “good?” If you have the process, the feedback loop, I believe you can answer that question.
I do like domain expertise, particularly in medtech because it’s complicated. Regardless of having domain expertise or not, a board member has to be able to knit together perspectives in order for the board to function at the right level.
As to board composition, what is the right composition?
I don’t have a formulaic view of board composition. Boards in the venture world are usually assembled according to the legacy of financing, which means you’re left with few degrees of freedom on how to construct the board. About 70% of the board consists of investors who’ve been added to it sequentially over time, and then the CEO has a seat, which means you may have an outside seat or possibly two available.
With the seats that are available, you have the tension of those who say “Put in someone who’s been CEO 10 times,” and others who respond, “No, you don’t, because that type of person will want to run the company and is most at risk of being overly detailed and involved in making decisions best left to management.”
I think about board composition in terms of skill sets. I heavily weigh board experience and the ability to operate strategically. You can absolutely have a very effective board member come in who doesn’t have domain expertise, provided they have the ability to ask the right questions and operate at the right level. That said, I do like domain expertise, particularly in medtech because it’s complicated. Regardless of having domain expertise or not, a board member has to be able to knit together perspectives in order for the board to function at the right level.
As to diversity of venture-backed boards, it must continue to be addressed. Certainly, in California, it is being addressed. I was talking with French colleagues about California’s mandate to have gender representation on public company boards. One of them said “Yeah, that’s nothing compared to France. It’s been that way forever. You [in America] are behind.”
If you look at board diversity in a global context, change is coming, and it needs to come. I’m in a couple later stage venture situations where we’re trying to add more women because it’s the right thing to do for the business, but there’s also a shortage of women with venture-backed company experience. It’s a bit similar to what happened when Sarbanes-Oxley came through and required people to put CFOs on public boards. The number of candidates, unfortunately, was much lower than the number of available positions. We’re going through a transition that is good but that poses challenges in the short-term.
Can you highlight a couple of companies where your board experience was great and they had a great culture?
I feel fortunate to have been part of the ReCor story. At one time or another ReCor had pretty much every problem a start-up can have. Jacques Seguin, a Paris-based surgeon who was an associate with Sofinnova Partners in Paris, put the company together with his co-founder Mano Iyer. When I became involved, ReCor was experimenting with ablation technology in mitral valve repair, with its core technology having come from the remnants of a company we acquired out of bankruptcy. We had the primary backing of Sofinnova, and Jacques had also invested.
We soon realized that the mitral valve therapy wouldn’t work. At the same time, a company focused on denervation got sold for $1.2 billion. We pivoted along with 60 other ablation companies to target this new area. The scale of the opportunity drove early acquisitions, but we weren’t one of them.
And then it got worse. The pioneering company that Medtronic acquired ended up failing its first trial. . This was a problem because that’s what we were all doing. All headlines basically said, “Denervation is dead.” Yet we had to raise capital. That was fun. You could start to talk with someone about denervation, but they would break out laughing before you made your pitch. We had a team of 25-30 people running along developing, and improving the technology, but every indicator out there said, “QUIT!”
We conducted classic risk analysis, but we went through it with a group of people who had the ability to ask, “If we can’t do what we were thinking about before, what do we do now?”
Not only did we pivot our focus, but we also pivoted how we thought about the opportunity. We had started a dialog with Otsuka pharmaceuticals, the Japanese drug company. We had a few patients who were spectacularly successful patients. With all the limitations of extrapolating from the anecdotal, we secured Otsuka as a partner. In what was a dead market segment, and with Otsuka’s help, we launched three clinical trials. Throughout there was truly extraordinary work on the part of the company’s management led by Andy Weiss, Recor CEO and Mano Iyer, founder and COO. The connection between that management team and the board had to be very tight to navigate through these challenges.
So, we doubled down on an opportunity that was arguably history—Medtronic had written off its investment in the space—but we kept going, partly because we saw things to believe in. In that way, it was a calculated risk.
In March of last year, our our trial turned out to be not only positive, but very positive. We had the opportunity to present results in May 2018 and then Otsuka bought the company.
What’s the board portion of that story? The board portion is big in that it required the board committing to an unconventional course against heavy odds. It required sustained belief and support. Essentially the board had to give a great management team the chance to succeed. In fact, I received a one-line e-mail from Antoine Papiernik of Sofinnova. Not only did he put in the first dollar, but also he is one of the most sophisticated investor board members I have ever worked with. He sent me the one-line e-mail before the public announcement of the merger with Otsuka: “Jay, I guess failure wasn’t certain after all.”
That’s a an intelligent, patient, highly experienced group of board members doing an extraordinary job. There are a lot of lessons.
Yes. It could have failed, but we had become comfortable with that reality in a way that allowed us to have an aspiration different from, “How quickly can we wind down and take a loss?”
One last thing. I’m sure we have all thought a lot about the Theranos story, where aspiration gets the better part of governance. You do need to locate where in an organization aspiration can live, exist and be nurtured. Boards themselves have a role to play in setting the frame for the aspirations of a venture. It’s essential. But the question to ask is: “If we were successful, what would that success mean? What kinds of foundations do we need to build – in talent, skills and culture – to give us the best possible chance of realizing our aspirations?”
That framing of success helps the board make its meetings matter and add up to something that gets you closer to the ability to deliver that outcome. If the meetings don’t get you there, and the board doesn’t have the ability to articulate that aspiration, there’s a good chance the board is just wandering. If the board is wandering, then the company is likely wandering too.
People say “the vision” has to be framed by a founder. True . . . but it really has to be shared, articulated and enabled by the board.
If you could give one piece of advice to a CEO who is founder and board member or chair, what would that advice be?
The biggest mistake founding teams make is to believe that the board is their boss, because then founder-CEO attitudes are baked accordingly. They figure, “I report to the board and therefore I need to treat board members as my bosses.” When founder-CEOs do that, it’s counterproductive to the board’s true function.
The board is married to the enterprise in the same way you are as a founder-CEO; you have a shared commitment. With that belief, and in that context, the board isn’t your boss—it’s your partner. My advice to founder-CEOs: have the latitude to embrace that notion, to explore what’s possible when you make the board your partner. If you do, you’ll develop a totally different construct of the board. Your challenge becomes finding board members who have the experience of not approaching their role as, “As a board member, the only decision I make is hiring and firing the CEO.”
This has been a rich, rich conversation. There are lots of important lessons here. Thank you!
I’m honored and appreciative of your effort here. Everyone who does board service is basically self-taught. To the extent you can help people recognize what makes functioning governance function, it’s a great service.
My thanks to Jay! He has been on many boards of directors and an inspiration to many entrepreneurs. He estimates he has served on about 30 venture-backed boards. I won’t list them all, some public companies include Gynecare, Cardiogenesis, and Rita Medical, and some recent (past 10 years) venture-backed companies include:
RefleXion Medical (chairman)
Shockwave Medical (former chairman)
ReCor Medical (chairman)─acquired by Otsuka Medical, August 2018
Cephea Valve Technologies─acquired by Abbott, January 2019
Avail Medsystems (chairman)
Synergeyes (former chairman)
Loma Vista─acquired by CR Bard, July 2013
Ciel Medical, acquired by Vyaire – April 2017
C2 Therapeutics─acquired by Hoya Pentax, June 2017
You can listen to a clip of our conversation here.
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