How board observers can potentially add even more value than board directors

Welcome back to Above Board. It’s a pleasure to welcome Yuechen Zhao, Partner at GSR Ventures and host of Decoded. Yuechen has experience in digital health, amongst other areas, and serves on the boards of Venteur, Akia, and Para Inc. In this edition, we discuss the unique value board observers can provide relative to board directors and what it’s like sitting on boards of companies in different sectors.

Before we dive in, a quick ask to please share this newsletter with others who you think may find it helpful. 

AB: Yuechen, thank you very much for joining us. What do you believe a great board observer can do to help a company, despite not being a director?

YZ: Many times in firms with an apprenticeship model, the director is a senior partner and the observer is a junior investor. The senior partner is typically very busy and can sit on more than a dozen boards at once. The junior investor typically has fewer commitments. That means the junior investor can devote lots more effort towards analyzing the business’s strengths and weaknesses and bringing up important observations and suggestions to both the senior partner and to company management. Don’t confuse lack of experience with lack of ability to contribute — experience can make it easier to recognize patterns and see around curves, but a fresh pair of eyes can sometimes notice details that may otherwise go unnoticed.

AB: How can founders leverage their board observers to make the best use of their time and ability to help?

YZ: It’s usually easier to get in touch with the observer (if junior investor) than the director (if GP / senior partner). If you get a competent junior investor on your board, it can be much more efficient to bounce ideas around / get feedback on preliminary plans with the observer than to do so with the director. Remember, the board observer can actually be more knowledgeable about the business / industry than the director (due to fewer engagements / commitments) so founders may need to spend less time setting the stage or providing information on background in such discussions.

AB: You were first a board observer for a number of companies before beginning to take director seats. What did you learn as an observer that now informs your perspective as a director?

YZ: I’m lucky in that Richard encouraged me to take ownership of the management of the companies I was involved in from day 1. Even as a board observer, I was encouraged to speak up during board meetings and work individually with management on business and fundraising strategy. Richard took the time and energy to help me think through every situation and mentored me through myriad fundraises, acquisitions, shut downs, bridge rounds, hiring sprees, budget cuts, business pivots, and more. All of those experiences helped me take on more and more responsibility, which ultimately led to me taking on board seats myself.

AB: You sit on boards across a variety of domains (ie: healthcare, hospitality, etc.). How do you ensure you are best prepared for each board meeting and up to date on the competitive landscape given the different spaces you invest in?

YZ: It comes down to only investing in spaces I'm interested in. I worked at Uber and have been following the gig economy for years. My wife and I run a hospitality business. And my current investment focus is healthcare. I naturally keep up with the industries and spaces my companies are in. If I ever find it hard to be informed, that probably means I shouldn’t be on the board. That said, I'm never the expert on the industry or the competitive landscape. The management is the expert. More often than not, a board member's value-add comes from having a more broad set of interests and experiences, bringing new perspectives to the table. 

AB: You raised money for the company you co-founded (TBOX) from GSR Ventures before joining the team as an investor. What did you learn from the process of raising capital from the same firm where you now work?

YZ: I had gotten to know Richard — the managing partner who worked on my company and now who primarily works with me in my day-to-day as a VC — very well over the course of two years. It showed me the power of long-term relationship building, which I continue to practice. Many think of fundraising as a “process,” in which the founder sets a timeline to meet with dozens of VC’s in a short period of time. That can help to generate FOMO around the business and push up the valuation in good times, but it unfortunately leaves little time for the founder to truly get to know the firm and partner they are committing to for a decade or more. As a VC, I try to avoid these types of investments, preferring instead to get to know founders for months and years before committing to partner up on the business and join their board.

AB: It seems like you enjoy investing in vertical SaaS. Why is that and what metrics do you find yourself looking at when considering vertical-focused companies?

YZ: I believe vertical SaaS is the future of software. 10, 15 years ago, software development and deployment was expensive, so it was too inefficient to develop vertical solutions, leading to the rise of giant horizontal platforms. However, from an end user perspective, that means businesses buying software have to piece together dozens of different solutions for every part of their business — many of which don’t integrate well with one another. Vertical SaaS companies focus on a particular customer profile and develop an entire software stack that is customized for the customers’ needs. Customers can now purchase one system instead of dozens, leading to a much better end customer experience.

AB: You worked at tech companies such as Uber and Google. How did your experiences at these companies inform the perspective you bring as a board member? Was there anything you saw at these companies that you try to help your portfolio companies emulate? Or not emulate?

YZ: At the time I joined Uber, it had roughly 3000 employees. At the time I joined Google, it had close to 100,000. Out of all the companies I work with, the largest is around 250. Companies - and the way in which they work - are constantly evolving, and it's actually highly inefficient for an investor or board member to get overly involved in how they are managed. That said, my previous work experiences inform my preferences and biases around hiring, team size, risk management, and product development, which inevitably affect how I think about and influence budgeting and projections, a large part of the work I do with companies.

AB: You worked in the Chinese tech ecosystem. How do you think about technology trends moving from east to west? Do you try to leverage your knowledge in this domain to win deals and help companies who may also be thinking about similar models, and if so, how?

YZ: I used to think explicitly about my experiences in China and try to draw on those when analyzing products in the US and other geographies, but I don't really do this anymore. The two ecosystems are just too different and trying to "leverage" China knowledge directly can, more often than not, lead to building the wrong product. It's still valuable as a part of my own personal experiences, which I draw on indirectly when reasoning about business and product on a fundamental level.

AB: You recently started a podcast called Decoded. Can you share more about it?

YZ: I've always been fascinated by how businesses work. What does Marriott provide its franchisees in exchange for their ~15% take? Does Disney make more money from parks and resorts or from their movies? How much of your $12 Chipotle order goes to the staff vs. raw ingredients for food? I’ve been posting about various businesses and business models on LinkedIn as a way to share what I’m learning, and it seems to resonate with quite a few people, so I'm exploring sharing more via the podcast. I'm a huge fan of Ben and David at Acquired, so a lot of how I'm thinking about building Decoded is inspired by Acquired.

AB: What do you personally learn while producing Decoded? Does it inform the types of companies you’re looking for or how you act as a board member?

YZ: I think first and foremost it scratches my own itch in just learning more about the great businesses around us. And I strongly believe that the more investors / board members understand business, and the broader their base of knowledge, the more likely they are to spot patterns and be able to provide more useful perspectives for management in deciding future business strategy.

Quick questions

AB: How many boards do you sit on?

YZ: 3.

AB: What tool helps you manage your time?

YZ: I'm easy, just live off my calendar.

AB: What’s the next big shift in health tech?

YZ: AI reducing administrative friction for both providers and patients in seeking care and paying for care.

AB: What have you previously done that was not helpful to being an investor/board member?

YZ: I think every single experience is helpful!

AB: What are you best at delegating work-wise?

YZ: I actually think VC is more of an art than anything else, and we have the luxury of being inefficient. I deliberately do most things myself.

AB: Coffee, tea, water, something else— what’s in your cup during a board meeting?

YZ: Coffee, usually, though I've been having trouble sleeping lately so it'll likely be water for a while :)