Some thoughts, first posted in 2017,about Operators vs. Investors
At Chenmark, we’re often torn between a desire to hop into the weeds of a portfolio company to help solve problems and the recognition that to be most effective, we should eventually adopt more of an arms-length advisory role. We talk about this internally as the distinction between governance and management and we spent time this week thinking about how to balance the two within the Chenmark portfolio.
In theory, the division is simple. As an investor, Chenmark should be focused on “big picture” strategy and developing a plan for the achievement of long-term goals. To be successful, we then must partner with highly capable managers who are given the power to handle the day-to-day operations of the organization largely autonomously. While this framework works for Fortune 500 companies, for us, this theoretical division of roles and responsibilities is easier said than done, particularly when working with smaller companies where everyone must wear several hats. The Wheel, an organization which provides educational resources for non-profit organizations, explains further:
“The larger an organization is, the easier it is to define the boundaries. The governing body governs, the chief executive officer/senior management team manages, and the rest of the staff and volunteers engage in operations. However, in smaller organizations, especially in those organizations without paid staff, it is easy for the governing body to get ‘bogged down’ with questions of short-term management and operations and to lose sight of the need to focus on strategy for the longer-term.”
Whether it is drafting a job posting or evaluating an equipment purchase, the Chenmark team occasionally provides assistance at portfolio companies in areas where we feel we can add expertise and/or where we can help alleviate resource constraints. In addition to improving productivity, we find this practice also provides a window into company operations that ultimately benefits the larger strategic planning process. Since we’re part of the same team, why wouldn’t we help out where we can and get some valuable business intelligence while we are at it?
Despite these benefits however, we must always strive to understand the point at which our involvement goes from being helpful to being a hindrance, both for the companies themselves (i.e., helping versus micromanaging) as well as for Chenmark at large (i.e., lending expertise versus being bogged down). Venture capitalist Hunter Walk added additional insight into how this tension manifests itself in the context of an investor’s role:
“The entrepreneur should be building the company they want to see exist and the investor should be assessing the entrepreneur’s capability to do so…. My first year of angel investing I fell into classic “operator turned investor” traps. During pitches I’d get excited about a company because I could imagine how I’d go about solving the problem identified or the product described. Instead I should have focused on the founder’s understanding of the problem and how they were going to solve it. Many times when working with a team my advice would often sound like “well here’s how I would do it…” That’s fine but only a B+ answer. What’s way more valuable is to understand the capabilities of the team, help them establish the framework within which to make a decision and then guide them towards execution. As I spent several more years investing and advising I was able to self-correct these tendencies and become more valuable to companies.“
The juxtaposition between management and governance reminds us of our collegiate rowing days when there was a clear distinction between who steers a boat (governance) and who rows (management). In large boats (“eights”), there is one dedicated individual – the coxswain – whose only role is to steer and provide strategic guidance. However, in most smaller boats (“fours”, “pairs”, “doubles”, etc.), there is simply no room for a coxswain so the rowers must do everything themselves. Naturally it is more difficult to steer a straight course (trust us, we know) when trying to perform at the limits of one’s aerobic capacity just as it is difficult to plan for the future if one is consumed by the daily minutiae of dispatching and production planning.
As investors that concentrate on the “small boats” of the business world, we acknowledge that we will be doing our share of rowing from time to time. Our bias for action means that we are even comfortable doing so. However, we also realize that our ultimate success is dependent not on faster 2k’s at the Chenmark level, but on our ability to evolve over time into world class coxswains.