April 15, 2024 • 28 mins
Michael Greeley has extensive experience in venture capital and significant board experience across a multitude of investment boards. In this episode, he shares his experience and lessons learned, emphasizing the evolving nature of board governance, the strategic importance of independent directors and the future of healthcare.
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Big Ideas/Thoughts/Quotes
1. Evolution of Board Composition of investor-backed boards
- Changes in the composition of investor-backed boards over the past 25 years, emphasize the need for a broader range of competencies beyond financial performance. The trend is to include diverse perspectives to help mitigate boardroom “groupthink.”
"Boards today are very deliberately trying to have the right competencies... Today the pressure on boards is to have a much wider range of expertise; cybersecurity, sensitivity around DE&I issues, and we're seeing that reflected in our term sheets.
2. Challenges in Board Compliance
- Discussion on the difficulties boards face in complaining with term sheets guidelines, particularly around independent directors and diversity.
"We did an audit... and said, 'How many of our companies actually have complied with that (term sheet requirement)?' And we were surprised, it was probably maybe half or two thirds… and frankly, if I could be just brutally honest, I think there's a little bit of an apathy to address deficiencies of boards."
3. Importance of Independent Directors
- The role of independent directors in providing an unbiased 'voice of the customer' to help guide company strategy and product market fit.
"The power of that [independent director] is a little bit sector specific but I think it cuts across all sectors, the principal risk we take as healthcare tech investors is around product market fit, and independent directors are the voice of the customers."
- Governance and Board Dynamics
- Michael's advocacy for more effective boards and the potential pitfalls of having too many observers or management members “in the room.”
"I'm a traditionalist in the sense that the board should not be stacked with management because it is meant to be the body that opines on the strengths and shortcomings."
- Future of Healthcare
- Michael's optimistic outlook on the 'golden age of healthcare' driven by technological advancements, regulatory changes, and innovative business models.
"Arguably, the golden age of healthcare is upon us as the sector embraces novel and impactful solutions to improve outcomes and lower the cost of care."
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:05):
Hello and welcome to On Boards, a deepdive at what drives business success.
I'm Joe Ayoub and I'm herewith my co-host Raza Shaikh.
Twice a month, On Boards is the place tolearn about one of the most critically
important aspects of any company ororganization - its board of directors
or advisors - with a focus on theimportant issues that are facing boards,
(00:28):
company leadership and stakeholders.
Joe and I speak with a wide range ofguests and talk about what makes a board
successful or unsuccessful, what itmeans to be an effective board member and
how to make your board one of the mostvaluable assets of your organization.
Our guest today is Michael Greeley.
(00:49):
Michael is co-founder and generalpartner at Flare Capital Partners
and was formerly the founding generalpartner of Flybridge Capital Partners.
Michael currently serves on boards ofnine companies, and over his career
has served on 50 company boards.
He has also served on various innovationand investment advisory boards,
(01:12):
including Advocate Health, BostonChildren's Hospital, Cleveland Clinic,
MedStar Health and MGB Ventures.
He was past chairman of the New EnglandVenture Capital Association and was on
the board and executive committee of theNational Venture Capital Association.
(01:34):
Michael also authors a blog focusedon venture capital, innovation and
healthcare called On the Flying Bridge.
Michael, welcome and thanks so muchfor joining us today on On Boards.
Thank you, Joe.
Thank you, Raza.
And Joe, it's great to be reconnected.
I think we've known eachother for 25 or 30 years.
I think so.
Could be even longer, butwe don't need to go there.
(01:57):
First, just talk a little bit about howyou got into venture capital and tell us
about your current fund, Flare Capital.
Sure.
I was an organic chemist in collegemany years ago, and rather than
going to medical school, I endedup in business school which quickly
put me on an investor track.
I graduated from business school andwas on Wall Street for a few years
(02:19):
and then have ended up in Boston,which is really, as you know, the
cradle of venture capital and we'resurrounded by interesting, fascinating
people trying to change the world.
I've started now three venturefirms over the course of my career.
Flare Capital is a firm that I startedabout 10 years ago with a colleague
of mine that manages today about abillion dollars focused solely on
(02:40):
the healthcare technology sector, sosoftware and services and healthcare.
And again, we have the great fortuneof being in a city, we're in Boston
today, that is at the intersection ofIT and healthcare and life sciences,
and so it's just been an incrediblyinteresting time in that sector, time
in the investment business, to be tryingto help partner with great entrepreneurs
(03:04):
to start interesting new companies.
And you've been doing it for a prettylong time, including having served
on 50 boards, many of which I'mguessing were investor-backed boards.
What I wanted to ask is,how has board composition of
investor-backed boards changedover, let's say, the last 25 years?
(03:26):
Yeah, I think all of the companiesother than the nonprofits and
some of the advisory boards havebeen investor-backed boards.
I think the changes have been maybein isolation look more subtle, but in
total, I think I've been quite profound.
Boards today, and I see it reflectedin our term sheets, for instance,
are very deliberately trying to havethe right competencies and oftentimes
(03:49):
investor directors look through avery narrow aperture of the world,
which is really around the capitalstructure of the company or how the
financial performance of the company is.
Today the pressure on boards is tohave a much wider range of expertise;
cybersecurity, sensitivity aroundDE&I issues, and we're seeing that
reflected, Joe, in our term sheets.
(04:10):
If I went back to some of the earlyboards that I sat on, I think there was
just a lot less attention paid towardsthe totality of the board's competencies.
New investors tend to ask or demand aboard seat and they tend to be populated
by an investor, and today, I think there'sjust greater sensitivity to having a much
(04:32):
more diverse set of lived and professionalexperiences and the challenges facing
a lot of our early stage companiesare so multivaried, multivariable,
the whole specter of cybersecurity hasintroduced a whole new set of risks
that a financial investor board membermay not be the best equipped to handle.
(04:53):
I think when we talked last week,you said that you started to put the
requirement, actually, that boardshave at least one independent about
eight to 10 years ago, but when yourecently did an audit, you found that
a number of them weren't complying.
Why is that, and what canyou really do about it?
(05:15):
Yeah, so we inserted in our term sheets,actually, probably 10 years ago, the
requirement, although not a legalobligation, and you're the lawyer, Joe,
so you would be able to discern thedifferences, to use best efforts to
have independent directors on the board.
And for us, the power of that, again,it's a little bit sector specific but
I think it cuts across all sectors, theprincipal risk we take as healthcare
(05:37):
tech investors is around productmarket fit, and so the attribute that
I think we're trying to solve andthat independent director is a voice
of the customers, how we refer to it.
Ideally, that director also isa little bit of a lightning rod
so it helps with recruiting.
There may be an experience set aroundcompensation committee activities,
(05:57):
but ultimately, it's voice of thecustomer, so help the management
team think about product market fit.
When we have that voice around thetable, that's been a very powerful voice.
We did an audit, you're alluding to,at the end of last year, end of 2023
and said, "How many of our companiesactually have complied with that?"
And we were surprised, it was probablymaybe it was half or two thirds, but
(06:21):
it wasn't unanimous, and frankly, ifI could be just brutally honest, I
think there's a little bit of an apathyto address deficiencies of boards.
They don't meet every day.
You see deficiencies or gapsin management teams every day.
You don't necessarily seethe gap in a board every day.
You see it much more episodically.
I think we're slow to remedy that.
(06:43):
Even though we do feel it's an importantrequest that we're making, the remedies
are difficult other than just continuallyreminding your fellow board members
and the CEO, "Hey, this is important.
It's in our collective interests to havea well represented board with a lot of
different lived experiences, particularlyfor us around voice of the customer.
(07:05):
Yeah, that makes a lot of sense, but oneof the things you said when we last talked
was this, it's a quote, actually, "I'm atraditionalist in the sense that the board
should not be stacked with managementbecause it is meant to be the body that
opines on the strengths and shortcomings,"and that sounds a lot broader than
just healthcare, although I understandwhy it's particularly important in the
(07:29):
sector in which you currently invest.
It's really but certainly true forall boards, but the fact that you
have been on so many investor-backedboards and see this and have seen a
shift, and I guess I'd be curious as towhether you think that venture-backed
boards or I should say investor-backedboards are generally trending in this
(07:51):
direction and whether in the foreseeablefuture the idea of having at least
one independent will really stick.
I'd like to think that this issomething that will be enduring.
There's a power dynamic here, that I'lljust put it on the table, that is at play.
Founders are very leery,which I perfectly understand.
I've founded three venture firmsand I've been an entrepreneur.
(08:13):
My business has beenan investment business.
You don't want to give up that controleasily and you certainly don't want
to give up control to a new investorthat you've got to know over the course
of a couple of months or two or threequarters, so I'm very sympathetic.
The power of an independent directoris they also can sort of mediate to
(08:34):
the extent there's any disagreementsand not that it's adversarial anyway,
but if there's a disagreement thatcould be relatively benign around just
product strategy or pricing or hiring,independence provide just another
perspective so it takes away some of thatadversarial tension that might build up.
I'd like to think that that isgoing to be an enduring feature
(08:55):
of a really successful board.
I'll say one other thing that evolved orwe put into our term sheets on the heels
of the George Floyd tragedy was a DE&Iclause, which is, again, the legality of
it is hard to enforce, but it's using bestefforts that at the board level, it is
a diverse set of board members whereverpossible at the senior executive ranks
(09:17):
and that's different, obviously, than anindependent director, but an independent
director could embody all of that, couldbe a diverse director, and, again, for
us in the healthcare sector, it's theaggregation of a lot of different lived
experiences that I think over time willmake for better decision making, so we
really feel very strongly about that.
(09:39):
I don't think that was the casenecessarily 20 or 30 years ago, and
the problem with how early stage boardsevolve over time with each round of
financing, the new investor that leadsthe subsequent round wants a board seat so
you quickly see board scale and size andthat dynamic is tethered to the financing,
(09:59):
not to the needs of the company.
Michael, I'll read from that parts ofthat clause that you mentioned about
DE& I in response to George Floyd.
It starts by saying Flare Capitalbelieves diverse teams lead to superior
outcomes and is committed to improvingdiversity, equity and inclusion
within the venture capital industry.
(10:20):
Subsequently, it basically says as such,Flare Capital expects its portfolio and
we expect them to adopt these policies.
I think you're right, it's basicallyshowing the intention or showing
the commitment to diversity, butyou can't legally enforce it.
In your audit, did you also find a similarcompliance ratio for your DE&I clause?
(10:47):
That's a natural and obvious question,and sadly, it was even less compliant
and the feedback that you hearis they're just fewer candidates.
We don't accept that and so we'vedeveloped a list of names of people
that we are always constantly puttingforward as appropriate candidates.
But sadly, shamefully, the compliancerate on that dimension, now we only
(11:11):
inserted it three or four yearsago, is less than just the straight
independent director requirement.
Michael, do talk about a little bitof how do you find these independent
board director candidates to makethe board stronger and well composed.
Yeah, it's multifaceted.
Not surprising, certainly, our ownpersonal networks and the firm here has
(11:32):
15 employees, some of them are very seniorexecutives that have run big businesses.
So, as we literally crowdsource a list,and we have a list of probably 75 names,
so that's one channel of developing, justbringing out our own personal networks.
There are published lists by tradejournals that track these types of
(11:53):
lists, that develop lists of the top100 diverse candidates, and then in
our companies where there are diversesenior executives that we think have
the potential to serve as appropriateindependent directors, we will often
try and bring those ideas to them.
We typically invest in Series A.
We have seated a bunch of companies.
We have a pre-seed program, and I thinkwe've made 20 of those in the last couple
(12:16):
of years, and so there is sort of aladder of where you can on board talent.
If it's somebody's first board, maybeyou invite them on to a pre-seed.
Ironically, they can have amuch bigger impact on a pre-seed
company than a Series C company,which is an important dimension.
The failure rate for the pre-seedstend to be higher so that you also want
to be mindful when you're trying torecruit board members that oftentimes
(12:40):
in venture, sadly, these companiesdon't work out and so you'd hate to see
them waste a lot of time on somethingthat's not productive, but they
certainly appreciate being considered,if not added to some of these boards.
But like anything, Raza, it's a little bitorganic in how you develop these lists.
The independent has to be selected by boththe investor board members and the common
(13:04):
board members representing common sothey may be sourcing candidates as well.
Yeah, there's artful language that notto be unreasonably withheld approval
so that both sides are throwing abunch of names into a bucket and
you'll run a little bit of a process.
It's not directly analogous to hiringa senior sales executive where they
(13:25):
know they're in a competitive process.
It's a little awkward to run acompetitive director search process and
then turn somebody down, so you tendto do it serially and not in parallel.
One of the things that surprised meactually was that you said in your Monday
morning meetings that open board seatsis almost always a topic of discussion
(13:46):
that some of your companies have had openboard seats for actually quite some time.
I am surprised to hear that actuallybecause I thought it would be something
that many people would want to do.
Why the difficulty?
Is it because some of theearly stage companies fail?
Is it the pool is small?
What is it that leads to emptyboard seats at a time when there
(14:07):
are a lot of qualified peoplewho I think would be interested,
but somehow that's not connecting
Yeah, I wish I had a great answer.
What you're alluding to is we have, likemany firms, written Monday meeting agenda.
Venture firms tend to not be openfor business on Mondays because
the partners are all togetherreviewing in process deals.
On that agenda, we have a sectionfor our open slots that we're
(14:28):
trying to fill in our portfolio.
We probably have 35 or 40 activecompanies right now so it's a pretty
long list, and we flag where we haveindependent director opportunities.
I think to your point, I wishI had a great answer, Joe.
I think it is a little bitout of sight, out of mind.
The issue only resurfaces typicallyaround board meetings where we're
like, "Geez, we didn't fill that slot.
(14:48):
Let's go do it," and then thenext fire drill, It gets deferred
until the next board meeting.
That's not a great answer, and I thinkintellectually, if you pulled the
founders, the management team, theinvestor directors, we know that the
company is better served by a diverseset of experiences on the board.
You raised something earlier, which Idon't want to leave kind of unaddressed.
(15:09):
I was a traditionalist in the sensethat it's hard to be judge and
jury of your own performance, andthis is where I think the tension
being adversarial starts to set in.
It's not meant to be adversarial, but aboard should be able to step back and look
at the performance of the company, look atthe effectiveness of the team and identify
gaps and be able to fill those gaps.
(15:32):
Naturally, again, this is a perspectivein early stage investors, these
companies scale, they go through sortof an S curve, the competency or the
needs of the leadership team, the CEO,CFO will change over time, and it's
hard to have those same people siton the board and have that kind of
awareness where they would actuallylook to augment or replace themselves.
(15:55):
Again, the board represents allshareholders, and I think the burden of
a board to represent all shareholders,not just my LPs as an investor or
not my common stock ownership as thefounder, and so there is naturally
the risk of a tension emerging there.
Well, given the importance ofindependent board members and, as we've
(16:17):
discussed, diversity of perspectiveof board members, what can you do
to change kind of the investor boardstructure, which is kind of at the
beginning, it's a lot of two to one?
Is there some way to that that wouldactually change or does it really need to
wait till it gets to seven before peopleare going to take it more seriously?
(16:38):
Yeah, so the pushback that you'll hearfrom investors is we have an obligation to
our underlying fund investors to activelymanage their capital and that more often
than not comes from being on the board,and so it's hard for investor directors
to give up board seats that they secure.
Now, we're also mindful ofproportional representation, so
(17:02):
the company goes on to raise a lotof money and our ownership is 5%.
I'm making these numbersup to make the math right.
It's a five-person board, so we're 20%of the board, but 5% of the ownership.
Well, yeah, that probably makes sense totransition the off ramp, which is pretty
tried and true is to move to an observer.
I'm on a number of boards now wherethere's two X the number of observers
(17:26):
as there are board members, and thatmakes for a terrible boardroom dynamic.
I was going to ask you about that.
One of the problems that I've seen is thatsometimes whether it's board observers or
sometimes too many people from managementin the board, the room changes and the
dynamics of the conversation change.
Dramatically.
Big fans of smaller boards, theteam should come in and present, and
(17:49):
then the team should leave the room.
I get why we have observers.
We do it.
It's a little bit of a trainingwheels for younger investors to get
board exposure, and it's an off rampfor early investors who are being
diluted down, but it absolutelystifles the boardroom conversation.
In the cases that I'm thinking of,we have this really calcified board
(18:12):
agenda where people are kind ofcoming and going through the course
of the meeting so you can get itdown to a small manageable group.
Michael, you've had plenty of war storiesand real board examples to go through.
Can you share some of the bad governancestories that you may have encountered.
Yeah, I can do that reluctantly, andnot for attribution, but I think one
(18:35):
of my worst board experiences has beenwhere the founders actually retained
governance control of the board, and inthe face of a really poor performance,
it was impossible for the company tomake a change, and the performance
was unambiguously poor, and still as acompany, we ultimately did fix it, but
(18:58):
that absolutely should exist, it's servinga really disenfranchised population,
bringing really novel solutions so therewas a lot of passion around the table
to help really build this company, butwe had a legal framework that made it
virtually impossible to affect any change.
An even worse outcome is where the boardis at loggerheads and the company is then
(19:22):
paralyzed, and so what we did in thatexample is we basically stepped back and
said, "The company needs to go forward,even if it's on a bad path, but we try
very, very hard to never get to the pointwhere the company is paralyzed because of
a board deadlock," and that's the default.
It tends to be like an even number ofboard members is something that most
(19:46):
of us try and avoid, although it'smore often than not in the governance
structure less the number of boardmembers that cause this paralysis and
that is a very, very bad place to be.
I think the extreme examples of suchpatterns would be the FTX or even
Theranos board where it's really,really founder controlled and many
(20:07):
other extreme examples, some positiveas well as many more negatives.
Michael, what are the principles thatyou come in while viewing your role on
the board coming in with an entrepreneur?
We do truly believe at least the way ourfirm operates is that we're the invited
guests and that it's an honor to be there.
(20:28):
It's a highly competitiveindustry to provide capital.
The capital we provide does have stringsattached to it, like we want to be on
your board, and so for us to be selected,we take that very, very seriously.
We compete very hard to be selected theway we've architected our investor base.
Half the capital come from a fewdozen major strategic incumbents,
(20:53):
household names, and so we think webring more than just capital, but
it's a privilege place to be in.
What I say to my partners is we wantto be the first call, and when the
CEO is struggling with something, wewant to absolutely be the first call.
Now, there are going to be issues thatthe CEO does not want to expose to his
investor directors first, and so that'stherefore the power of the independent
(21:15):
director, talk to a brethren of yourswho's been through that issue, and
so I'm happy to be the second call.
The first call should be tothe independent director, not
to another investor director.
We work very hard to be thefirst call, at least for the
independent directors on the board.
Thanks.
There's a great quote in your bio onthe Flare website that I'm going to
(21:38):
read and ask you to talk about it,"Arguably, the golden age of healthcare
is upon us as the sector embraces noveland impactful solutions to improve
outcomes and lower the cost of care."
To start, what in your view makesthis the time in which we're living
the golden age of healthcare?
(21:58):
There's been a confluence of, andI'll try and be really brief, what
look to be unrelated conditions.
One is the advances inhigh performance computing.
Data liquidity has enabled novelnew healthcare models, particularly
around the ability to take risk onpopulations, the way you can activate,
engage, populations, you can triage,you can predict outcomes for population.
(22:22):
There's a high performance computethat we all know, but it is
now very present in healthcare.
The ability to do drug discoveryon unprecedented advances.
We also have a regulatory framework thatI think is becoming more accommodating
and is encouraging new entities to comein and manage populations in a different
(22:43):
way, so there's a transition from feefor service to value-based care models.
i'm so excited about the next 20 yearsand I hope i'm investing through the
next 20 years, notwithstanding, Joe,it is a very challenging '23 and
'24 the years we're sitting in now.
COVID was a massive accelerant fortechnology, so you've seen rapid purchase
(23:04):
and incorporation of technologies.
Those capabilities now will start toreveal themselves as the healthcare
system has been pushed really overthe last two or three years to become
intelligent, predictive, always onvirtual, empathetic, all these attributes.
I'll make an analogy, and I'm surethe two of you can punch holes in it.
The US advertising industry 20,25 years ago was re-architected
(23:28):
with the advent of the internet.
It's a $375 billion industry, it'smassive, and I think today, as an
investor, we can look and see 10-plustrillion dollars of venture capital backed
companies that are now public, so enormouswealth creation; Twitter, Facebook,
Google, a whole litany of great companies.
Healthcare spend is arguably 14 timeslarger, so you have this massive
(23:51):
industry that's being re-architected.
There are new risks.
There are new revenues and theexecutives who run the healthcare
industry simply do not have thetools to make that transition,
much like other financial services;advertising, commerce, and so it's
that impetus that I think will create.
(24:12):
I think we're on the threshold, asI said in that quote, of building
predictably multibillion dollarventure-backed companies in healthcare.
Now, these are hard companies to build.
I don't want to sound so naive.
They're not going to be straight up andto the right, but directionally, we're
clearly on the golden age of how you orI or our children will purchase, engage,
(24:35):
be active with the healthcare system,and ultimately, the tools that facilitate
that are being built by startups.
Michael, this sounds so promising andexciting, but at the same time, I'm
reminded of this thing called the reverseof Moore's law, which is Eroom's law,
which says that the cost of getting anFDA drug approved every 18 month doubles,
(24:59):
and healthcare is like one-sixth of USGDP or some really big number like that.
A former from a consumer and just acitizen perspective, do we also see all of
that resulting in lower healthcare costs?
Either now or in the foreseeable future.
Yeah, I don't know if we'll see lowercosts in the foreseeable future.
(25:22):
I think what we'll see is betterand longer quality of life.
I don't know if we'll see that rightin the next couple of years, which
is why I'm couching it in 20 years.
But if I reflect on the COVID vaccinephenomenon, typically vaccines take 10
to 20 to 30 years to develop, and wedid it in eight months, whatever it was.
You're starting to see, I think, realevidence that these technologies that
(25:45):
proliferates into the system willhave tremendous and obvious benefits.
Some of the boards that I've been on,figuring out some of these tech-enabled
services, the ability to triage, curate,identify subpopulations and then treat
them differently, we're seeing dramaticimprovement in medical loss ratios,
which is sort of the inverse of costof goods sold, where you're picking up
(26:07):
20 to 30 points of margin improvement.
So, I can also convince myself thatsome of these models actually create a
lot of economic value, and ultimately,that should inure to the system.
But I think in the short to medium term,I don't think you'll see healthcare as a
percent of GDP go from 18 to 14 percent.
It'll be sticky on the way down, butI think there'll be other measures
(26:31):
that will be really embraced, likequality of life, longevity of life I
think will see dramatic improvements.
Now, the power of healthcaretechnology, it is the great
democratizing force for healthcare.
If you can get into MGH with a phonecall, a lot of what we're doing isn't
relevant to you, but if you live inneighborhoods that have no access
(26:54):
to high-quality care, so there isgoing to be a rising tide benefit to
a lot of disenfranchised populationsthrough a lot of this virtual care.
One of the areas that I've seen it,I still serve on the board of St.
Jude Children's Research.
A lot of the work that we're doing isreally focused on each individual patient,
because with the incredible advancesand looking at genome and really being
(27:20):
able to run that data so quickly, wecan look at a kid and decide exactly
what it is that he or she needs to betreated with other than saying, "Oh,
it's a five-year-old with X," whichis going to give them the basic thing.
That is not the case anymore.
It will increasingly be less and lessthe case and not in the far future,
(27:43):
it's now and in the near future.
Yeah, you've done terrific work, Joe.
I know you've been involved withthat for a few decades, I believe,
so if you roll the tape back 20 or 30years ago, those cases 20 or 30 years
ago, now, it's dramatic improvement.
So, I couched this overa couple of decades.
We still have a lot to do, but youcan see early evidence of the impact.
(28:04):
Michael, it's been greatspeaking with you today.
Thanks so much for joining us.
My pleasure, Joe.
It's always great to see you.
Raza, great to see you again,but thank you for including me.
And thank you all for listening to OnBoards with our guest, Michael Greeley.
Please visit our websiteat OnBoardsPodcast.com.
That's OnBoardsPodcast.com.
(28:24):
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(28:45):
We hope you'll tune in forthe next episode of On Boards.
Hello and welcome to On Boards, a deepdive at what drives business success.
I'm Joe Ayoub and I'm herewith my co-host Raza Shaikh.
Twice a month, On Boards is the place tolearn about one of the most critically
important aspects of any company ororganization - its board of directors
or advisors - with a focus on theimportant issues that are facing boards,
(00:28):
company leadership and stakeholders.
Joe and I speak with a wide range ofguests and talk about what makes a board
successful or unsuccessful, what itmeans to be an effective board member and
how to make your board one of the mostvaluable assets of your organization.
Our guest today is Michael Greeley.
(00:49):
Michael is co-founder and generalpartner at Flare Capital Partners
and was formerly the founding generalpartner of Flybridge Capital Partners.
Michael currently serves on boards ofnine companies, and over his career
has served on 50 company boards.
He has also served on various innovationand investment advisory boards,
(01:12):
including Advocate Health, BostonChildren's Hospital, Cleveland Clinic,
MedStar Health and MGB Ventures.
He was past chairman of the New EnglandVenture Capital Association and was on
the board and executive committee of theNational Venture Capital Association.
(01:34):
Michael also authors a blog focusedon venture capital, innovation and
healthcare called On the Flying Bridge.
Michael, welcome and thanks so muchfor joining us today on On Boards.
Thank you, Joe.
Thank you, Raza.
And Joe, it's great to be reconnected.
I think we've known eachother for 25 or 30 years.
I think so.
Could be even longer, butwe don't need to go there.
(01:57):
First, just talk a little bit about howyou got into venture capital and tell us
about your current fund, Flare Capital.
Sure.
I was an organic chemist in collegemany years ago, and rather than
going to medical school, I endedup in business school which quickly
put me on an investor track.
I graduated from business school andwas on Wall Street for a few years
(02:19):
and then have ended up in Boston,which is really, as you know, the
cradle of venture capital and we'resurrounded by interesting, fascinating
people trying to change the world.
I've started now three venturefirms over the course of my career.
Flare Capital is a firm that I startedabout 10 years ago with a colleague
of mine that manages today about abillion dollars focused solely on
(02:40):
the healthcare technology sector, sosoftware and services and healthcare.
And again, we have the great fortuneof being in a city, we're in Boston
today, that is at the intersection ofIT and healthcare and life sciences,
and so it's just been an incrediblyinteresting time in that sector, time
in the investment business, to be tryingto help partner with great entrepreneurs
(03:04):
to start interesting new companies.
And you've been doing it for a prettylong time, including having served
on 50 boards, many of which I'mguessing were investor-backed boards.
What I wanted to ask is,how has board composition of
investor-backed boards changedover, let's say, the last 25 years?
(03:26):
Yeah, I think all of the companiesother than the nonprofits and
some of the advisory boards havebeen investor-backed boards.
I think the changes have been maybein isolation look more subtle, but in
total, I think I've been quite profound.
Boards today, and I see it reflectedin our term sheets, for instance,
are very deliberately trying to havethe right competencies and oftentimes
(03:49):
investor directors look through avery narrow aperture of the world,
which is really around the capitalstructure of the company or how the
financial performance of the company is.
Today the pressure on boards is tohave a much wider range of expertise;
cybersecurity, sensitivity aroundDE&I issues, and we're seeing that
reflected, Joe, in our term sheets.
(04:10):
If I went back to some of the earlyboards that I sat on, I think there was
just a lot less attention paid towardsthe totality of the board's competencies.
New investors tend to ask or demand aboard seat and they tend to be populated
by an investor, and today, I think there'sjust greater sensitivity to having a much
(04:32):
more diverse set of lived and professionalexperiences and the challenges facing
a lot of our early stage companiesare so multivaried, multivariable,
the whole specter of cybersecurity hasintroduced a whole new set of risks
that a financial investor board membermay not be the best equipped to handle.
(04:53):
I think when we talked last week,you said that you started to put the
requirement, actually, that boardshave at least one independent about
eight to 10 years ago, but when yourecently did an audit, you found that
a number of them weren't complying.
Why is that, and what canyou really do about it?
(05:15):
Yeah, so we inserted in our term sheets,actually, probably 10 years ago, the
requirement, although not a legalobligation, and you're the lawyer, Joe,
so you would be able to discern thedifferences, to use best efforts to
have independent directors on the board.
And for us, the power of that, again,it's a little bit sector specific but
I think it cuts across all sectors, theprincipal risk we take as healthcare
(05:37):
tech investors is around productmarket fit, and so the attribute that
I think we're trying to solve andthat independent director is a voice
of the customers, how we refer to it.
Ideally, that director also isa little bit of a lightning rod
so it helps with recruiting.
There may be an experience set aroundcompensation committee activities,
(05:57):
but ultimately, it's voice of thecustomer, so help the management
team think about product market fit.
When we have that voice around thetable, that's been a very powerful voice.
We did an audit, you're alluding to,at the end of last year, end of 2023
and said, "How many of our companiesactually have complied with that?"
And we were surprised, it was probablymaybe it was half or two thirds, but
(06:21):
it wasn't unanimous, and frankly, ifI could be just brutally honest, I
think there's a little bit of an apathyto address deficiencies of boards.
They don't meet every day.
You see deficiencies or gapsin management teams every day.
You don't necessarily seethe gap in a board every day.
You see it much more episodically.
I think we're slow to remedy that.
(06:43):
Even though we do feel it's an importantrequest that we're making, the remedies
are difficult other than just continuallyreminding your fellow board members
and the CEO, "Hey, this is important.
It's in our collective interests to havea well represented board with a lot of
different lived experiences, particularlyfor us around voice of the customer.
(07:05):
Yeah, that makes a lot of sense, but oneof the things you said when we last talked
was this, it's a quote, actually, "I'm atraditionalist in the sense that the board
should not be stacked with managementbecause it is meant to be the body that
opines on the strengths and shortcomings,"and that sounds a lot broader than
just healthcare, although I understandwhy it's particularly important in the
(07:29):
sector in which you currently invest.
It's really but certainly true forall boards, but the fact that you
have been on so many investor-backedboards and see this and have seen a
shift, and I guess I'd be curious as towhether you think that venture-backed
boards or I should say investor-backedboards are generally trending in this
(07:51):
direction and whether in the foreseeablefuture the idea of having at least
one independent will really stick.
I'd like to think that this issomething that will be enduring.
There's a power dynamic here, that I'lljust put it on the table, that is at play.
Founders are very leery,which I perfectly understand.
I've founded three venture firmsand I've been an entrepreneur.
(08:13):
My business has beenan investment business.
You don't want to give up that controleasily and you certainly don't want
to give up control to a new investorthat you've got to know over the course
of a couple of months or two or threequarters, so I'm very sympathetic.
The power of an independent directoris they also can sort of mediate to
(08:34):
the extent there's any disagreementsand not that it's adversarial anyway,
but if there's a disagreement thatcould be relatively benign around just
product strategy or pricing or hiring,independence provide just another
perspective so it takes away some of thatadversarial tension that might build up.
I'd like to think that that isgoing to be an enduring feature
(08:55):
of a really successful board.
I'll say one other thing that evolved orwe put into our term sheets on the heels
of the George Floyd tragedy was a DE&Iclause, which is, again, the legality of
it is hard to enforce, but it's using bestefforts that at the board level, it is
a diverse set of board members whereverpossible at the senior executive ranks
(09:17):
and that's different, obviously, than anindependent director, but an independent
director could embody all of that, couldbe a diverse director, and, again, for
us in the healthcare sector, it's theaggregation of a lot of different lived
experiences that I think over time willmake for better decision making, so we
really feel very strongly about that.
(09:39):
I don't think that was the casenecessarily 20 or 30 years ago, and
the problem with how early stage boardsevolve over time with each round of
financing, the new investor that leadsthe subsequent round wants a board seat so
you quickly see board scale and size andthat dynamic is tethered to the financing,
(09:59):
not to the needs of the company.
Michael, I'll read from that parts ofthat clause that you mentioned about
DE& I in response to George Floyd.
It starts by saying Flare Capitalbelieves diverse teams lead to superior
outcomes and is committed to improvingdiversity, equity and inclusion
within the venture capital industry.
(10:20):
Subsequently, it basically says as such,Flare Capital expects its portfolio and
we expect them to adopt these policies.
I think you're right, it's basicallyshowing the intention or showing
the commitment to diversity, butyou can't legally enforce it.
In your audit, did you also find a similarcompliance ratio for your DE&I clause?
(10:47):
That's a natural and obvious question,and sadly, it was even less compliant
and the feedback that you hearis they're just fewer candidates.
We don't accept that and so we'vedeveloped a list of names of people
that we are always constantly puttingforward as appropriate candidates.
But sadly, shamefully, the compliancerate on that dimension, now we only
(11:11):
inserted it three or four yearsago, is less than just the straight
independent director requirement.
Michael, do talk about a little bitof how do you find these independent
board director candidates to makethe board stronger and well composed.
Yeah, it's multifaceted.
Not surprising, certainly, our ownpersonal networks and the firm here has
(11:32):
15 employees, some of them are very seniorexecutives that have run big businesses.
So, as we literally crowdsource a list,and we have a list of probably 75 names,
so that's one channel of developing, justbringing out our own personal networks.
There are published lists by tradejournals that track these types of
(11:53):
lists, that develop lists of the top100 diverse candidates, and then in
our companies where there are diversesenior executives that we think have
the potential to serve as appropriateindependent directors, we will often
try and bring those ideas to them.
We typically invest in Series A.
We have seated a bunch of companies.
We have a pre-seed program, and I thinkwe've made 20 of those in the last couple
(12:16):
of years, and so there is sort of aladder of where you can on board talent.
If it's somebody's first board, maybeyou invite them on to a pre-seed.
Ironically, they can have amuch bigger impact on a pre-seed
company than a Series C company,which is an important dimension.
The failure rate for the pre-seedstend to be higher so that you also want
to be mindful when you're trying torecruit board members that oftentimes
(12:40):
in venture, sadly, these companiesdon't work out and so you'd hate to see
them waste a lot of time on somethingthat's not productive, but they
certainly appreciate being considered,if not added to some of these boards.
But like anything, Raza, it's a little bitorganic in how you develop these lists.
The independent has to be selected by boththe investor board members and the common
(13:04):
board members representing common sothey may be sourcing candidates as well.
Yeah, there's artful language that notto be unreasonably withheld approval
so that both sides are throwing abunch of names into a bucket and
you'll run a little bit of a process.
It's not directly analogous to hiringa senior sales executive where they
(13:25):
know they're in a competitive process.
It's a little awkward to run acompetitive director search process and
then turn somebody down, so you tendto do it serially and not in parallel.
One of the things that surprised meactually was that you said in your Monday
morning meetings that open board seatsis almost always a topic of discussion
(13:46):
that some of your companies have had openboard seats for actually quite some time.
I am surprised to hear that actuallybecause I thought it would be something
that many people would want to do.
Why the difficulty?
Is it because some of theearly stage companies fail?
Is it the pool is small?
What is it that leads to emptyboard seats at a time when there
(14:07):
are a lot of qualified peoplewho I think would be interested,
but somehow that's not connecting
Yeah, I wish I had a great answer.
What you're alluding to is we have, likemany firms, written Monday meeting agenda.
Venture firms tend to not be openfor business on Mondays because
the partners are all togetherreviewing in process deals.
On that agenda, we have a sectionfor our open slots that we're
(14:28):
trying to fill in our portfolio.
We probably have 35 or 40 activecompanies right now so it's a pretty
long list, and we flag where we haveindependent director opportunities.
I think to your point, I wishI had a great answer, Joe.
I think it is a little bitout of sight, out of mind.
The issue only resurfaces typicallyaround board meetings where we're
like, "Geez, we didn't fill that slot.
(14:48):
Let's go do it," and then thenext fire drill, It gets deferred
until the next board meeting.
That's not a great answer, and I thinkintellectually, if you pulled the
founders, the management team, theinvestor directors, we know that the
company is better served by a diverseset of experiences on the board.
You raised something earlier, which Idon't want to leave kind of unaddressed.
(15:09):
I was a traditionalist in the sensethat it's hard to be judge and
jury of your own performance, andthis is where I think the tension
being adversarial starts to set in.
It's not meant to be adversarial, but aboard should be able to step back and look
at the performance of the company, look atthe effectiveness of the team and identify
gaps and be able to fill those gaps.
(15:32):
Naturally, again, this is a perspectivein early stage investors, these
companies scale, they go through sortof an S curve, the competency or the
needs of the leadership team, the CEO,CFO will change over time, and it's
hard to have those same people siton the board and have that kind of
awareness where they would actuallylook to augment or replace themselves.
(15:55):
Again, the board represents allshareholders, and I think the burden of
a board to represent all shareholders,not just my LPs as an investor or
not my common stock ownership as thefounder, and so there is naturally
the risk of a tension emerging there.
Well, given the importance ofindependent board members and, as we've
(16:17):
discussed, diversity of perspectiveof board members, what can you do
to change kind of the investor boardstructure, which is kind of at the
beginning, it's a lot of two to one?
Is there some way to that that wouldactually change or does it really need to
wait till it gets to seven before peopleare going to take it more seriously?
(16:38):
Yeah, so the pushback that you'll hearfrom investors is we have an obligation to
our underlying fund investors to activelymanage their capital and that more often
than not comes from being on the board,and so it's hard for investor directors
to give up board seats that they secure.
Now, we're also mindful ofproportional representation, so
(17:02):
the company goes on to raise a lotof money and our ownership is 5%.
I'm making these numbersup to make the math right.
It's a five-person board, so we're 20%of the board, but 5% of the ownership.
Well, yeah, that probably makes sense totransition the off ramp, which is pretty
tried and true is to move to an observer.
I'm on a number of boards now wherethere's two X the number of observers
(17:26):
as there are board members, and thatmakes for a terrible boardroom dynamic.
I was going to ask you about that.
One of the problems that I've seen is thatsometimes whether it's board observers or
sometimes too many people from managementin the board, the room changes and the
dynamics of the conversation change.
Dramatically.
Big fans of smaller boards, theteam should come in and present, and
(17:49):
then the team should leave the room.
I get why we have observers.
We do it.
It's a little bit of a trainingwheels for younger investors to get
board exposure, and it's an off rampfor early investors who are being
diluted down, but it absolutelystifles the boardroom conversation.
In the cases that I'm thinking of,we have this really calcified board
(18:12):
agenda where people are kind ofcoming and going through the course
of the meeting so you can get itdown to a small manageable group.
Michael, you've had plenty of war storiesand real board examples to go through.
Can you share some of the bad governancestories that you may have encountered.
Yeah, I can do that reluctantly, andnot for attribution, but I think one
(18:35):
of my worst board experiences has beenwhere the founders actually retained
governance control of the board, and inthe face of a really poor performance,
it was impossible for the company tomake a change, and the performance
was unambiguously poor, and still as acompany, we ultimately did fix it, but
(18:58):
that absolutely should exist, it's servinga really disenfranchised population,
bringing really novel solutions so therewas a lot of passion around the table
to help really build this company, butwe had a legal framework that made it
virtually impossible to affect any change.
An even worse outcome is where the boardis at loggerheads and the company is then
(19:22):
paralyzed, and so what we did in thatexample is we basically stepped back and
said, "The company needs to go forward,even if it's on a bad path, but we try
very, very hard to never get to the pointwhere the company is paralyzed because of
a board deadlock," and that's the default.
It tends to be like an even number ofboard members is something that most
(19:46):
of us try and avoid, although it'smore often than not in the governance
structure less the number of boardmembers that cause this paralysis and
that is a very, very bad place to be.
I think the extreme examples of suchpatterns would be the FTX or even
Theranos board where it's really,really founder controlled and many
(20:07):
other extreme examples, some positiveas well as many more negatives.
Michael, what are the principles thatyou come in while viewing your role on
the board coming in with an entrepreneur?
We do truly believe at least the way ourfirm operates is that we're the invited
guests and that it's an honor to be there.
(20:28):
It's a highly competitiveindustry to provide capital.
The capital we provide does have stringsattached to it, like we want to be on
your board, and so for us to be selected,we take that very, very seriously.
We compete very hard to be selected theway we've architected our investor base.
Half the capital come from a fewdozen major strategic incumbents,
(20:53):
household names, and so we think webring more than just capital, but
it's a privilege place to be in.
What I say to my partners is we wantto be the first call, and when the
CEO is struggling with something, wewant to absolutely be the first call.
Now, there are going to be issues thatthe CEO does not want to expose to his
investor directors first, and so that'stherefore the power of the independent
(21:15):
director, talk to a brethren of yourswho's been through that issue, and
so I'm happy to be the second call.
The first call should be tothe independent director, not
to another investor director.
We work very hard to be thefirst call, at least for the
independent directors on the board.
Thanks.
There's a great quote in your bio onthe Flare website that I'm going to
(21:38):
read and ask you to talk about it,"Arguably, the golden age of healthcare
is upon us as the sector embraces noveland impactful solutions to improve
outcomes and lower the cost of care."
To start, what in your view makesthis the time in which we're living
the golden age of healthcare?
(21:58):
There's been a confluence of, andI'll try and be really brief, what
look to be unrelated conditions.
One is the advances inhigh performance computing.
Data liquidity has enabled novelnew healthcare models, particularly
around the ability to take risk onpopulations, the way you can activate,
engage, populations, you can triage,you can predict outcomes for population.
(22:22):
There's a high performance computethat we all know, but it is
now very present in healthcare.
The ability to do drug discoveryon unprecedented advances.
We also have a regulatory framework thatI think is becoming more accommodating
and is encouraging new entities to comein and manage populations in a different
(22:43):
way, so there's a transition from feefor service to value-based care models.
i'm so excited about the next 20 yearsand I hope i'm investing through the
next 20 years, notwithstanding, Joe,it is a very challenging '23 and
'24 the years we're sitting in now.
COVID was a massive accelerant fortechnology, so you've seen rapid purchase
(23:04):
and incorporation of technologies.
Those capabilities now will start toreveal themselves as the healthcare
system has been pushed really overthe last two or three years to become
intelligent, predictive, always onvirtual, empathetic, all these attributes.
I'll make an analogy, and I'm surethe two of you can punch holes in it.
The US advertising industry 20,25 years ago was re-architected
(23:28):
with the advent of the internet.
It's a $375 billion industry, it'smassive, and I think today, as an
investor, we can look and see 10-plustrillion dollars of venture capital backed
companies that are now public, so enormouswealth creation; Twitter, Facebook,
Google, a whole litany of great companies.
Healthcare spend is arguably 14 timeslarger, so you have this massive
(23:51):
industry that's being re-architected.
There are new risks.
There are new revenues and theexecutives who run the healthcare
industry simply do not have thetools to make that transition,
much like other financial services;advertising, commerce, and so it's
that impetus that I think will create.
(24:12):
I think we're on the threshold, asI said in that quote, of building
predictably multibillion dollarventure-backed companies in healthcare.
Now, these are hard companies to build.
I don't want to sound so naive.
They're not going to be straight up andto the right, but directionally, we're
clearly on the golden age of how you orI or our children will purchase, engage,
(24:35):
be active with the healthcare system,and ultimately, the tools that facilitate
that are being built by startups.
Michael, this sounds so promising andexciting, but at the same time, I'm
reminded of this thing called the reverseof Moore's law, which is Eroom's law,
which says that the cost of getting anFDA drug approved every 18 month doubles,
(24:59):
and healthcare is like one-sixth of USGDP or some really big number like that.
A former from a consumer and just acitizen perspective, do we also see all of
that resulting in lower healthcare costs?
Either now or in the foreseeable future.
Yeah, I don't know if we'll see lowercosts in the foreseeable future.
(25:22):
I think what we'll see is betterand longer quality of life.
I don't know if we'll see that rightin the next couple of years, which
is why I'm couching it in 20 years.
But if I reflect on the COVID vaccinephenomenon, typically vaccines take 10
to 20 to 30 years to develop, and wedid it in eight months, whatever it was.
You're starting to see, I think, realevidence that these technologies that
(25:45):
proliferates into the system willhave tremendous and obvious benefits.
Some of the boards that I've been on,figuring out some of these tech-enabled
services, the ability to triage, curate,identify subpopulations and then treat
them differently, we're seeing dramaticimprovement in medical loss ratios,
which is sort of the inverse of costof goods sold, where you're picking up
(26:07):
20 to 30 points of margin improvement.
So, I can also convince myself thatsome of these models actually create a
lot of economic value, and ultimately,that should inure to the system.
But I think in the short to medium term,I don't think you'll see healthcare as a
percent of GDP go from 18 to 14 percent.
It'll be sticky on the way down, butI think there'll be other measures
(26:31):
that will be really embraced, likequality of life, longevity of life I
think will see dramatic improvements.
Now, the power of healthcaretechnology, it is the great
democratizing force for healthcare.
If you can get into MGH with a phonecall, a lot of what we're doing isn't
relevant to you, but if you live inneighborhoods that have no access
(26:54):
to high-quality care, so there isgoing to be a rising tide benefit to
a lot of disenfranchised populationsthrough a lot of this virtual care.
One of the areas that I've seen it,I still serve on the board of St.
Jude Children's Research.
A lot of the work that we're doing isreally focused on each individual patient,
because with the incredible advancesand looking at genome and really being
(27:20):
able to run that data so quickly, wecan look at a kid and decide exactly
what it is that he or she needs to betreated with other than saying, "Oh,
it's a five-year-old with X," whichis going to give them the basic thing.
That is not the case anymore.
It will increasingly be less and lessthe case and not in the far future,
(27:43):
it's now and in the near future.
Yeah, you've done terrific work, Joe.
I know you've been involved withthat for a few decades, I believe,
so if you roll the tape back 20 or 30years ago, those cases 20 or 30 years
ago, now, it's dramatic improvement.
So, I couched this overa couple of decades.
We still have a lot to do, but youcan see early evidence of the impact.
(28:04):
Michael, it's been greatspeaking with you today.
Thanks so much for joining us.
My pleasure, Joe.
It's always great to see you.
Raza, great to see you again,but thank you for including me.
And thank you all for listening to OnBoards with our guest, Michael Greeley.
Please visit our websiteat OnBoardsPodcast.com.
That's OnBoardsPodcast.com.
(28:24):
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(28:45):
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