The $2.5M Empty Board Seat

How Poor Governance Kills Category-Creating Companies

Photo by Brusk Dede on Unsplash

In September 2024, I watched as we wound down Nori, the carbon removal marketplace I had built from a 15-person meetup into a 30-person company that had raised $20 million dollars. But the truth is, we had died 20 months earlier in a January 2023 board meeting. I just didn't know it at the time.

Here's what I wish I'd understood then: When you're building something entirely new and times are good, VCs love you because you have the potential to return their fund. But when markets turn, they face intense pressure from their own investors. And in those moments, they will inevitably evaluate you against their conventional benchmarks. It's not personal - it's literally their job.

Let me show you how this plays out - and what you can do to protect your category-creating company from the same fate.

The Fatal Board Meeting

January 2023. I sat across from our two VC board members, discussing a bridge round we desperately needed. With new investments in crypto-adjacent companies stalled because of the FTX collapse, we needed more runway from our existing investors to weather the storm. I presented my model showing we needed $10M to give our category-creating company 18-24 months of runway and volunteered to step down as CEO to bring in someone more focused on go-to-market and commercial growth. Our board needed to understand: a new CEO would need time to transition in, build their team, and show meaningful results.

What followed perfectly illustrated how familiar playbook thinking takes over during uncertainty:

VC #1: "$10 million seems like too much. Let's do half."

VC #2: "We have to give Paul a chance. Let's call it $7.5 million."

Six years of category-creating work had been reduced to a simple negotiation based on typical company benchmarks. No discussion of the models. No strategic debate. No consideration of the CEO transition plan. Just conventional metrics at work. Little did I know how much difference that was going to make.

The empty fourth seat at our board table - an independent director seat I'd left unfilled for 18 months because it never seemed urgent - had never felt more conspicuous. Not because anyone was making wrong decisions, but because we needed someone who could help bridge the gap between category-creation needs and traditional metrics.

Unfortunately, this initial pattern-matching moment was just the prelude. As market conditions continued to deteriorate, the real cost of that empty board seat was about to become clear.

When Crisis Hits

Two months after that initial bridge round discussion, our investors blindsided me with a new proposal: "What if we just give you $1-2 million now and the rest after hiring a new CEO?"

Then the Silicon Valley Bank crisis hit, amplifying every market fear. This is where the limits of conventional wisdom become stark for category creators. Our investors, facing their own pressures during the banking crisis, naturally fell back on familiar playbooks: reduce burn rate, milestone-based funding, prove the model with less capital. These are smart strategies for traditional companies, but they can be lethal for category creators who need time and space to prove something new can exist.

Once again, crucial decisions about our company's future were being made based on gut feelings rather than data. Without an independent voice on the board, there was no one to help translate between category-creation realities and traditional company metrics. No one to ask: What milestones actually make sense when you're creating a new market? How do you balance prudent capital management with the runway needed to prove a new category can work?

This is the moment when proper governance matters most - not to fight against natural market pressures, but to help bridge between what VCs need to see and what category creators need to prove.

How $2.5M Became Fatal

We took the reduced deal because we had to. We hired an excellent new CEO who brought exactly what we needed. But here's where that missing $2.5M became fatal: he had only 12 months of runway to execute his vision, when what we really needed was 18 months. We had significant supply of carbon credits ready to sell and promising customer discussions in progress. What we didn't have was time.

When our CEO went out to raise a new round in early 2024, the story was clear: strong product, solid supply pipeline, but not enough closed buy-side deals to attract new investors. That missing $2.5M - about six months of runway - would have given us a fighting chance to convert potential into proof. There were no guarantees we'd succeed, but without that time, failure was certain. By September 2024, we were winding down the company.

This is how governance failures cascade: Without strong governance structures, a single board decision based on conventional metrics eliminated our chance to prove an entirely new business model could work. We'll never know if those extra six months would have made the difference - but without them, we never had a chance at all.

The Predictable Pattern

Think of it like this: When times are tough, VCs will do what VCs must do. They have their own investors, their own pressures, their own patterns. The mistake isn't in their behavior - it's in failing to build governance structures that account for this reality.

Without strong governance frameworks in place, category-creating companies are particularly vulnerable during market downturns. Not because anyone is making wrong decisions, but because conventional wisdom will naturally take over exactly when you most need the freedom to be different.

Why This Matters for Category Creators

What happened to us wasn't a unique failure - it was a preview of what happens to many category-creating companies during market downturns. The same governance gaps that seemed insignificant during good times become fatal when traditional metrics collide with category-creation realities. Without proper structures, even the most promising new categories can be forced into conventional boxes they were never meant to fit.

Looking back, the lesson is clear: that empty board seat was a fatal vulnerability waiting to be exposed. If you're building something that's never existed before, you can't afford to leave independent director seats unfilled.

Next week, I'll share exactly what to look for in independent directors who can help bridge the gap between category creation and traditional metrics.

But for now, remember this: If you're building something that's never existed before, traditional governance structures aren't enough. Don't wait until crisis hits to realize this. By then, natural patterns will already be in motion.

---

Next week: What to Look For in Independent Directors for Category-Creating Companies