Independent experts on the boards of VC and PE portfolio companies

11. March 2024

Opinion piece by Marko Maschek, Marondo Capital

Both financial investors and companies in Germany are increasingly open to taking external management specialists on board – especially those technology companies that are facing the next scaling threshold and no longer believe they can handle the associated tasks with their own resources.

In the USA, it has been customary for years to appoint independent experts to the supervisory boards of VC & PE-financed portfolio companies. Some even believe that this constellation represents a unique selling point compared to other countries and contributes to the success of US companies. In Germany, this practice was less common in the past. However, a rethink is now taking place. Both financial investors and companies are increasingly open to this type of participation.

First of all, there is a major difference between the USA and Germany in terms of corporate governance: the American “monistic” board of directors, a single body (equivalent to a board of directors), is contrasted with the management board and supervisory board as supervisory bodies in German stock corporations. The Supervisory Board controls the management, sanctions the annual financial statements and determines the incentives for the operating staff. Although it also contributes indirectly to corporate strategy, this is essentially the task of the management board or management. Asset-managing financial investors are also prohibited from directly influencing operational matters.

Collected know-how at one table

The US Board of Directors, on the other hand, consists of operational management as well as investors and external experts, also known as “independent directors”. It determines the company’s strategy, meets frequently (ten regular meetings per year are common) and gathers virtually all of the company’s expertise around one table – the “board”.

Experts are usually former (or operational) C-level managers from the industry segment of the portfolio company. The alignment of interests is ensured by incentivizing the independent directors through options or financial participation. They are often wealthy and can also invest larger sums. However, who sits on the board is usually differentiated according to their potential contribution to the portfolio company rather than their capital investment. Supervisory board mandates in small technology companies are remunerated with an average of 15k per year for ordinary members and 25k for the chairman. In addition, options can be distributed to experts – the percentage is comparable to second-level executives as a function of the expert’s contribution.

The investment company Marondo Capital focuses on technology growth companies in Germany and has invested in nine IT companies since it was founded. It has recently started practicing the US-American approach and has added two proven luminaries to its expert advisory board: Prof. Markus Schwarz, who spent 26 years in management positions at SAP, and Dr. Ralf Brunner, who spent over 30 years at several international IT service providers, most recently at Atos. They are now passing on their experience to Marondo portfolio companies.

Corporate governance problems and lack of specialist expertise

Markus Schwarz was a member of the supervisory board of Datavard, a former portfolio company of Marondo, for several years. Ralf Brunner currently has two advisory mandates in IT companies, a start-up in Tübingen and a medium-sized company in Stuttgart. He was asked to do this by the founders in each case. “The founder of the medium-sized company was in his 60s and wanted to arrange his succession,” he explains. “He clearly recognized that there were corporate governance problems in his company. He also lacked specialist expertise, particularly with regard to establishing new business models and positioning the company in terms of cyber security. I felt that I could contribute to both of these issues based on my experience.”

Markus Schwarz: “The topic of digital transformation has moved me for many years, which is why I got involved with Datavard. After my appointment as a university professor, I wanted to stay connected to the IT industry, where I had spent my entire career. Of course, there were also doubts about what I could contribute in the role. I had previously held a management position at SAP, which was a significant difference in terms of scale. How could I work together with the other committee members in practice, how could I actually contribute my expertise?”

Previous business models need to be adapted

Markus Schwarz expressly did not want to be a breakfast director who only appears on the website or stationery. The former SAP manager currently recognizes a clear professionalization of small technology companies. While the years from 1980 to 2000 are considered “calm waters”, the phase from the turn of the millennium onwards is characterized by major upheavals, keywords cloud, cyber security and, most recently, AI. This required a rethink and, in most cases, an adaptation of previous business models.

Many small tech companies in Germany are driven by an owner who has grown their company over the last 20 years – sometimes against all odds – and generated the first 10/20 million in sales. A proud achievement, but one that often obscures the realization that outside help is needed to scale the business and to understand new technological trends.

For this type of collaboration to work, an open-minded attitude towards the external party is required. For both sides, this manifests itself in an investment of time. The CEO must allow access to the 2nd management level and promote exchange. This is not about interfering in the operational business. For example, the Sales & Marketing team can be coached in the development of a partner program.

The wave of external luminaries in Germany seems to have started, underpinned by the pressure for change in the industry. The founding generation has recognized that additional expertise is needed to take the next step and remain competitive in the face of new technological challenges. The aim must be to build better companies in the end, as in the USA.

The author

Marko Maschek is co-founder and partner of the investment company Marondo Capital, which focuses on technology growth companies in Germany and has invested in nine software and IT companies since its foundation.