Comment & Analysis
“When do I have time to think about a board and how can I possibly afford it” are two constant refrains I receive as an angel investor, adviser and recruiter. The task of establishing a board may appear a low priority in the early stages of a start up’s life, but again and again I see examples where energy, time, cash and resources are wasted as the start up heads off in directions where wise counsel would have stopped fundamental mistakes. The “nice to have” is suddenly the “I should have had”.
Not enough founders give the matter of board composition and timing much thought. Once you have accepted the realization (and acceptance) that in order for the company to move forward, strategic help is needed, not optional, you have made the first step from founder to CEO. New founders try new things and learn the hard way, seasoned founders learn to take advice and not re-invent the wheel. Every start up journey (for the founder and the investor) is a roller coaster, not a linear hockey stick, with inevitable dizzy heights and near death lows.
Founders often privately admit to angels (sometimes belatedly asking if they will join the board) that they feel overwhelmed or are burning out, usually imploring for help to find where they can get support.
Remember, as every CEO will agree – its lonely at the top and as Mike Tyson warned “Everyone has a plan until they get punched in the mouth”.
We are now at a point where over 500 companies have reached unicorn status and an increasing body of evidence is emerging to show that the sooner a founder builds an effective board (and/or Advisory board – more of which another time), the greater the chance of survival and success, as well as higher valuations through successive funding rounds.
The journey to maturity typically takes seven years, as a start-up moves through venture, growth and pre IPO stages. Whilst that may seem plenty of time, consider this; with a likely 10-12 separate board meetings year, that’s 84 opportunities to maximise thinking in your team, so your timeline is condensed, and you don’t have time to waste.
Be aware also that the board should reflect where you are in the firm’s maturity cycle. A board should be dynamic, not static. The board you start with should not be the board you finish with, it should align with the priorities at that moment in time, for the founder, employees and investors. So ask yourself the question – what is the purpose of the board at each stage of growth?
In your start up phase, the focus is top line revenue; “growth, growth, growth” (from anywhere!). The total focus is on traction, burn rate and cash reserves. Bringing “real” commercial focus to an inexperienced founder CEO can maximise your chance to get to the next round. We’ve all seen founders go missing in combat when things go wrong (when, rather than if), retreat down the corridor to write more code or tweak the product yet again to hide from the burn rate or avoid to deliver bad news to investors (usually concurrent with “We don’t need a Chairman”).
How to choose the right founder board will be explored in detail on another occasion, but in summary they should bring networks, contacts and leads whenever possible, (and be willing to make senior introductions), as well as sound and impartial advice. The “safe space” – advice from a mentor(s) who has been there, done that – even to answer “how did you sleep at night” – can help you make better decisions and to know what you know and know what you don’t know.
And sorry to disabuse you, but the board is the showcase to investors – if you have picked the right team, you will be judged (and priced) accordingly at the next round, so no, your Chair shouldn’t be your godfather and no, because your cousin is an accountant, that doesn’t qualify them for a position on the board. (Similarly, it’s not just someone whom you already know, who “worked in a similar sector 20 years ago”).
Whilst family and friends may have your best interests at heart, their loyalty to you can lead to group think and undue positivity, whilst it also won’t offer the perspective to give you the best advice and ultimately the diversity of thought you need to deepen perspectives and validate presumptions about suppliers, customers and networks, nor concepts of purpose, mission and values.
This requires reaching outside your own network to explore blind spots and gain different opinions.
For the founder, the key is to take discreet advice, across all aspects of your new business - from proof of concept, pricing and route to market. We all know founders who have fallen in love with their own creation and exhibit the “founder bias” focus on product development, rather than a sophisticated understanding of customer and market development, team building and fund raising.
How often does an investor hear the pitch about how great is the new product, not what is it solving for and who will buy it. We’ve all heard the “if we build it, they will come” pitch. Well sorry, no they won’t. Having those hard conversations with informed board directors who care, rather than half way through an investor or customer pitch, can only make sense.
Some key stats to consider:
90% of start-ups fail, 75% of venture backed start-ups fail, 20% of all start ups will fail in year 1.
For further study, read Steve Blank’s “The start up owners manual” – “A veteran board can bring 50-100x more experience to a room than a first time founder”.
So if you can maximise your chances of early survival with wise counsel, why not give yourself the best chance – yes, cash is tight, but you should balance cost versus value. Every(relevant) NED increases the likelihood of success to create an enduring business. As one angel succinctly said “Think of each NED as an arrow in your quiver, to shoot at your target to accelerate growth and achieve success”.
Presuming you have survived your start up phase, as the founder moves into venture and growth phases, this is often the point that investors will ask for and expect a seat on the board (at least as an observer). Having an existing board in place gives the investor confidence and minimises their incentive to force a solution.
Every founder has an understandable reluctance to cede what they perceive as control and independence. But this is the point at which you have the chance to demonstrate maturity of thought as a genuine CEO, not just as a founder, as well as maximum influence whilst you remain the dominant and majority shareholder.
Once you accept that as a founder CEO you will likely be diluted down to a minority shareholder, after multiple rounds, and have signed evolving shareholder agreements (wait until you see the down round), you can accept and embrace the inevitability of the board playing a role in your life. Given this reality, the wisest action is to face this whilst you control the process, to raise the capital you want (and the shareholders you want) as well as expand the board accordingly.
The sooner you learn how to appoint and rotate your board, the more experience you will have in good governance. Start early – learn by doing it. Family and friends may be expedient on day 1, but they’re not there for life! If a 3-year term is good practice for a public board, why isn’t that even more important for a private board?
Re-evaluate your board with each round of funding, before not after. Boards should always reflect the next stage of growth, not the last and therefore require a skillset in place with people who have ideally already been through that stage of growth and have experience of the rules of the road at that point. Learn to de - personalise the process and remember- good governance attracts capital!
Often I hear “I don’t understand what’s involved – I’ll leave it until the VC round when they can help me”. Why would you leave it until the VC appoints a board member in their own interest (funding growth versus funding losses), rather than yours. Can you really be sure that you can safely outsource the decision and abrogate responsibility?
Academic studies by commentators such as Brad Phelp and Sam Gorg offer some more compelling stats;
70-80% of venture boards add zero value, 48% add negative value and only 2% add value.
The huge variation of performance in companies with VC led boards (often even with the same Chairman),shows that although the ingredients to a board may be similar, outcomes are often VERY different. So why do some boards propel growth and some hinder and what steps can you take to influence that outcome with early and timely adoption?
Covid has forced a greater investor focus on profitability (and a fixation on the “path to profitability”).Timing for funding is everything and invariably it’s always sooner than the founder thinks. Wise counsel not to delay the next raise and wait for the next order to maximise the pricing has a value far surpassing the cost of that counsel. Experience about targeting of investors, shaping the deck and endorsing the management team (never mind the time it takes you away from running the business) - all are compelling reasons to put together the strongest board team you can, just as you would with the executive team.
In conclusion, the early adoption of a strong, talented and diverse board increases the chances to execute a pan faster, raise finance, hire and offer you as the founder a less stressful life, at a time when we are all conscious of the mental health issues surrounding Covid. The role of the Chair to aid the founder as “CEO with L Plates” is critical (which will be explored another time), as well as avoiding friends and family recruitment and over (and overt) reliance on VC and private equity “NED banks”. A board is dynamic and reflects both the maturity of the founder and the business. The balance between executive, non executive and advisory board teams is now considered by investors in ever more granular detail. Just as the data showing that high performing public companies have high performing (and diverse) boards, so the direction of travel for private companies is increasingly clear.
Ultimately, everything cascades from the board. Whom you appoint reflects the vison of what you want to create, how you intend to create it and what the culture will be. It demonstrates to both investors and customers how you intend to avoid chaotic and uncontrolled growth, which might compromise your ability to deliver. The more varied the background of your board, the more failures and successes they will have seen, the more insights they can give and the greater the reach of their networks.
A final thought from someone wiser than me – “Great ideas with poor execution can kill companies, but less spectacular ideas with phenomenal teams can bring success.”
Comment & Analysis
Comment & Analysis
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