What makes a high-value startup board?
Written by Damien Steel, Managing Partner, OMERS Ventures
A startup’s board of directors plays a critical role in steering the direction of a business, so being intentional about who sits on it makes sense. But that’s easier said than done — especially for first-time founders who might not have the experience to know what a high value board should look like. It’s a question we get asked regularly by founders.
To understand the challenges around board composition and identify the best strategies to address them, I sat down for a discussion with two of our partners in the US and Europe to hear about the current status of boards in each region, in addition to our experience in Canada, and what can be done to improve them.
It’s worth saying that I am writing this post having been encouraged to see so many of our own portfolio companies embracing the idea of independent board members. Congratulations to Workramp for the addition of Annie Pearl, Jobber for the addition of Gail Goodman, TouchBistro for the addition of Mychelle Mollot, Landed for adding Charmel Maynard, PeerWell for adding Dr Jonathan Slotkin and Klipfolio for adding Kim Walsh and Kirk Simpson. All in just the last few months.
What’s the point of a board?
Appointing independent board members to a board of directors is a big milestone for startups … sort of a signal that the business has evolved to a new level requiring a wider strategic lens and operational expertise. But we also hear that many founders struggle with boards — from recruiting to managing to tracking.
Too often, startup boards are simply made up of investors, some of whom may be in seats they really shouldn’t be occupying. The best startup boards are diverse — made up of investors, independent operators with functional or sector expertise, and people with varying perspectives.
I think it’s fair to say Canadian boards are often dominated by investors. There aren’t as many truly independent board members as there should be, and not for lack of interest. It has more to do with early investors claiming a seat on the board and then holding onto it. Canadian investors are long haulers — once we’re on a board it’s rare that we’ll step off. In some cases, with lead or large investors, this is inevitable — they have the highest vested interest, but the reality is that the needs of the business change so frequently in its early years that board members rarely add equal value for the duration of their tenure.
Everyone wants that badge of recognition that comes with a professional association to a successful company. Sometimes that desire overrides our ability to gauge how much of an impact we’re actually making, or whether there might be someone better for the job. I think this is a dangerous mentality. An early-stage company might want a go-to-market expert on the board, for example, but a pre-IPO business may be better served by an HR executive. Long-term board members, and specifically investors, can prevent companies from leveraging more strategic talent through specific phases of growth if we’re not diligent about evaluating our own performance honestly, and often.
Our Managing Partner in Europe, Jambu Palaniappan, says they see the same thing, but adds the positive insights an investor board member brings to the table: ‘most investors and VCs holding board seats come from a finance background. So, they’re great with governance, pricing, revenue and forecasting, but not as well equipped to advise on the other foundational business areas, like product, growth, people or marketing’.
As an industry, it makes sense for us to advocate for more organic board cycles or regular transitions for board members. A startup needs a board with a broad range of expertise, including deep industry and operational experience. Stacking a board with investors, particularly if they’re friends or ‘friendlies’, won’t provide the perspective you want and need out of a board.
There’s actually additional risk in the event that investors or board members without strategic or operational experience act as though they do have that experience — which can happen in board settings where there’s a bit of ego at play. In that case, real damage can be done to the business. On a related note, board observers who do more than ‘observe’ also run a personal risk because they are unlikely to be covered by the Directors & Officers liability insurance that a board director will typically have.
When I asked Michael Yang, our Managing Partner in the Bay Area he agreed: ‘I’ve seen the issue of board members offering advice where they have no real experience play out plenty of times. It’s a real risk. The whole purpose of independent board seats is to access and leverage people who know different things than the founders do and offer industry connections or operational expertise that the management team can’t access as readily on their own. Given that start-ups evolve so quickly and the needs of the business change every few years, lifetime board positions are counter-productive’.
How can founders mitigate some of these risks?
Jambu highlights that when founders are deliberate about the composition and recruitment of boards, they set themselves up for success down the road. For example, looking for current or former CEOs as early board members can be a big advantage. They’re hyper-relevant to early-stage companies — they’ve been there before — and can appreciate the various nuances an investor may not be able to recognize. They also make good mentors or coaches for founders. It can be a lonely job — having a sounding board who’s seen it all before can be incredibly reassuring.
Finding current or former founders to act as independent board members used to be a bigger challenge, when you had to find someone with specific experience at an executive level within your own network (and geography). Now that global and physical barriers have essentially disappeared, your pool of potential board members is much wider, so you can recruit much more tactically than before. Board members can support a business from anywhere in the world.
Jambu adds that in his experience ‘it is the people who are all too often not in the room who bring the most varied and interesting viewpoints. These include operators, functional experts, industry experts, women — in general, the more diverse perspectives you can have, the more value you’ll get. I read a study recently around team homogeneity in startups, and how the more similar the team, the worse it performed compared to teams with diverse backgrounds’.
Any other tactics to keep in mind while building or managing a board?
On this subject, Michael had some sage advice. He’d specifically like to see more purposefully selected board Chairs. Without a designated chairperson, it’s too easy to have one or two members dominate discussions, or an unequal balance of influence. Having a Chair, especially one with experience, makes it easier for founders and other board members to simply focus on the topic at hand, and not the politics. They’ll take on the heavy lifting of making sure everyone is heard, dissent is welcome, and objectives are clear.
Chairs can enforce accountability as well, which takes even more pressure off the founder and avoids any potential sensitivities around investor relations.
Jambu added that it’s important the Chair isn’t the founder. Having an independent Chair creates more integrity between the board, since they can stay objective and act as connective tissue between members and the CEO or founder.
Another good litmus test when adding to your board is whether or not new members will add credibility or good publicity to the business. Board appointments should be brandable moments. It should feel like a real win to get them on the team and be very obvious to the industry what they’re bringing to the table.
We all need to do a better job of recognizing the expectations of every board seat. Each member should serve a purpose and add value for their entire term. Setting expectations and clear objectives will weed out those who aren’t willing to put in the time and effort to do so. It will also help keep the board small. If you’ve got more than 8 people in a room, the odds of a productive conversation start to deteriorate.
All of us agreed that as investors and board members ourselves, we also need to commit to recognizing the responsibility of our own board seats. If you’ve been a part of the journey at any stage, you’ll always be part of the company story.
One piece of advice for founders building boards?
Michael (US): As a board member, if you’re learning more than you’re adding, consider retiring your seat — passing the torch at the right time can be one of the most valuable things a board member can do. And if the task of finding independent board members who tick all the boxes around value and/or brand credibility is daunting, designate one of your investor board members to take this on and own it. it’s a precursor to a more formal Nominating & Governance Committee that you see with Public companies — one of those committee’s key functions is to recruit independent directors. In fact, the move to add independent board directors to your startup board will inevitably stand you in good stead as you grow, especially if you have a view to going public one day. Here’s a useful resource if you know a (US) IPO is in your medium-term future.
Jambu (EU): The interests of a business and an investor can sometimes conflict with each other, so stacking your board with friendly investors won’t necessarily give you the kind of guidance you need from a board. Focus on building a diverse team with varied perspectives and relevant experience.
And from me (CA): Your business changes daily. Don’t be afraid to evaluate your board to suit the stage of your business. You’ll get more out of your board if you take an active role in defining objectives and success metrics from the start. Board seats are incredibly valuable so make the most of them.
All of this theory is easy to talk about but not always so easy to implement. We are actively working with many of our portfolio companies to create a model for identifying the best criteria for an independent board member to suit your own business. I will follow up with a separate post outlining the process our own companies have found useful.
In the meantime, if you or anyone you know would make an invaluable independent board-member, ideally from a group likely to be under-represented on boards, we’re happy to compile a list.
Tweet me @damiensteel to make any suggestions — we’ll share the list back with the community assuming those we add to it are happy for us to do so!
