November 16, 2022 | By Anik Bose, General Partner at BGV
You’ve recruited a talented team and designed a great product. You’ve set a staged growth plan, and gained initial traction selling to enterprise customers.
Now you’re closing in on a round of institutional financing, and it’s time to focus on your board of directors. It will include key founders, and some initial investors. But who do you really want sitting around that table?
In my experience, an effective board can accelerate a startup’s success or weigh it down like a heavy anchor. Here are a few tips and red flags for early-stage startups as they consider the composition of their board of directors.
Size: Find the Goldilocks Number
The more venture capitalists on your board the better, right? They are the ones willing to take risks, after all, and the only people in the room with experience shepherding young companies to market success.
In fact, there is a correlation between the presence of venture capital board members and a business’ ultimate success. But it’s not one you might expect. A study conducted by Correlation Ventures found that two VC members was the ideal number on a board of directors. Zero or one board member from a VC compared favorably, but any more than three was found to have a dampening effect on the business.
More specifically, startups with three board members lead to exits of 3.6x, while those with six or more board members yielded 1.4x exits. Too many board members = too many cooks in the kitchen. Lowering the temperature, the noise and the competing voices and egos is often critical to decision making, focus and execution.
Takeaway: Choose your VC members carefully, and don’t appoint too many.
Diversity: A Variety of Perspectives
A founder should resist the temptation to stack the board with sycophants. Diversity is important. Ideally, your board will be composed of members with a broad resume of experience: broad strategic thinkers, niche industry veterans, male and female perspectives, local and global outlooks.
A good CEO will challenge herself to communicate with a broad array of people who can shine a light on blindspots and challenge assumptions. In that way, a founder can test ideas and lean on the advice of veterans. When everyone is united in the same goal, the board, and the company at large, will prosper.
Context Drift: Keep Them Focused
Yes, your board members bring decades of experience, insights and seasoned perspectives. Their accomplishments speak for themselves, and put them in high demand. However, this also means that they’re frequently overextended, advising a handful of companies at once, and quickly drawing patterns and conclusions without fully understanding the context before providing input for key decisions.
As a consequence, their input may be reactive, and fail to add value. This situation is a recipe for disaster, especially when bruised egos may be involved.
To avoid these eventualities, founders must do reference checks on members. Indeed, founders should vet every board candidate at least as thoroughly as an executive hire. There’s a case to be made that CEOs should be even more careful with board-member appointments: Furthermore ensure that board members understand the vision, and the peculiarities of your business and will devote the necessary bandwidth. It is also important to engage board members in bet
Takeaway: Select your board members carefully, a ineffective board leads to poor governance. Discernment is critical.
Respect: Essential for Trust
So far, we’ve discussed how startup founders can best evaluate and recruit their board members. But it’s important to point out that these individuals also have responsibilities. For one, they must conduct themselves in a manner that is appropriate to their position.
A board member who shows a lack of respect for the CEO or other company executives is bad for business – especially if the critique takes place during a board meeting. There are two negative outcomes here. First, the board member is actively undermining a CEO in front of his or her team, compromising the team’s trust in their CEO. Second, the CEO never trusts that board member again. Whatever good advice he may have is now colored by that negative experience.
Takeaway: Board members who show a lack of respect for company executives lose influence and sow discord.
One tip for the CEO: Make sure to frame issues before the board into open and closed sessions (where execs do not participate). That will provide a confidential forum and help keep oversized egos in check.
Set Clear Objectives: The Value of OKRs
High-functioning board members help the CEO and leadership team see their blind spots and direct them toward successful value creation. Likewise, CEOs should work with the board to set clear objectives and key results (OKRs) for the company to ensure alignment on value creation.
Without clear OKR’s it is difficult to judge a company’s and CEO’s performance objectively. This can lead to a difficult situation of bad surprises and finger pointing that spells doom for the company and lost market and investment opportunity. A smart startup founder will proactively work with the board to set clear OKR’s (achieving Product market fit, establishing a repeatable sales motion, hiring key talent etc) that results in successful market adoption and refinancings. A forward-thinking CEO is a successful CEO.
Takeaway: Create company wide OKR’s to align your board and the management team to drive value creation.
Communication: Not Just for the Meetings
It’s not enough to see your board members at board meetings. Call them in between board meetings, structure at least a few board dinners prior to board meetings every year.
Get to know your board members strengths and how they can best help. A lack of communication and poor chemistry can lead to bad dynamics and unwanted surprises.
Takeaway: Your board is taking this journey with you. They are your partners embrace them. Keep in touch, build chemistry and communicate often.
