Leveraging Board Meetings to Reinforce a Hypothesis-Driven Culture
“You only find out who is swimming naked when the tide goes out.” — Warren Buffett
Startups need to be resilient if they want to withstand high-frequency shocks and to be able to bounce back from near-death experiences. Unfortunately, there isn’t a strong consensus or broadly accepted framework to differentiate between which startups will be successful and those that will not.
Many VCs argue that great markets can pull product out of the startup and into the hands of customers — and that ultimately it is the market, not the team, that creates success. While we acknowledge this thesis, we feel that it can be distilled into an even more tangible form.
As operators, we have seen first hand how great founders have become successful; they were able to look inside their companies and develop processes, teams, and cultures that ultimately enabled them to manage high growth and win great markets. In other words, we believe that resilience is built from within and that this is what drives success.
Building resilient organizations
After studying dozens of technology companies, we’ve found that governance quality is closely related to resilience and that board meetings are a great place to establish the foundation for that sound governance. We can look beyond the boring legal responsibilities of a board, and instead think of it as a mechanism to create a positive feedback loop in a founder’s experimentation process.
To get the most value out of board meetings, we see an opportunity for founders to optimize them in the same way they optimize other functions within their business. Here are some principles that can help do just that.
Board meeting principles
1. Speak about what is top of mind for you
Do not sell when presenting to your board. They need to hear how it really is not how you wish it to be. Instead of selling, try to use your board meeting as a time to step outside of your role and look at the company dispassionately.
2. Engage with your board, don’t simply report to it
Board members are people that you can’t necessarily hire but can add tremendous value outside of the day-to-day. Map out what their value is and engage them; don’t just go through your deck flipping slides. Send the board package at least 48 hours in advance of the board meeting and consider doing 1:1s ahead of time to create alignment or ask for help as needed.
3. Address bad news upfront
Addressing bad news upfront is a great way to build trust. Everyone around the table understands that misses and key people leaving the company are inevitable parts of the journey to eternal glory — how you communicate and manage tough situations is what differentiates resilient organizations from those that falter.
4. Create continuity in your reporting
It is incredibly powerful to set a quarterly reporting cadence across your team with defined, measurable results for each function (sales, marketing, engineering, product, etc.); create as much consistency over time as possible. As you think about preparing your next board, try to evaluate how easy it is to measure the difference between the current quarter’s results against targets set at the previous meeting ( tables are useful for this). Demonstrate what the quarterly results look like in the context of your full-year forecast to provide perspective (a waterfall or bridge chart is great for this).
5. Use empirically observed behaviors from users to support your hypothesis
Just like the end of a rainbow, formulaically derived LTV is an illusion you can never catch. Deriving conclusions from formulas can be dangerous and misleading. Relying on observed cohort data (for employees, sales rep, customers, users, etc.) is simply a much better input for making decisions. Try to use empirical data as much as possible to support your hypothesis. For example, “We should move upstream to larger enterprise customers” — can you demonstrate that you have product-market fit in that segment? How do/will you know if it is working? What does success looks like?
6. Write down the definitions of metrics that matter
This one sounds simple, but having definitions for all the metrics presented to the board (or any stakeholder) as an appendix will put you in a position of power because it makes them tangible — it removes the anxiety of not knowing what the meaning is of the values presented. Perhaps more importantly, a glossary also helps track how you’re thinking about the business evolving, given that the metrics definitions themselves will change over time.
7. Invite your execs and have them present to the board
As one of our CEO coaches put it nicely: “You should only do what only you can do — and empower your team to do the rest”. Inviting your execs to present to the board is a great way to empower them and create accountability for their measurable quarterly targets.
8. Ask “why” until you get to the root cause
The modern startup paradigm has been developed around running experiments, measuring results and iterating fast. While this mindset is generally useful, it can sometimes obfuscate the root cause of a deeper problem. When quota attainment or conversion rates seem to low, you can refine metrics and improve processes, or just ask why smart people are having trouble selling your product. The board is a great place to explore these more awkward questions and get valuable feedback.
9. Bring solutions to your boards, not problems
It is one thing to identify problems, and yet another to find solutions. Even if you only have time to sketch raw ideas on how to solve a problem, they are worth bringing up to your board. Presenting a set of solutions creates confidence and trust; this will lead to more useful input. This will also let you ratify decisions, instead of spending additional time discussing them.
10. Always have a path to cash-flow positive
Knowing when to step on the gas (offensive) is generally more intuitive than knowing when to pull the emergency brakes (defensive) because of the emotional commitments you have made to everyone (employees, investors, etc.). Admitting that we are wrong is just an extremely hard thing to do. Having a plan in your back pocket, that gets you to breakeven, is an important step. Simply going through the exercise will create a level of clarity that actually reduces the odds of having to fall back on that plan.
Converting data into knowledge
The board also provides a great opportunity for founders to assess where they are in their analytics journey. Specifically, as you prepare for your board, try to probe into how easy it is to get relevant data from all functions. The illustration below captures the high-level steps in your journey to convert data into knowledge and provides a helpful mental model.
1. Descriptive analytics (typically from Seed to Series B)
Can teams clearly see what is going on in real time? Do they squander in spreadsheets with no clear ground truths? Exactly how many accounts were created, renewed, canceled last week? How many people viewed your website, took action, etc. Where were these people from? This is the stage where you stress test how readily fresh data is available.
2. Diagnostic analytics (typically Series B to Series D)
Once you have built data pipes and can “see what is happening” the second level of abstraction is “defining what matters”. What does normal business fluctuation look like? Why do only 1% of the 1,000 leads convert? What is causing sales to close? This is the stage where you can start shortening your experimentation cycle from quarters to months/weeks.
3. Predictive analytics (typically Series D to pre-IPO)
If we do X than what’s the expected Y? What is the expected selling price of product X? How do I prioritize S&M investments to maximize returns? Which market should I enter next? This level of maturity requires both a critical amount of empirical data as well as data science capabilities to assist in the decision making process. Interestingly, we are seeing more companies develop those capabilities earlier in their life cycle.
Using empirical data to calibrate
An important function of the board is to help folks understand the extent to which the company has achieved product-market fit and how capital efficient it is. We have found that five fairly universal questions capture these two concepts well and recommend that you assess whether or not your board reporting sheds light on those questions.
1. Acquisition: What does your customer acquisition funnel look like?
This will vary across business model (SaaS, marketplace, etc.) and types of funnels (MQL funnel, SQL, CSQL, PQL, etc.). For instance, for businesses that grow predominantly via outbound sales (SQL funnel), it is useful to map out each rep and measure their new bookings against their quarterly quotas to understand how the sales machine is performing. For MQL funnels, understanding where leads are originating, determining the cost by channel and charting conversion rates (over time), is useful. Try to take a step back when you think about your funnel and make sense of how you can communicate its performance.
2. Engagement: Do your users deeply engage with your products?
This will be unique to each business. The idea is that pricing doesn’t necessarily correlate perfectly to value. Therefore finding your north star engagement metric (eg. MAU, DAU, # of messages sent, etc.), that closely tracks value delivered, can be helpful to measure the results of experiments. Once you find this north star, then identify what thresholds define great engagement. For instance, you might want to have X% of MAU active for more than 7 days in a month, or have those users take Y number of actions in the first week after they signup and so on.
3. Retention: Do customers spend more over time on your product?
This is perhaps the most important thing to understand for any startup. What you want to do here is to show customer cohorts, and track their spend over time. The key is to understand how much a dollar spent by a given cohort is worth as time goes by — then find ways to increase the value of that initial spend. The more we look at startups, the more retention tends to be the best indicator of product-market fit and scalability, regardless of the business model.
4. Payback: What is your CAC payback (using gross margin dollars)?
The best way to compute your CAC Payback is to look at empirically observed revenue LTV cohorts and use that as a baseline for your CAC Payback model. Using empirically observed LTV, then analyze how long it takes to recoup your CAC investment. Avoid formulaic derivations, they are misguiding.
5. Value creation: How much value do you generate with each dollar you consume?
To create value, startups need to grow fast. To grow fast, startups need time to figure things out. It is thus somewhat ironic that startups need to balance both growth and runway because those two things are inversely related. To understand the value you are creating relative to the cash you burn, it is helpful to measure 3 things: (i) Your revenue growth rate (drives valuation multiple); (ii) The sum of your growth rate and free-cash-flow margin (connects growth and burn); (iii) The amount of time you have until you run out of cash under 3 scenarios (1) current plan with growth; (2) no growth; (3) no revenues.
Other great resources to help you get more value out of your board meetings
1. Preparing a Board Deck — Sequoia
2. How to manage your board, even when you miss a quarter — Sequoia
3. High Growth Handbook, Chapter 2: Managing Your Board — Elad Gil
