unsplash.com (GWe0dlVD9e0)

Building a Great Tech Startup Board

Who to Get, Who to Avoid, How to Screen Them, and the Benefits of Getting it Right

This article is part of a series I’m posting based on concepts that I share regularly with the businesses I advise.

There’s no need, as a tech startup CEO, to fear having a Board of Directors. In fact, a board can, and should be, a huge asset, provided (a) you get the right members and (b) you manage it well. This article covers the first part of that.

I have been fortunate as a venture-backed entrepreneur to have worked with some great board members, both VCs (from Trinity Ventures, Canaan Partners, JH Whitney, UBS Capital, and others), and non-VCs (including executives from Western Union and Bloomberg). I’ve also had informal advisory boards; led not-for-profit boards; been a part of quasi-board groups, including Vistage and YPO; and advised and mentored numerous CEOs on working with their boards.

From that, I have observed a wide variety of board members, with different backgrounds and styles, some productive and some not. Based on these direct experiences (combined with reviewing books, talks, and posts by others on the topic over the years) I have categorized, below:

  1. Who to get on your board
  2. The benefits a strong board can bring to your business
  3. Who to avoid
  4. How to screen for the right ones

I. Who to Get

While some CEOs look to minimize their board’s involvement and perceived meddling, that really misses the point of what a good board can provide to your business.

First, of course, a board must fulfill its necessary governance role (which I won’t detail here, but it is covered at length for instance in Brad Feld’s book Startup Boards). Beyond that though, a board should be a substantial strategic asset for a CEO in thinking through challenging problems and driving the business.

To that end, look for members who have most or all of the following attributes:

  • Deep experience with tech startups: so they understand the typical twists and turns, don’t get too worked up about normal things, and can help you “see around corners” for what’s coming next.
  • Sit on other boards and/or run companies that have some similarities to yours: so they can provide insights on trends they are seeing elsewhere.
  • Complementary to one another: bringing different skills, points of view, and observations to the discussions.
  • Willing and able to be involved and take their role seriously: by showing up to the meetings, doing the pre-reading, engaging and focusing on the business, and helping out when called upon.
  • Understand their role: that is, to provide insights and advice, challenge management’s strategies and approaches, open your eyes to potential blind spots, and assess management’s performance, but not to run the company.
  • Align with your goals and interests for the business: including key financing matters like openness to raising capital and exit horizons (a mismatch on something that fundamental will likely cause later conflicts).
  • Are enthusiastic about the company: proud to be on your board, to associate their own brand with yours, and to “talk you up” to their network.

Good board members, while different in their contribution content, experiences, and points of view, all share these common attributes of understanding how, when, and to what extent to participate.

II. How Boards Can Help You

The contribution of a strong board can be substantial, and, as I said above, should go well beyond fulfilling the baseline requirements of their governance tasks.

Ok, yes, the elephant in the room is that they are your boss, they review your compensation, and they can even fire you. Of course, that shouldn’t happen if you do a decent job — so, in the inspiring words of the World Series champion Chicago Cubs’ manager Joe Maddon: “Try not to suck!”

Aside from that issue (or perhaps in addition to it, since you might as well get the most out of them along the way), if you keep a good board well-informed, and involved at a strategic level, they can provide a wide range of benefits.

Networking and Introductions

One of the most basic, highly leveraged contributions that boards member can make is simply opening their contact bases to you. In addition to extending your network, if they are well connected and well known in the right circles, they can effectively confer their stamp of approval onto you and your endeavor.

For example, board introductions have helped me land:

  • Management team members, including a CTO out of Bloomberg, and an experienced CFO
  • An audience with a prominent investment banker, who in turn got me in front of the CEO of HealthSouth, with a single on-the-spot phone call, leading to a multimillion-dollar strategic partnership
  • Relationships with key suppliers that wouldn’t typically have worked with a business of our size, including an electronics supplier that extended my board member’s volume discount schedule to us
  • Financing sources, for both debt and follow-on equity rounds
  • Relationships with other CEOs to exchange ideas and experiences

Synthesis and Pattern Recognition

While every startup is unique in its specifics, there are typical repeating patterns. A commonly used phrase is that experienced board members can “see around corners” of what’s coming next. It’s not because they’re brilliant. It’s just because they’ve seen this movie before and already know how it ends.

One of the best and most experienced board members I had was remarkably quiet at meetings, to the point that, early on, I sometimes thought he wasn’t paying attention to the discussion. But then, well into the conversation, while ideas, analysis, and even arguments were flying back and forth, he would finally speak up, synthesizing all the information, and summarizing the bigger picture issue that we were all missing — for instance, he might say that it looked to him like we had a people issue, not a process issue; or in another case that we were just biting off more than we could chew at our size. That insight would then help us focus on what to do next. As the old game show put it, he seemed able to “name that tune in one note.”

From a business content standpoint, he had simply been through enough presentations of enough businesses in enough settings for enough years to be able to spot patterns. From a style standpoint, he knew that his role was not to micromanage the details, and that the impact of his wisdom was amplified by how infrequently and succinctly he shared it.

Early Indicator of Trends

If your board members sit on other boards in related non-competitive businesses, they can share insights on current trends, well before they are being reported generally. This can range from leading economic indicators (e.g., a tightening on spending in some sector) to emerging tools (e.g., other companies’ liking or disliking a new piece of business software they tested — shortcutting your evaluation process).

VC board members can add a multiplier effect to this benefit, based on their discussions with other partners in their fund who are each on multiple boards.

Providing Reassurance or Sounding the Alarm

Related to synthesis and pattern recognition, experienced board members also bring perspective. They’ve lived through the ups and downs before and can help differentiate the speed bumps from the serious obstacles that require detours.

Among the numerous reassurances I’ve gotten that we were on the right path despite some bumps in the road were simple things like getting feedback that a capital raise was going fine despite how long it felt like it was taking. Or that it was normal to need to bring in a more seasoned VP of Sales to keep up with our rapid growth pace, and how to keep an early player with a lot of knowledge on board even though that particular role wasn’t right for him.

On the other hand, sounding an alarm when things that feel normal internally are actually, in the eyes of experienced and one-step-removed board members, serious concerns, can be equally if not more helpful.

As Andreessen Horowitz partner Lars Dalgaard writes:

“… it’s easy to think of your board as a necessary bureaucratic evil. In reality, your board is your last line of defense between you and self-delusion, bankruptcy, and perhaps even jail.”

For instance, at one memorable board meeting when our sales were behind plan, we (the management team) were reacting as though it were a short term miss that we had to diagnose and take internal corrective action to address, and we presented our data and game plan. One of our “seasoned” board members stood up, walked over to a whiteboard and, without explaining what he was doing, started drawing a graph of GDP history. “See this,” he said pointing. “That’s the last recession.” He wrote the year below it. “Now the problem is,” he continued, looking at me and my team, “you were all still in school when that happened.”

He went on to describe that our sales miss was the tip of the iceberg of what was going to happen next as we were entering a recession, the devastation the last one had caused tech startups, and that the ones who survived it hunkered down early and lived to fight another day. We did just that, with their help, and it is a big part of how we emerged as the only player standing in our category when the dust settled.

That’s what high value, well timed, strategic help looks like.

III. Who to Avoid

Some board members are simply not helpful and can detract more than they contribute. I have found that the problems fall broadly into two general categories:

  1. Experience/knowledge problems
  2. Style/process problems

Some examples, which I’ve experienced directly or indirectly, follow. In the final section, I offer some tips on how to screen potential board members in advance.

Style and Process Challenges

These are people who have the experience, knowledge, and potential to be valuable, but they just don’t play the role of a board member properly, either doing too little, or too much, or just in the wrong way to be productive. For example:

The No-Shows

While the worst board member is one who is both bad and active, that doesn’t mean you should seek inactive board members. Assuming you screen out the various challenging types below, inactive really is a negative for a couple of reasons. First, you miss the many potential benefits of an engaged and strategically helpful board member. Second, when it comes time to make a board-level decision for which you need their approval, it can be a hassle to track them down and bring them up to speed on the rationale.

While the No-Shows may come in with good intentions, if they can’t commit to attending the vast majority of the meetings, doing the pre-reading, and being engaged while there, it’s best not to have them on the board.

My Way or the Highway

Some people are simply overconfident that their solutions are always right and they can hijack a meeting or a decision process stubbornly. The worst offenders that I’ve seen (fortunately not on my own board) are people who have a narrow frame of reference, made a lot of money from their one and only unrelated business endeavor, and don’t seem to realize that not all businesses are the same.

The Wannabe Execs

Sometimes board members seem to want to be executives instead of directors. Rather than staying up at the strategic level, they want to dive into every operating detail and generate long lists of action items, but without the benefit of the day-to-day knowledge. If not managed well, this can tend to consume meeting time on less important matters and generate excessive follow-up work. For one director briefly on our board, we internally spoke of needing a “VP of Managing Joe” (name changed).

If the Wannabe Exec is a functional expert in, say, technology or sales, that can tend to drag a meeting into too much discussion of those areas. One such director I saw came up through the consumer marketing ranks before becoming a VC. Consumer marketing was in his blood. He went from portfolio company to portfolio company turning the conversation to consumer marketing tactics (even when it wasn’t a B2C company). As the saying goes, when the only tool you have is a hammer, every problem is a nail!

Experience and Knowledge Challenges

Some people, even if they have the right style, may simply lack the types of experience and knowledge needed to be helpful to your business. Inexperience is easy to spot from their resume, but what might be harder to identify is having the wrong experience.

They might, for instance, be accomplished businesspeople, but in some other industry with a very different set of keys for success. Closely examine whether their experience translates to your business. If not, their formula for what works and what doesn’t may not apply. If they can’t see the bigger picture, their past success can cause them to have excessive confidence in pushing their formula, and for less experienced, less confident listeners to believe it.

I’ve found this is especially the case if they made a lot of money (and, heaven forbid, if they have their own plane!). As the song in Fiddler on the Roof goes, “…and it wouldn’t make one bit of difference if I answer right or wrong…cause if you’re rich they think you really know.”

Here are some examples I’ve seen of successful people whose lessons learned from their past success may not be helpful to your tech startup:

Different Business Models (e.g., Real Estate People)

I’ve recently seen several businesses that got early-stage funding from friends and family members who made their money in real estate development and wound up on their boards. In each case, this created challenges, with the CEO later frustrated in trying to get them to agree to participate in or even allow subsequent funding rounds.

At first this seemed like a strange coincidence until a VC connected the dots for me: you don’t milestone-fund a strip mall, first pouring the foundation and framing the building, and then raising Series B to complete it. So instead of celebrating the fact that a next round could be raised at a higher valuation to keep your company progressing (a sign of success for a tech startup that’s on the right track), it plays in the boardroom like a failure, as the need for more money would be in a strip mall that ran over budget. Ultimately, these boards are holding promising startups back from reaching their potential.

I happen to have noticed this with real estate lately, but any business that thrives on a completely different model could produce successful people who don’t necessarily translate into helpful tech startup board members.

Bootstrappers Who Built Lifestyle Businesses

I had several investors in one of my seed stage rounds who had bootstrapped local businesses to profitability, while retaining full ownership in the process. They grew slowly, but steadily, and held onto and ran the businesses, in some cases, for decades, generating healthy profits in their niche markets. This was a wonderful model for them.

Their resulting bias for us, though, was to get to profitability and grow organically from there, solely by reinvesting profits to minimize future dilution. Fortunately, none of them were on my board and none controlled key decisions, because a rapid growth tech company in a potentially competitive space often needs to move more quickly and invest “ahead of the curve” to build products and infrastructure, or risk getting bypassed quickly.

Functional Experts

Even someone who was a part of a successful business that closely matches your own could have a myopic view of what drove that success if they were deeply embedded in a single functional area and cannot step back and see the bigger picture within which they existed. I’ve seen technical people who think it all comes down to the product and “if you build it, they will buy,” and marketing people, like my Wannabe Exec above, who are completely focused on positioning and buzz.

Takeaway Points

I’m not suggesting that everyone you recruit for your board has to be a well-rounded generalist from your industry who can do it all. It can be helpful for someone to come from a functional background that’s important to your business, or an experience with a somewhat different business model.

The key is to find out whether they can recognize that they may have only seen one part of the elephant and can appreciate where their feedback fits as a result. Otherwise they can be an overly opinionated obstacle rather than a valuable contributor with a helpful perspective.

IV. How to Screen Them

Just like hiring a senior executive, a prospective board member should be well-vetted through a process involving interviewing and reference checking. Doing this, with the lens of what to look for and what to avoid discussed above, will screen out most potential issues.

Interviews

Ask questions about their experience, what contributions they might be able to make, how they have helped on other boards, etc. Ask about their expectations for how the board might function to see if it matches your own view. Have an open dialog about any expectations they have for growth pace, capital strategy, and exit horizons to make sure they align with yours. Have a heart-to-heart about their time availability and ability to make your board a priority. If you have an existing board, have them interview the prospective new member as well.

Reference Check

The best way to find out what someone might contribute and how they might behave on your board is to find out how they contribute and behave on other boards. Ask for a list of the CEOs whose boards they serve on or have served on recently and for permission to contact them — and then make the calls. If they aren’t on corporate boards, get the next closest things: non-profit boards, round table groups, committees, etc.

In addition to using these calls as an opportunity to ask questions to see if they would be a good fit, you can do two other valuable things. First, get any suggestions on how to work with them as a board member. It can take a while to learn the preferences and hot buttons of a board member and you’re talking to people who can give you the cheat sheet. Second, consider it a networking opportunity. The CEO role can be lonely and these might be peers worth staying in touch with.

Do the Same for Investor Board Seats, Really

You should follow the same interview and reference check process for a board seat that is part of a term sheet for an investment round too. In fact, it may be even more important since that board member could be structurally more challenging to replace than an independent who isn’t working out.

This might seem uncomfortable. When a mentor suggested that I do reference checks for my first venture round, I was at first hesitant to ask the VC for references, thinking it seemed like a bit of chutzpah while we were busy selling them on the company, jumping through hoops to get them in, and responding to their due diligence list.

When I finally did ask, the co-lead investor we wound up taking an investment from was delighted. Rather than chutzpah, it was received as showing maturity and confidence, and that I was taking the process of adding board members very seriously, which he appreciated, since he took his role of sitting on boards very seriously. He also was proud to share his references and for good reason — the CEOs of the boards he was on loved him. They also gave me some good tips for working with him. I have done this and suggested this to others for every round since then.

Similarly having an interview (or at least a heart-to-heart) with a prospective investor board member is time well spent, pre-closing, to ensure you’re well aligned. Brad Feld, quoted in Matt Blumberg’s book Startup CEO, even suggests having an open dialog pre-investment about the fund’s bias regarding keeping CEOs or considering them fungible — something that might be an important factor for how you feel about having them on your board as your boss.

If you have the luxury of comparing competing term sheets, the information you get from prospective board member interviews and reference checks can be the deciding factor for which investor(s) to choose. It is well worth a discount on valuation to get a better, more effective board.

Even if you have just a single offer, this still should be done. You will get valuable information for what’s ahead. You will look good in the process. And you just might uncover something troubling enough to make the round not seem worth it — better to know before than after.

Revisit the Heart-to-Heart Check Each Round

Finally, note that a board member’s level of commitment can change over time. The kickoff of each funding event can be a good time to revisit earlier discussions about their interest and availability to help for the next leg of the journey.

At FitLinxx, for instance, we had a great seed investor on the board with strong technical expertise who played a valuable role in advising us on product strategy during our early days. By Series B, with product and technology strategy issues well-covered by a diversified management team, his input was less critical and his interest decreased. He stayed on the board by default, most likely out of loyalty to me, but he had other priorities and showed up only infrequently, making it difficult to get his sign-off on things that needed board authorization. Both he and the company would have been better served if I had thought to have an open discussion and given him the opening to bow out. Eventually, we replaced him with a new independent board member who was better suited to the later stages of our growth, but we could have gotten there sooner and without the lull.

V. In Conclusion

It is a real effort to form an effective board and to manage it on an ongoing basis. Given the enormous impact a board can have on your business — for better or for worse — it’s worth doing the work to get it right. That all starts with getting high-value board members.