OPINION: Startup founders who take a 'do it yourself' approach are dicing with failure. As an angel investor and board member for many startups, I've found a carefully built board of directors is key to success.
A formal board of directors is not suited to very early stage companies. Pre-proof of concept ventures are best served by a group of supportive, experienced advisors, and there is little benefit in forming a formal board. But once proof-of-concept validation has started - and certainly once the first external funds are attracted - a board of directors, built strategically, will add significant value to your venture.
A board with about five members is appropriate for an early stage company. It lets the founder retain flexibility while being able to tap into the experience and connections of a few industry players. After the first round of financing, a board will ideal have a mix of founders, investors and independent members. .
Entrepreneurs need to invest a lot of time in building the board. If you appoint one or more independent directors, you should aim to appoint people who are genuinely independent and can add something substantial to the company.
Shoot for the stars, seek experience and find people with contacts to support you to achieve your strategic goals. Don't make the mistake of turning to friends and family for early board positions - unless they are the CEO of Facebook or Xero.
In building a board, it is useful to identify some of the key operational challenges your company is facing over the first few years of operation, then think of people who can help overcome those. Identify the weaknesses in the management team and board, then identify someone who has strengths in those areas. If, for example, you are planning to raise capital, try and identify someone whose contacts and experience will help you achieve those goals.
Build your board strategically, aligning it with your vision - and set clear expectations. Investor directors will be focused on making money and maximising the exit value for shareholders. If the director represents an angel group, try to get an angel group member who can really add strategic value and relevant industry experience. This may not be the angel who led the due diligence for the group.
You need to have individuals who have the time to meet monthly and dedicate about another four hours per month for ad hoc advice, reviewing materials and contracts, attendance at conference calls and working their networks.
Make sure you have a strong personal relationship with the directors and are comfortable asking for their help.
Incentivise the non-executive directors with stock options to encourage them to add true value. You shouldn't spend precious cash or hard-fought investment capital on director’s fees. It should be preserved for activities that grow your business.
Your monthly board meeting should consider two strategic topics only. This will maximise the value directors can add and enable them to share perspectives and experience. The time an entrepreneur spends preparing the information for the board to consider, and the time spent in the meeting engaged in discussion, should be a few of the most valuable hours each month. If they aren’t, then either the board composition is not right or members' skills are not being properly used.
Tips for building a startup board
1. Don’t appoint friends and relations to the board.
2. Don’t use up board seats with people already inside the company, instead invite them as observers.
3. Appoint independent outside directors who can help with key strategic goals and remunerate them to make the venture a key focus for them.
4. Appoint experienced independent directors early.
5. Get people who have 'been there, done that' in building growth companies.
6. Seek industry experience and relevant networks in your target markets.
Andrew Duff is co-founder and chair of Sparkbox Venture Group. www.sparkboxventures.com
What is the biggest challenge your small business is facing in 2014?Related story: (See story)