Entrepreneurs, especially experienced ones, often have a fairly jaundiced view of venture board members. A recent survey showed that venture board members think that entrepreneurs value them as a mentor, while the same survey showed entrepreneurs actually valued them for their follow on money.
source: http://fis.dowjones.com/VS/2009boards.html – (slide 24).
I have been on thirty plus boards and while I cannot comment on what the CEO’s think about me, I have developed my own way of simplifying how I should do the job of being a board member. You have to start by recognizing that it is a job. Like all jobs it has an objective, which is guiding the company to make money for the shareholders. It starts with a job interview – with the CEO – where the CEO invariably asks one really good question, followed in my view, by one fairly misleading one.
The good question is, what do you bring to the table apart from money, the misleading one, almost invariably in the next sentence, is tell me about the contacts you bring? It is misleading, because the second question often becomes the answer to the first question, in other words, the main thing the investor should bring, apart from money is contacts. Contacts can be hugely valuable to a start up – and clearly from the survey above both management and venture investors value them highly -but they are most emphatically not the most important thing that investor brings to the table, and not what the CEO should be focusing on at the interview stage.
When the CEO is interviewing a potential venture investor board member he or she is about to make the oddest hiring decision they ever make. They are hiring someone to be part of the committee that is their boss (important distinction, the board member is not the employer, the board is), they are hiring someone who, in taking the job, will have both fiduciary obligations, and significant corporate authority, and they are hiring someone who will have a significant economic interest in the company, that is in part aligned with theirs and in part not. Finally they are hiring someone they probably can never fire. How that person perceives the job, and how they will do that job, is what the CEO needs to understand.
At the broadest level the objective is clear, to help guide the company to make money. At the most mechanical level, the processes are clear and widely understood around compensation committees, board authority etc. It is in that middle section between grand strategy and pure mechanics that the discretion comes in and where a good or a bad board member can make the difference.
I think of my job as a board member is simply to guide the company so as to avoid bad things from happening, or fix them if they are. The management team can then make all the good stuff happen. Three bad things can happen to a start up. First the strategy or the core business can simply be wrong. Second the team, led by the CEO, can be incapable of executing the strategy. Last, the company can run out of money. If, the board can avoid these three outcomes, the management team will make the investors money, most of the time. If the board member does not focus on these three issues, all the contacts in the world will not save the investment.
As the entrepreneur, if you believe this, you need to figure out are you and the potential board member aligned around the business and the strategy. If the exact business is still emerging, do you think that the board member will be additive or subtractive to the process of figuring it out? Additive is great, subtractive but passive is survivable, subtractive but active is fatal. Do you want this person judging your strategy? Even more starkly, do you want this person judging you? Hiring, compensating, and if necessary firing the CEO is the job of the board. Do you trust the potential board member’s judgement enough to give him or her, a vote in that decision. You do not simply want a yes man who will “vote for you”. Sometimes replacing the founder can be a great decision for the company, and if you as the founder, are a large shareholder, being replaced can be great for you. However sometimes it can be a disaster, replacing commitment and raw talent with “professional management” that turns out to be an empty suit. We have a bias to backing strong founders, not out of charity, but because we have found that we make the most money, when the founding team goes all the way. However we have also had to make changes at times and that can be hard. Think hard, as the entrepreneur, about the person who is joining your board, would you give him or her, that authority over the start up that is your baby.
Finally will that investor board member be supportive of the company with money when times are tough. If your existing investors are not supportive in tough times, attracting outside money is almost impossible. Assessing that conviction up front is hard. Circumstances change and sometimes the right investor decision is to pull the plug. However there are also times when the plug gets pulled because the firm is out of money, or the GP in question no longer has the juice to get a deal through, or – and in my view a very common outcome – the GP did not have real deep conviction in the deal but chased it because it was hot only to abandon it when it seems cold.
If you can get a board member who understands and can contribute to your strategy, and whose opinion you will listen to, even when it is critical of you, and who will be there with the cold hard cash when times are tough, grab him or her and go for it.
