VC Minute – quick advice to help startup founders fundraise better
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One of the things that almost nobody thinks about in the early stages is how to build a great board of directors.
When most companies get started, the board is nothing but founders. As they raise money from VCs, they add VCs to the board. Frequently, they do add independent board seats, but those seats usually go unfilled. And I think that’s just because most first time CEOs don’t know how to make use of a board properly. And they might be a little bit afraid of their board. They might sort of think of their board as a tax. A lot of founders I talk to, I start talking about their board and they kind of give me an eye roll or their eyes glaze over and like, Oh, you know, that’s a necessary evil. Why do I want to do that?
And the reality of boards is that a great board can make a tremendous positive impact on a company. A weak board is just sort of a waste of everybody’s time. Yeah, that is something where you might roll your eyes as the CEO. it’s an obligation to spend time with them.
But a bad board can kill a company. And I have seen bad boards kill otherwise perfectly good companies many times over. And that’s if you have directors that are not engaged and not aligned and not well tended to.
But let’s focus on the positive side. So, a great board can be a real strategic asset for a startup. A great board gives you as a founder an opportunity to have new voices around the table, that are really experienced senior voices, give you strategic advice on your business.
And the key to the whole thing is to have independent board seats and then fill them with great independent directors. Independent directors means they’re not on the management team and they’re not an investor. You’ll give them some options as compensation, but they’re not sitting on your board as a representative of their firm or their fund, or their limited partners and capital. So they don’t have that dual interest. They’re literally there to serve the business.
What I have when it comes to to board building is something that I call the Rule of ones.
So the rule of ones is first of all build independent directors into your board from day one. Then only have one member of the founding team on a board. And then for every one investor you add to the board, add one independent. That way you’re always keeping your board in balance.
When it’s a three person board, it’s you as the CEO, it’s one investor and it’s one independent. When you add another VC, you add another independent. When you add another VC, you add another independent.
And look, over time, if you take it out to an extreme, when you’re a public company, you probably have 9, 10, 11 board members, and they’re probably all independents or largely independent. So start building that muscle early; it’ll pay off tremendously.
Recruiting board members takes time, but it gives you the opportunity to reach high to meet some tremendous people that know way more about business than you do. And can open doors for you, can give you great strategic advice, can help you think through product market fit or distribution. It’s just a great opportunity that most CEOs let go.
The time to do it is when you’re doing your first round. If you haven’t already done it, I actually think the best time to add an independent is before you’ve raised money.
When I was building my first board at Return Path, the company I started in 1999, and I was looking to add my first independent director, at that point I felt like it was really important for me to have a CEO on the board because I had never been a CEO before. I have a different philosophy about that today.; I have very different independents on my board today. But at the time, that’s what I was very focused on.
I made a list of everyone who was a CEO of companies in my industry or related to my industry. So Return Path’s business was in email marketing. I made a list of a bunch of prominent CEOs, many of them CEOs of large public companies in the direct marketing field, catalog marketing as well as some of the ones in sort of other nascent, but slightly bigger than mine email companies.
I was a little bit timid about approaching them at first thinking , well, this person would never meet with me in a million years. I run a 1 million company, they run a billion dollar public company. And the reality is when you go to them, if you go to them the right way, And you introduce yourself and you say, I am trying to build a great board and I’m looking for an experienced CEO to be an independent director for me, and I’m wondering if you have half an hour to talk to me to see if you might be interested, or if you might know other people who would be interested. Your hit rate is going to be pretty high with that. And that’s exactly what I did when I was building the Return Path board. I met with some people I never in a million years would have gotten a meeting with, and it ended up helping me populate my board as well.
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