February 2, 2020

The Role of the Board

How to build your board — or the art of carefully choosing your investors

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The Role of the Board

Many of the startup founders we speak to are uncertain about the value a board might bring them. Understandably so, considering the lack of broad consensus on matters such as: when should you first set up a board and who should be part of it?

Some view the board simply as another entity that requires updates and reporting—a necessary evil associated with the acquisition of external capital. At byFounders, however, we’re advocates of curating a healthy and active board early on. The potential value of bringing people together whose skills and competencies complement each other is immense.

To uncover some of the stories underpinning our beliefs, I spoke to three members of our byFounders Collective, all with significant experience on the topic: Jacob Aqraou, Camilla Ley Valentin, and Peter Holten Mühlmann. Jacob is a veteran chair of the Board in public and private companies, including Telenor, TeamViewer, and Endomondo. Camilla is the co-founder and CCO of Queue-It, and Peter is the co-founder and CEO of Trustpilot.

The overall message from these experts is that it’s your responsibility as a founder to build the board that can best help you grow your company. Nobody’s necessarily going to tell you to go set up a board. You have to take the initiative and drive it forward. To unlock your board's value, you, moreover, need to be thoughtful about its composition. You need to take into account what each member brings to the table. How does that compliment you and your founding team as well as the other board members?

Your Board is Not Your Co-pilot...

A point that repeatedly resurfaced in my conversations with these founders and board members was the degree of latitude a board lends to the founder’s perspective. Our three experts agreed that among the most valuable things a board could add are perspectives and support beyond day-to-day operations.

According to Trustpilot-founder and CEO Peter Mühlmann:

"The board is crucial in helping founders see the big picture and change course if necessary. They force you to peek out from under your massive pile of day-to-day work and think about the big picture and where you’re headed."

In contrast to the boards of public companies, where a board tends to focus a lot on mitigating risk, the boards of early-stage companies tend to be more proactive in their approach. According to Jacob Aqraou, “the boards of startups should be focused on co-developing strategy, leverage their networks, and ensuring focus on the right issues.”

However, this proactivity mustn’t transgress into controlling the founder or otherwise limiting her autonomy. The founder is the pilot, and the board members should not attempt to act as co-pilots. They should stay out of the cockpit entirely.

As Eric Lagier from byFounders highlighted during his workshop at Slush Founders Day last year, the board of a startup should never be in a position to demand, only advise:

Hence, in setting up the board for your early-stage company, founders should look for board members who understand their role and responsibility and the inherent limitations of their mandate.

…It’s Your Air Traffic Control

At critical injunctions during any flight, the pilot needs to communicate with an outside entity that provides perspective beyond what onboard tools can give them: the air control tower. From their safe vantage point, the air traffic control informs the pilot about planned as well as unforeseen activities in the air space, conveying to the pilot any crucial or advantageous adjustments she should make to the course of her plane.

"A good board functions like air traffic control while the management team is in the cockpit. It should drive the overall mission and vision of the company together with management and make sure you’re on the right track." - Peter Mühlmann says.

“Having a board is usually not explicitly demanded at the early stages of a startup’s lifetime. But having one, if only in an informal “advisory” capacity, can bring significant value to the founders’ day-to-day decision making,” says Eric Lagier, Managing Partner at byFounders.

What the Board Can Bring

For Camilla Ley Valentin, individual board members can even act as valuable advisors for operational decisions and mentorship “on-the-fly.” However, “as a group, the Board should stay focused on strategic initiatives, funding and leadership advice and not get caught up in operations. More specifically, topics that can benefit from board input and support include business modeling, new market considerations, C-level organizational adjustment, as well as crisis management when required.”

Jacob Aqraou adds that “a board has proximity to the company coupled with an external role and outlook. This makes for an advantageous position when it comes to finding the right talent, identifying and helping to implement the right organizational setup, as well as providing a critical look at the firm’s makeup. The latter provides critical insight for companies that inevitably face scrutiny from the public, future investors, and employees alike. Being acutely aware of one’s strengths and weaknesses allows for tackling issues head-on, whether pertaining to company culture, diversity or lack thereof, communication of values, or otherwise,” he stresses.

According to Eric, “a good board functions as a sounding board for founders. They can provide insights into best practice as well as reality checks on the founder’s ideas and plans.”

Assembling Your Board

Our experts agree that a board should embody the following characteristics: they complement the leadership team in terms of background and skillset; they’re sufficiently diverse and reflect the organization they’re set to steer. Lastly, they possess relevant operational experience.

1. Complementary competences

For Camilla, having board members with expertise in areas your company does not yet have in-house competencies is an adequate substitute for trading up your leadership before you can fully afford to do so.

"It’s a huge benefit to have board members who add value beyond the company’s existing capabilities. Try to identify skills that complement those that you already have in your company. Consider adding board profiles that reflect your target customers. For instance, if your market consists of large enterprises within a specific industry, it can be valuable to include a Board member from such an organization.” - says Camilla.

Peter emphasizes the importance of industry knowledge as essential for opening doors and providing strategic input: “It’s helpful to have someone with thorough knowledge of your industry and a broad network. Someone with a proven track record when it comes to building and advising small companies is also precious.”

Jacob agrees, adding that “the ideal board of an early-stage company consists of a small group of individuals who collectively possess deep industry knowledge, strong technical skills, and great marketing acumen. Unless covered by any of these three, someone with strong general management skills is also valuable to have as the Chair of the Board.”

2. Diversity

While diversity in organizations and leadership groups is frequently discussed in public, this is less the case regarding boards of directors. However, as Camilla points out, “talent will investigate all layers of leadership, including the board, when deciding whether to take a job or not.

The diversity of the board may thus impact their decisions, for better or worse. Aim for a board composition that reflects the organization to let employees and potential employees mirror themselves. You can’t go wrong in establishing a diverse board, even if it may take extra effort to find underrepresented candidates.”

Jacob, who is also an active angel investor, thinks that having the founding team's values aligned with his own is crucial. Diversity comes into play here, “If companies score low on diversity early on, they must recognize this as an issue and instate a plan to improve. This diversity should, in turn, be reflected in the composition of the board as well. I often see teams that fully consist of men with a similar educational background and little industry experience."

"In an ideal world, you have diversity in industry- functional background and gender. A team of generalists with no industry experience rarely solves significant customer issues,” he states.

The issue of diversity is not merely an “optics” concern, “look to add members with a diverse range of experiences and backgrounds that can contribute to key areas of your company and limit groupthink,” Peter emphasizes.

In other words:

3. Operational experience — where VCs often struggle to add value

All parties need to remember that having an ownership stake doesn’t necessarily translate into adding value to a board. To Jacob Aqraou, having someone who’s been through the founder journey on your board is invaluable. Along the lines of Vinod Khosla, who famously stated that “most VCs don't add value [because they lack startup experience],” Jacob argues that:

"Most VCs are not great board members. They struggle to add value because they lack operational experience, as they usually have asset management backgrounds. This is not bad; it’s just not what the founders need early on.

Founders should thus opt for a balance between operators and investors on their board, Jacob argues. “As people tend to talk about what they know and feel comfortable with, a group of investors will inevitably steer the conversation to resemble that of an investment committee. While these conversations can sometimes be useful when you are fundraising or exiting, they won’t bring your company to the next level. That requires shifting the focus onto specific initiatives that lift the founder and the company.”

An essential advantage of having people with substantial operational experience on your board is the network they bring. Leveraging their network, Board members can support everything from hiring to landing new clients. “An experienced board member who’s invested in your success can also help introduce you to people in their network with the types of skills you’re looking for. This is invaluable for young entrepreneurs considering how challenging and time consuming it can be to find the right team to build your company,” Peter Mühlmann muses.

To conclude, boards can be of immense value to early-stage startup founders. To maintain the necessary perspective, they should contribute as the advisory capacity they are without getting too involved or entangled in everyday matters.

“Hiring up” by getting otherwise out-of-your-league execs to sit on your board is an excellent strategic move for early-stage founders.

Board members have to be carefully selected to deliver the potential value. Startup founders would be well advised to assemble a board that collectively possesses the relevant operational and diverse experience, different backgrounds and perspectives, as well as complementary competencies.

With that in mind, you should think twice about which investor you get onboard. Given they will most likely end up on your board, make an effort to find someone that adds value and complements the team. At byFounders, we are very focused on this, and if the founder wants it, we may give our board seat to a member of our Collective. Consisting of 65 serial entrepreneurs who have all invested in our fund, this group embodies all of the characteristics outlined above, with killer networks and experience.

Lastly, we advise all founders — be they in our portfolio or pitching to us for the first time — do not sugarcoat the truth. Honesty is key to any successful relationship, business, or private — between a startup founder and her board members.

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