ACTIVIST VC BLOG
Board performance and best practices have been studied exhaustively, but mostly from a big company perspective. But are the same teachings valid also in a VC-funded startup?
The long and winding road
Let’s have a look at the roadmap of a typical VC-funded company:
- Sailing uncharted waters
– Business is based on new and often unproven technology
– Very little history and track record to rely on
- Having limited resources
– Small teams, little backup resources
– Limited funds, almost constant fundraising
- Targeting extreme growth
– From zero to exit in less than 10 years
– Exit should return over 10x to early investors
This is a perilous journey and most companies do not make it.
A statistical view of the sprint to the top by CB Insights
The reality is rather harsh. A survey of 1098 US seed-funded startups showed that
- 70% end up closing shop or become living zombies
- 29% reach an exit via M&A or IPO
- less than one percent become unicorns
According to another CB Insights study, the top three reasons for failure were:
- No (big enough) market need: 42%
- Run out of cash: 29%
- Wrong team: 23%
What’s the board got to do with it?
Most of the advice in board manuals are quite generic and fairly useful also for VC-funded companies. But there is a big difference in what to emphasize and where to focus – especially during the early stages when still in search of a highly scalable business model or when shifting into violently fast growth.
In our experience, there are three things of overriding importance for these projects bent on fast world domination:
- Recognizing and exploiting an exceptional market opportunity
Very few success stories are born as winners. The path to hypergrowth is typically an interactive and very market-driven process: a lot of trial and error in search of a large and highly scalable market opportunity and a winning strategy to exploit it. The strategy will evolve or it will be adapted or even changed dramatically during the growth phase. Agility and fast reactions are the big competitive advantages against the large but clumsy incumbent players. The board must have data and knowledge about the market AND the company. However, measuring history with old metrics is usually not the way to find and create something new. The board must be deeply interested in the everyday operations of the company and have the insight and courage to notice and act upon small signals and new phenomena changing the market.
- Supplementing the scarce resources
The world domination must be achieved with a small operative team that needs all possible support. The board must not be a bureaucratic hurdle, it should rather be a strategic reserve providing help and support – even in operative matters – to maximize performance and the likelihood of success.
- Juggling with limited cash reserves
VC-funded companies are bit different animals, they live from fundraising round to another, not fiscal quarter to fiscal quarter. They almost always incur deep losses and fight to create enough traction to raise the next funding round and live on. Because of this, the most important financial indicators differ from traditional: it is more about showing evidence of a great market opportunity ahead and ability to exploit it with a reasonable amount of additional funding. It is much less about balance sheet optimization and quarterly P&L.
Building and managing the board
Here are some key questions we use to measure the boards which is an important part our Company Canvas model.
- General: Is the board size right (small enough)? Are there any members who are disorganized or unprepared (i.e. useless)? Are there missing skills or networks? Does the board fill any potential competence gaps the CEO might have? Does the board need reinforcements or changes because of the new business model, target market or geographic focus?
- Attitude and approach: Is the atmosphere positive and constructive? Is helping and supporting the CEO and the management team the key objective of the board? Are we actively building a culture of honest, yet supportive interaction? The chairperson has a key role in this and it is important to ensure the chairperson and the CEO play well together.
- Visibility: Does the board have true visibility and also sees under the hood? Is the CEO open about negatives or is the board the last to hear about bad news (and even then from third parties)? Does the board have enough access to and interaction with other team members besides the CEO?
- Decision making: Is the board able to make hard decisions and act fast if needed? Are there any conflicts of interest?
Few words about the chairperson: should we select one of the investors or should she be an independent industry veteran? Even though we are an Activist VC and are happy to do some of the heavy lifting, an outside chairman can often be a good solution. If there is friction between the investors and the team, an independent chairperson can bring a good balance to the discussion.
A simple litmus test
Here’s a simple test for CEOs: does your current board feel like dead weight and just a bureaucracy you must report to? Do you hate going to board meetings? Does the board take more than it gives?
If you answered even one of these questions affirmatively, something is wrong.
Fix it. Now.
Next week we will write about the CEO’s role in the board – stay tuned!