How Boards Need to Evolve Over Time
I should note that my friend Brad Feld has written a new book on the subject that I would recommend if you want the bible on the topic. I admit that I haven't yet read it but I've had numerous discussions with Brad over the years about board structure and conduct and consider him a mentor on the topic.
In the Early Days
When you first start your company and raise initial venture capital your board probably consists of one to three founders and one to two VCs. The main thing you're concerned about in this phase of your company is maintaing control of your board, which in a legalistic perspective is ensuring that founders and management have the majority of seats on the board.
Most experienced VCs won't push you to give up founder control at this stage of the business nor should they. With small amounts of money invested (sub $3 million) the risks are reasonably low for most VCs, and the consequences of bad decisions or decisions a VC has limited say in is tolerable. Obviously I'm a proponent of still working closely with your investors to make sure that they feel brought into your decisions which will matter a lot if you ever need their support in the future.
And here's an important point that I think modern entrepreneurs often forget: Investors are "co-owners" of your business. If you raise millions of dollars from professional investors it is no longer "your" company but a shared company that you control. I think that mindset is useful to remind entrepreneurs that it is a shared journey and capital (whether active or passive) is a part of your success and your ability to access it when you need to and for the amounts you need is a very critical differentiator between successful companies and unsuccessful one.
The functions of an early-stage board are pretty obvious and well understood:
- Providing introductions to customers, biz dev partners, recruits, the press, other investors, etc.
- Offering a sparring-partner function on strategic decisions
- Reviewing financial and operational performance
- Planning and dealing with extra-ordinary events: M&A, fund raising, crises
As You Start to Mature
Over time you start to figure out who you customers are and how to sell to them or how to get them to adopt your products if you're a consumer-oriented startup. You may have raised money across multiple rounds of investors from three to four different VCs and of course most of them would like board seats or at a minimum board observer rights.
By now you have many smart people around your board but probably people who don't totally understand the nuances of your employees, customers, sales reps, marketing messages, technology challenges, competitors and strategic choices. It's your job to help them get oriented with the right amount of information so that when you come together you can focus on making good decisions or at least helping you discuss difficult topics rather than spending all of your time informing them.
It's highly likely that you have more investor seats than management seats and in the majority of cases you don't "control" the board. If you work at a company that has raised $20 million in capital or more this is the likely situation unless you had overnight and meteoric growth that gave you the power to hold on to a board majority. And honestly if you did raise a ton of capital from many people it's ok that you share control.
By now everybody has a big stake in your success and would like to feel consulted on the major decisions you're making with their money. It surprises me that this is even controversial but in this day-and-age it sometimes is. I know there are bad investors who do bad things. There are just as many bad entrepreneurs who do bad things. As with most of life, it's more about whom you choose to work with, what their reputation is from others and how well you’ve vetted them more than an absolute need for control.
One of my biggest suggestions as your business starts to mature is that you start to add independent board members -- preferably those that have a background that would be useful to you. And I've also been convinced that it can be quite useful to have another startup company CEO on your board.
In any case that is infinitely more valuable to you than just having your two buddies that you started the company with on the board. If you don't have control anyways wouldn't you rather have a friendly founder who has walked a mile in your shoes just two years before you or just two levels of success beyond your current position?
You'll get empathy. Experience. Relationships. Founder's perspective. And somebody who isn't thinking necessarily thinking about how to maximize their ownership in your next round of financing.
In the Growth Years
Where life gets really interesting and where way too few of companies make necessary changes is when you get to the growth phase of your company. Unless you're SnapChat, Instagram or similar this is probably three to five years into your existence.
I'm going through this situation now with the first investment that I ever made as a VC in Invoca - (Inbound voice call), a SaaS marketing automation company. If you want to know more about them and why they grew so rapidly I've written about them here (online / offline mobile ad integration) and here (the most obvious mobile phone ad unit).
In the first two years we were really focused on getting our product adopted through major channel partners like Commission Junction, LinkShare, Google, eBay, ShareASale and others. So our board meetings consisted of discussion about
- How much energy to put into channel partners vs. direct sales
- How to build an initial sales organization
- How to market our products and company
- How to evolve our management team
- When to build out our offices in Silicon Valley, New York and Los Angeles
- How and when to raise capital
Easy peasy 101 discussions for VCs.
I got to spend time with one of my favorite early-stage board members -- John Greathouse (you can meet him here through this great interview) and management and nobody much else, which was great. John and I were a great team since we both had worked for years in startups and had tons of experience with sales, marketing and management in early-stage companies.
Fast forward a couple of years and the company is now beyond eight-figure million of recurring revenue, has dozens of sales reps and growing rapidly and is now gearing up for multiple offices, enterprise integrations and relationships with Salesforce.com, HubSpot, Marketo, Marin Software and many others. We have also built out an amazing management team.
And here's the thing. As we've ramped up direct sales over the last few years our need to have relationships with the major media and advertising companies has become critical. As we have invested millions in building out our sales organization efficiency really matters. And while John and I have been through these phases ourselves (and have even written several blog posts on the topic like this one and John keeps a great blog with many similar concepts) we simply haven't been running large sales teams for the past eight years.
So we first turned to solve the question of how to better meet the needs of our growing customer base of large brands and media companies. I called an old friend of mine, Josh Jacobs, to talk about considering joining our board. Josh was a perfect fit for us because he is global president of Accuen, which is the data-drive, programmatic buying part of the global media empire that is Omnicom. But as importantly Josh was also formerly a startup CEO of a tech business and thus had empathy for startup land.
By bringing in an industry player with startup DNA we brought somebody that could push the team much harder on how their value prop would resonate (or not) with customers, which verticals to target our offering to and importantly what others solutions were in the market and how we stacked up. This brought insider knowledge and perspective that frankly John and I lacked.
We also sat down and talked about what the big challenges for 2013-2016 would be for the company and we are in the fortunate position of our major issue being how to handle growth. I know that sounds like I'm on a job interview and saying, "my biggest fault is that I'm too much of a perfectionist" but the truth is the rapid growth can really screw up a company if not handled well. See as a board we can already see very clearly how our 2014 and 2015 years pencil out with a fair degree of predictability.
We're the market leader in a space that is growing so unless there is an exogenous shock we will continue to grow. But if you don't think through your long-term strategy you can open yourself up to a host of problems that kill companies:
- Spending money too quickly and running into cashflow traps
- Ramping up sales teams too quickly and eroding quality and trust in your customer base
- Selling tons of "shelfware" (customers who buy but don't use your software) and thus having bad customer references
- Not building future R&D and therefore topping out as your market matures
- Not building marketing and sales integration processing and thus wasting millions in poor lead quality and misguided sales campaigns
- Defections of large swaths of talented employees due to low morale
And so on.
We realized we needed help. We reached out to my former Salesforce.com colleague Brett Queener. Brett was formerly SVP of the Marketing Cloud at Salesforce with an enormous organization of sales, marketing, implementation, sales engineers, etc. He formerly held many roles at Salesforce including running sales operations and many product teams.
Where I can teach the key aspects of sales, sales management, comp plans and lead-funnel management, I'm at 20,000 where Brett is on a commando mission in the jungle. He has way more insights that are current and relevant for:
- What customers are actually buying in the market today
- What is the current best practices in sales compensation plans
- How to set sales quotas
- How much "sales coverage" do you need to hit budget
- How to build a great forecast
Adding Brett has meant that I could pull up on operational issues because I had somebody far more skilled and fresh grilling the team on these issues and coaching the CEO on planning and structure.
We're now a tight board of early-stage VCs, management and two hands-on operational experts in our target markets. It's allowed me to spend more time on other issues like executive compensation, senior recruiting, capital expansion and long-term product planning. We're really now humming as a team where we all trust each other to be the domain experts in our relative areas of board responsibilities.
As your company grows it changes in obvious and predictable ways. You build out your management team, devolve power, increase process and spend more time on people management. Most management teams recognize the needs to change, plan for these changes and actively manage them.
Surprisingly some tech startups don't also evolve their board structures. The inertia of working solely with the board members who funded you early in your cycle becomes comfortable and making change on the board seems like a non-critical-path chore.
But just as your company needs change with growth so too do your board needs and bringing diversity of skills, people, experiences and relationships on boards is critical to your continued growth and success.
This article was originally published on Mark Suster's blog, Both Sides of the Table.