By David Frankel, Partner
One of the challenging parts of being a first-time founder is learning to manage a board of directors. It’s an art and one that even well-established executives can have a hard time mastering. The critical first step in doing so is learning to understand the personalities and motivations you’re likely to encounter. This post is a short list of some of the “types” you may meet around the table in your conference room — good and bad — along with some thoughts on how to best work with them.
As a baseline, assume that your investors won’t add that much value beyond the capital they contribute—the truth is that most of us don’t. If you do well, they may be more helpful. If you struggle, they may or may not pitch in to help. Many walk away from troubled deals to focus on their “winners.” Some abandon struggling companies, which is a poor reflection on those VCs, but it’s a reality.
The most valuable thing most VCs can do for founders is to take ownership of the next funding round or help guide an M&A process. Less critical but helpful is to provide advice and encouragement, and on the margin, help with recruiting and customer intros.
At a minimum, look for someone who brings non-obvious insights to your conversations. A deep understanding of your industry is a plus. A good VC will be able to save you time by providing shortcuts to key industry contacts and customers. Ideally, you’d prefer to have a VC that brings some unique value to the table.
Occasionally, you’ll get pressure from later stage investors to drop your earliest supporters. They’ll explain that you need new ideas around the table, particular expertise, and so on. And they’re often correct. Over time though, sometimes having a trusted sounding board who is firmly in your corner matters as much as someone with more advanced expertise.
One way to avoid a Vanilla VC is taking a chance on someone early in their career. Junior VCs lack the gravitas and experience of other board members, but what they lack in muscle memory, they can make up for with energy and focus. Some are busting at the seems to make partner in the next fund. Others are leading new funds and want to make a name for themselves. In either case, they’re often willing to roll up their sleeves in ways that other VCs won’t. They’ll provide bandwidth, surface area, and often add new skills to a management team. In many ways, it becomes a peer relationship.
An obvious negative can be their stature in their firm if your startup is in a challenging period. Do they have the ability to advocate sufficiently for you and bang the table in front of their partnership when you desperately need it?
When a business starts booming, a quant jock can bring an invaluable perspective. At some point, you’ll want to explore activity based costing and marketing cohort analyses in great depth, amongst many other data points. With success, you will outgrow your gut and someone who has seen dozens of other growing companies and can give you a sense for how your monthly acquisition per cohort ranks will seem very valuable.
Think of this kind of investor as a running coach that’s trying to help an athlete cut their sprint time from 12 seconds to 10. You want to work with the person who has helped someone else get to 9 seconds. Their advice is highly technical and amounts to the finest of fine-tuning, but ultimately it’s what separates the good companies from the great.
A word of warning, quant-focused VCs aren’t great in the early days of a company. Their tools are all about optimization of metrics, but in the very beginning, decisions will be made more with gut than a cohort analysis.
In my opinion, the best board members are active entrepreneurs who are busy running successful companies.
I have the great pleasure of serving on the board of OLO with Danny Meyer of Shake Shack fame. He is so deeply immersed in the Quick Serve Restaurant world that he provides advice almost no one else could. For instance, we once discussed whether it made sense to offer the product to chains with fewer than twenty stores. Danny reminded us that young cubs become big lions and we risk missing out on the next Shake Shack, Chipotle, or Panera if we weren’t serving them from the start.
Likewise, I work with the amazing Steve Haffner on the SeatGeek board. Steve, along with Paul English, built Kayak into an OTA leader. He is always able to share perspectives that are fresh, immediately tell if our SEO stats looked right based on our size, and provide guidance on the search for a CMO, for example.
This caliber of person is very hard to recruit. Consideration thereof only makes sense once your company is heavily invested in growth. If you can pull it off, the advice that these active entrepreneurs can provide is unlike what you’ll get anywhere else — present company included.
People who were “operators” early in their career can provide a wealth of advice and guidance on the nuts and bolts of running and growing a business. The company CEO always needs to weigh this advice carefully. These board members may not have been at the “coal face” of a company in quite some time. There is a binary distinction between being in the trenches and being on a board. As time passes, the context that drove certain decisions gets cloudy. Lucky breaks can easily be subliminally recategorized as brilliant strategy.
Entrepreneurs are a mile deep and an inch wide. Board members are just the opposite. As a founder, it’s your job to “be all over it,” to know how every part of your business works and to be soliciting advice from many corners. It doesn’t matter if you are building the next gen enterprise CRM system or a social network for healthcare providers, take advice from these board members seriously, but don’t take their word as final — it’s your life and if you fail, be sure that you will take the blame.
I served briefly alongside the head of R&D for a top five pharma firm who was asked to join the board of a startup in which I had invested personally prior to Founder Collective. He was a legend in the industry, and we felt extraordinarily lucky to have him join the board.
Until the meetings started.
He would parachute into meetings with tremendous knowledge and was authoritative about the course the company should take. Given his stature in the industry, the rest of the board effectively followed his recommendations. And the context made it harder for our CEO to stand up to an individual who had steamrolled even more experienced peers.
Tens of millions of dollars were spent pursuing a path which this board member had dictated, and the company flopped. To be fair, biotech is risky business, and we can’t know for sure if another path might have led us to success. But this disproportionately powerful voice was a major factor in hindsight.
Sometimes you’ll be dealing with someone on your board who is checked out, yet is still required by fiduciary responsibility to keep tabs on what you’re doing. This often happens when a VC leaves a fund and your company lands in another partner’s lap. It also happens when a VC has lost faith in the founding team. Some firms are explicit about “culling their losers” to better focus attention on companies that are growing rapidly. Being abandoned by an investor can be a frustrating dynamic, especially when the company isn’t failing, but is just not growing as fast as one might like. I’ve seen companies with millions of dollars a year in revenue, growing 30% a year, that become completely uninteresting to a VC who needs billion dollar businesses for their model to work. The best case scenario is to ask them to leave the board, but in most cases you may remain in each other’s lives for years to come.
With all the focus on being “founder-friendly,” more and more VCs have become overly supportive of entrepreneurs, especially at the seed stage. I’m not for a moment suggesting VCs get mean or introduce punitive terms, but the dynamic of non-stop optimistic encouragement doesn’t help founders either.
Some companies have unsustainable burn rates, founder disputes, and other structural problems that need to be addressed. A good board member will force entrepreneurs to focus on those problems and try to find fixes. They will be involved in the solution & they will, sometimes painfully, keep pointing out weaknesses including even too much funding papering over inherent business problems.
Your board members should be hard on you in a “play the ball, not the person” kind of way. The best ones figure out how to be supportive in meetings, but push hard in one-on-one sessions. An excellent board member should feel more like a sparring partner than a supportive family member.