Managing your board of directors

Silhouettes of Business People Discussing Business IssuesFirst time entrepreneurs seldom give enough thought to their Board of Directors, many don’t have one until forced to after raising a series A round of investment. That’s what prompted my first post about BoDs. Before we get into how to manage a BoD let’s just spend a minute on the makeup of a BoD. Experienced founders know that the BoD has hiring and firing power over the CEO – the CEO reports to the BoD. That being said, Series A investors will take as many as one or two Board seats if there are two vcs investing. Generally they will allow two founders. Because no one wants paralysis of the venture through a 50/50 split of the BoD its in everyone’s interest to add a fifth independent Board seat. That should be it until you raise a Series B and C at which time you may need to add another investor and/or outside Board member. But I was taught to keep Boards small; the smaller the Bod, the easier it is to manage, which is the job of the CEO.

What is the value added of your Board? That depends on the added value of your investors whom you have chosen. The Forbes article buy Chaka Booker, Your Board Of Directors: Managing Their Gift And Their Curse, provides a good answer:

Board members generally have a depth of experience that has exposed them to a range of problems in a variety of contexts. As a result, their minds move quickly. They understand patterns. They ask questions you don’t have answers to and provide suggestions you hadn’t considered. They have an uncanny ability to poke holes in your thinking and mend holes in your strategy. This is their gift.

Here are Chaka Booker’s tips on managing your BoD, with my annotations based on experience serving on half a dozen boards:

Boards don’t focus on execution.

The role of the board is strategic, not operational. Typically they are freer to explore strategic alternatives because they are freed from the weight of execution. You need to be open to these ideas, even if they generate stretch goals. Keep in mind you and the BoD are typically on the same side of the table: how do we best create value in our venture?

Boards don’t need details. Until they need them.

That means that while you may only present the absolute minimum amount of detail to support your business case, be prepared to have all the details that went into your decision in the appendices to your BoD presentation.

Always “pre-wire.”

I learned to brief each member of the BoD before the Board meeting from Sigrid Reddy, who was the Director of the Watertown Free Public Library where I was assistant director. She either met personally or had a phone call with every member of her Board of Trustees (the non-profit equivalent of a BoD for a public library) to preview any potentially controversial topics and find out where each member stood on them. There should be no surprises at your BoD meeting if you have done your pre-meeting prep properly.

As I’ve written elsewhere, founders need to get their Board members to work for them, either en toto or as individuals. This means you know the experience and expertise of each BoD member as well as how likely they are to help, if asked. Too few founders realize that their BoD is a valuable resource that they should manage just like other resources – capital and human – under the CEO’s purview.

But don’t just rely on a conversation, make sure you send a brief memo along with the list of agenda items to each Board member well in advance of the meeting. Don’t make assumptions that they understand all the issues or even that they are going to back you if the issue comes to a vote. Test your assumption in that f2f meeting or phone call.

Keep in mind that your directors are usually extremely busy people, so get them in the habit of dedicating a block of time with you before your BoD meeting. Also don’t assume Board meetings are simply a formal necessity whose function is to rubber stamp your decisions. You should welcome being challenged on your assumptions by BoD members. And you should work to generate a spirit of camaraderie amongst the directors. Helping the BoD function as a team rather than a group of individuals will turn them from spectators to active participants in your venture – again, at the strategic level. The only operational functions the Board should play are to interview high level candidates – at your request – and to help in raising capital through their connections.

If you have zero experience building and managing a BoD I suggest you mine your contacts for a CEO who has that experience and is willing to share it with you. There really is no work experience that can substitute for the important task of building and managing your Board.

Finally keep in mind that being a director these days probably carries more risk than back in the last century when I was founding companies. You may need to invest in D & O (Directors and Officers) insurance if you have a key Board member who won’t serve without it. Directors have a fiduciary responsibility to shareholders, so if your venture goes sideways they bear some exposure to litigation from shareholders. D & O insurance is expensive, so try to avoid it unless you have so much capital from your seed or first round that it’s a very manageable expense.

To those of you who haven’t raised vc money, keep in mind that your lead investor will also be a Board member, so your due diligence on them and their firm is doubly important.

 

Shutting down your startup

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There are hundreds of books, articles, videos, blog posts, etc. on how to start a company. But what if you are in the position of having to shut one down? Where do you get help?

Abigail Edgecliffe-Johnson is the founder of The Shut Down an open source project trying to build a road map for people who need to wind down their startup. It’s a project she says she took on because she might just need it herself someday.

She did need it, as her startup, Race Ya, failed to reach its Kickstarter fundraising campaign of $75,000 by half. So she realized that she had to shut it down. But looking for advice on how to close down your startup was scattered and incomplete. Her’s was a not uncommon problem:

Hundreds of thousands of new businesses get started every year, according to the Bureau of Labor Statistics. But between 30% to 40% of all startups fail, according to Harvard Business School, meaning the company liquidates all assets and investors lose most or all of the money they put into the venture. The numbers climb as high as 80 percent if you measure failure by whether a startup reaches its projected return on investment.

There’s plenty to do when it comes to a shutdown, including:

  • Letting your employees go
  • Notifying your Board and investors
  • Determining if you can pay severance, and if so, how much
  • Finding a lawyer to handle the dissolution paperwork
  • Paying any outstanding debts
  • Canceling corporate credit cards
  • Closing social media accounts
  • Notifying your customers, suppliers, and partners

If you have assets, how do you value them? And how can you sell them?

The survey that Edgecliffe-Johnson has posted online for The Shut Down asks people who have been through the process to share some of those details, from whether they had filed for bankruptcy to what they wish they had known. She wants entrepreneurs to spill everything “from which forms to file in New York vs. Delaware, to how you sold the company assets.”

Her goal is to build a single, open source resource that guides anyone who needs to shut down their startup through a customizable checklist.

I’ve been through this process myself with Throughline, Inc. as I’ve written about previously.  It’s a painful process. I do recommend that you do a formal post-mortem with staff, Board, and possibly investors to document what went wrong and how, what lessons are to be learned, and how to communicate the shutdown to the outside world.

Let’s hope you never need the Shut Down, but if you or a friend need help shutting down your startup it’s now just a click away.

The Decelerator: How Do You Shut Down A Startup? was a story produced and edited for radio by Ian Stewart, Francesca Paris and Evie Stone.

Does every startup need VC capital?

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Virtually every startup I mentor at MIT seems to believe that they need to raise outside capital immediately. While there are few notable exceptions, it seems like the entrepreneurial culture puts a premium on raising venture capital – it’s sort of the startup seal of approval. But Peter Strack argues against the tide in his Forbes article Why You Shouldn’t Always Raise Money For A New Business. Here are his arguments annotated by my comments:

You Can Keep 100% Of Your Company

As a notable VC once reminded me, “They only make 100% of the company, so act accordingly.” But there’s a more important factor than how much equity you have upon a liquidity event, that factor is control. Once you take a VC investment you will be giving up a board seat to that investor. Since first rounds are often syndicated, there may be two or more VCs looking for board seats as well. Generally you can get two insiders on your Board, the founder and another member of senior management, to balance the two VCs, but you aren’t going to have the freedom and independence you had as a new founder. Keep in mind that you may be working with these investors for years, so make sure the individual partner and their fund are going to contribute more than money – contacts, advice, feedback, and support when times are tough.

Bigger Is Not Necessarily Better

While tech startups often need engineers to build their product and these engineers typically will want a salary, which can increase the pressure on the founder to raise money. But keep in mind Mr. Strack’s admonition: Premature scaling can cause technology startups to fail. And 46% of professional, scientific and technical services companies close within the first five years.

You Learn So Much From Doing It Yourself

I consider learning to be job one for any founder. No matter what your academic credentials, not matter what hot startups you’ve worked at, being the CEO of a startup is very hard. The longer you can stay in control and learn the ins and outs of running your company the more you will learn, and the more valuable the company will be. Of course, there is a point of diminishing returns where you will need to bring on partners and staff but premature hiring is almost as dangerous as premature scaling, actually it’s a subset of that problem.

So what does Mr. Strack advise in lieu of taking on investor capital?

• Hustle – hard work is just the ante. To create value in your enterprise you need to be productive. That means being absolutely ruthless on how you spend your time, your most valuable asset as a founder. Focus on productivity not activity.

• Be smart with the funds you have – I was taught by the VCs to stretch the dollar. For example, rather than hiring full time staff who require not only salaries, but benefits and stock options as well, use consultants and contractors to work on a project basis.

And let me add one other point: look for leverage. As Archimedes said, “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” Examples of leverage include hiring interns instead of consultants and contractors, finding a law firm that will defer your fees until your first round of investment, and sub-letting office space from another tech company that may have a surplus and be willing to offer you a cut rate.

There is nothing wrong with raising capital, but be strategic about it. The best time to raise capital is when you don’t need it. Believe me, investors can smell desperation a mile away and they will take advantage of it. And keep in mind it can take six months or more between starting to raise capital and the check clearing the bank. So start understanding the VC climate in your region. Get to know some VCs informally. But just because you are studying something doesn’t mean you are committed to it. The Boy Scouts’ motto applies to raising capital: Be prepared.

How to ask better questions

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I first learned the power of questions when I was hired into a software engineering company as one of the first, and few, non-engineers.  Most of what was discussed was over my head. I had three options: pretend I understood, remain silent in the hope I “didn’t get called on,” or ask a question. It quickly became apparent that I would learn nothing from options one or two and if I was to swim rather than sink I had to learn and learn fast. I soon determined that there was great power in being the most ignorant person in the world just so long as I asked smart questions. These questions often clarified the discussion and even surfaced hidden assumptions. Thus questions became my most powerful tool as they helped me learn and helped focus discussions.

After being exposed to the Socratic Method I learned that asking the right question of the right person at the right time was extremely powerful. I also learned that making statements can make people defensive, whereas if you phrased the statement as a question it made people think.

The Wall Street Journal article The Secret to Asking Better Questions by Hal Gregersen, sub-titled Most bosses think they have all the answers. But the best bosses know what to ask to encourage fresh thinking. Here are six ways to build that skill drew my attention. Here are the six ways to ask better questions, annotated from my own experience.

1. Understand what kinds of questions spark creative thinking. There are five ways a question can break down barriers to creative thinking: It reframes the problem. It intrigues the imagination. It invites others’ thinking. It opens up space for different answers. And it’s nonaggressive—not posed to embarrass, humiliate or assert power over the other party. What I’ve found is that the newspaper reporters six questions can often be the right ones to spark creative thinking: who? what? where? when? why? and how? Of these the question I ask the most is why? as it will reveal intentions and goals.

2. Create the habit of asking questions.

I find the sample questions in the article far too generic. The more specific the question the more specific the answer. Generic questions like “What more can we do to delight the customer at the point of purchase?” are far from penetrating. Better to ask, “what are we doing now at the point of purchase to better engage customers? Then a series of follow up questions: “What are our competitors doing?” “What do our POP programs cost us?” “Should we be evaluating these programs on a strict ROI basis or are the more long term strategic initiatives?” “How do POP programs relate to customer satisfaction at the point of consumption?” “How are we measuring customer satisfaction and when do we take these measurements?”

3. Fuel that habit by making yourself generate new questions.

Better yet lead your team into a question generating mode by setting an example for them and positively reinforcing the asking of questions. Keep in mind, “There are no dumb questions, only dumb answers.” Staff need to feel safe in questioning senior managements thinking and assumptions, otherwise they will suppress their questioning.

4. Respond with the power of the pause.

Silence is a very powerful tool. It can slow down a rush to judgement as well as stimulate more discussion. By the way, this is a technique interrogators use, as people naturally dislike silence and may talk when they should have held their piece!

5. Brainstorm for questions.

This can be an effective technique when a team is stuck. Rather than trying to brainstorm answers brainstorm questions. That may enable you to zero in on the real problem.

6. Reward your questioners.

If there’s one constant theme here, it’s the idea that bosses should reconceive what their primary job is. They aren’t there to come up with today’s best answers, or even just to get their teams to come up with them. Their job is to build their organization’s capacity for constant innovation.

So whether you are a mentor, a manager, or an individual contributor, learning to ask more and better questions will help you and your team improve.

Bigger fonts, less words, greater impact!

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The most common and most serious problem I’ve seen in the hundreds of presentations I’ve reviewed over the past few decades is presenters cramming far too many words into a single slide. Just to recap, here are the problems with this practice:

  • Try as they might, people actually cannot multi-task. Thus they cannot read your many words while at the same time listening to you talk. If they try they will just get frustrated. e.
  • Too many words on a slide necessitates type that is too small: it is hard to read, especially for middle aged people, many of whom have developed age-related vision deficiencies. Smaller text has less impact than large type.
  • Less room for graphics, which have a higher impact and recall rate than text.

So I was pleased to read the Inc. article by presentation guru Carmine Gallo, Guy Kawasaki Explains Why Steve Jobs Used 190-Point Text on Presentation Slides. The sub-title presents the benefit: Make your presentations stand out with fewer words and bigger text.

Using larger text forces the presenter to user fewer words, which need to be more carefully chosen.

… most presenters try to put as many words as possible on a slide–Jobs did the opposite. He removed and removed and removed through every iteration. The result was strikingly simple, often just one word on a slide.

Jobs would go so far as to have a slide with just a single word, in 190 point type! And he would show slides with no text at all!

According to cognitive biologists, the human brain is far more capable of recalling information when it’s presented as pictures with few words–one or two words to accompany the photo. If you take a look at some of Jobs’s presentations, you’ll see he followed the guideline.

There is one other tip from Mr. Gallo’s interview with Guy Kawasaki: “He [Jobs] really practiced,” Kawasaki says. “He made it look easy because he practiced for weeks.” When was the last time you practiced your presentation for weeks?

VCs need to hit grand slams, not just home runs!

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The best single line I’ve heard about how venture capital works is from investor Marc Andreesen: “returns are a power-law distribution” with the majority of returns concentrated in a small percentage of companies. That’s true now more than ever, and one of the great promises of the venture capital industry that motivates and drives investors.

It’s vitally important that founders seeking investment understand the venture capital industry, what motivates VCs and how they make investment decisions. The article on Medium by Eric Feng A stats-based look behind the venture capital curtain is de riguer reading for founders planning to raise capital from VCs.  Eric Feng is now at Kleiner Perkins. Previously CTO of Flipboard, Founder of Erly, Founding CTO of Hulu, and Microsoft Research alum.

Mr. Feng’s article focus on how the VC industry has changed in the last fifteen years – which is substantially – more money, more investors, more deals, bigger exits!

In the past 15 years, the amount of money invested by US-based VC firms into startups grew more than 4x to almost $85 billion dollars last year. Before 2011, an average of $28 billion was deployed each year but in the past 7 years, that number has jumped to $62 billion invested annually. Not surprisingly the number of deals has seen a corresponding sharp increase. From 2003 to 2010, the industry averaged almost 3,800 investment deals per year. But since 2011, the average number of deals per year has shot up to more than 8,700.

What is the effect of many more funds deploying more capital into more companies? The industry is making over 5,000 more investments each year compared to 15 years ago (with most of those being seed investments). One would think that it must true that any given startup thus has a better chance of raising capital than 15 years ago. However, there’s an unintended consequence of the changes: On average, there are more than 7x the number of billion dollar exits now than a decade ago. 15 years ago venture capital was considered a hits business where the hit had to be a home run to make up for all the strikeouts in an investors portfolio. But now?

“Venture capital is not even a home-run business. It’s a grand-slam business.” Bill Gurley, Benchmark

As a result there is even more pressure on an investor from their fellow partners, their peers and their limited partners to swing for the fences. Now the rule of thumb is that you need to build a company with a minimum of $100 million in yearly revenues, so it would be valued at 10X sales, or a billion dollars, commonly called a unicorn. If you can’t meet this yard stick don’t waste your time chasing VC dollars or pivot to a multi-billion dollar market where you have a markedly better chance to qualify for the grand slam derby.

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If you search Eric Feng’s article for the term “profit” you will get zero hits! That’s right in an article about venture capital the word “profit” doesn’t appear even once. If you need more proof that profitability is not a key success factor for startups just look at all the companies now going public or that have gone public recently. They are all losing money with the exception of Zoom! Uber and Lyft are losing billions of dollars.

So founders, pay attention to what VCs pay attention to: top line revenue, revenue growth, growth of your customer base, and stickiness of your customers. You can start worrying about making money after your IPO, what you need to worry about now is growth and the ability to scale.

What founders can learn from Facebook’s Cambridge Analytica scandal

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The Wired article 15 MONTHS OF FRESH HELL INSIDE FACEBOOK by  and   has some interesting lessons for founders in how to make, or not make, decisions.

The key decision Facebook was faced with in the aftermath of articles in The Guardian and The Times was how to respond to articles exposing how Facebook had enabled first Ted Cruz, then Donald Trump, to use the private data of Facebook users by Cambridge Analytica to attempt to influence voters.

To the amazement of those inside and outside of Facebook there was no response from Mark Zuckerberg, Cheryl Sandberg or anyone else at Facebook for five days! Dead silence. Here’s how Sandberg explained their lack of response to the article’s authors:

“Those five days were very, very long,” says Sandberg, who now acknowledges the delay was a mistake. The company became paralyzed, she says, because it didn’t know all the facts; it thought Cambridge Analytica had deleted the data. And it didn’t have a specific problem to fix. The loose privacy policies that allowed Kogan to collect so much data had been tightened years before. “We didn’t know how to respond in a system of imperfect information,” she says.

There are two very important aspects to this explanation. While Sandberg is no doubt one of the most able and experienced executives in the worldwide tech industry, to the best of my knowledge she has absolutely no startup experience. And that becomes clear in two ways. First, I was taught that no decision is a decision. That things move fast in a startup, you will be faced with many decisions. You will get some wrong. That’s ok. What isn’t ok is to fail to make a decision, as was the case with Sandberg. Secondly one of the two big differences between a startup and a large established company like Facebook is that big companies can survive a failure, startups may not. But more importantly, leaders of startups must get used to learning how to respond in a system of imperfect information. I’m amazed that somehow either Zuckerberg never learned this in his meteoric rise or was overridden by Sandberg – but both of them should have had that founder skill of decision making with less than perfect information.

You may never run a social media company, and you may never have to deal with the type of self-inflicted crisis Facebook was err… faced with. But there’s no doubt you will be faced with making big decisions for your company, even the the mot du jour, existential decisions. And certainly you will be faced with making these decisions with imperfect information. Better get used to it … now.