Editor’s note: Serial entrepreneur Steve Blank is the author of Four Steps to the Epiphany
As customer and agile development reinvent the Startup, it’s time to ask why startup board governance has not kept up with the pace of innovation. Board meetings that guide startups haven’t changed since the early 1900s.
Reinventing the board meeting may offer venture-backed startups a more efficient, productive way to direct and measure their search for a profitable business model. It may also offer angel-funded startups – which because of geography or size of investment typically don’t have formal boards or directors – the ability to attract experienced advice and investment outside of technology clusters (i.e. Silicon Valley, New York).
The combination of Venture Capital and technology startups is only about 50 years old. Rather than invent a new form of corporate governance, venture investors adopted the traditional board meeting structure from large corporations. Yet boards of large companies exist to monitor efficient strategy and execution of a known business model. While startups eventually get into execution mode, their initial stages are devoted to a non-linear, chaotic search for a business model: finding product/market fit to identify a product or service people will buy in droves at a sustainable, profitable pace.
In the last few years, our understanding that startups are not smaller versions of large companies, made us recognize that startups need their own tools, different from those used in existing companies: Customer Development – the process to search for a Business Model, the Business Model Canvas – the scorecard to measure progress in the search, and Agile Engineering – the tools to physically construct the product.
Yet while we’ve reinvented how startups build their companies, startup investors are still having board meetings like it’s the 19th century.
From a VC’s point of view there are two reasons for board meetings.
1) It’s their fiduciary responsibility. Once a startup gets going, it has asymmetric information. Investors get board seats to assure themselves and their limited partners that they are duly informed about their investment.
2) Investors believe that their experience and guidance can maximize their return. Here it’s the board that has asymmetric knowledge. A veteran board can bring 50-100x more experience into a board meeting than a first time founder. (VC’s sit on 6 – 12 boards at a time. Assume an average tenure of 4 years per board. Assume two veteran VC’s per board=50-100x more experience.)
From a founder’s point of view there are three reasons for board meetings.
1) It’s an obligation that came with the check.
2) Founders who have a great board do recognize the uncanny pattern recognition skills that good VC’s bring.
3) An experienced board brings an extensive network of customers, partners, help in recruiting, follow-on financing, etc.
What’s Wrong With a Board Meeting?
The Wrong Metrics. Traditional startup board meetings spend an insane amount of wasted time using Fortune 100 company metrics like income statements, cash flow, balance sheet, waterfall charts. The only numbers in those documents that are important in the first year of a startup’s life are burn rate and cash balance. Most board meetings never get past big company metrics to focus on the crucial startup numbers. That’s simply a failure of a startup board’s fiduciary responsibility.
The Wrong Discussions. The most important advice/guidance that should come from investors in a board meeting is about a startup’s search for a business model: What are the business model hypotheses? What are the most important hypotheses to test now? How are we progressing validating each hypothesis? What do those numbers/metrics look like? What are the iterations and Pivots – and why?
Not Real-time. Startup board meetings occur every 4-6 weeks. While that’s great when you showed up in your horse and buggy, the strategy-to-tactic-to implementation lag is painful at Internet speeds. And unless there’s rigor in the process, because there is no formal structure for follow up, tracking what happened as a result of meeting recommendations and action items gets lost in the daily demands of everyone’s work. (Of course great VC’s mix in coffees, phone calls, coaching and other non-board meeting interactions but it’s ad hoc and not always done.)
Wastes Founders Time. For the founders, “the get ready for the board meeting” drill is often a performance rather than a snapshot. Powerpoints, spreadsheets and rehearsals consume time for materials that are used once and discarded. There are no standards for what each side (board versus management) does. What is the entrepreneur supposed to be doing? What are the board members supposed to be contributing?
The Wrong Structure. If you read advice on how to run a board meeting you’ll get advice that would have felt comfortable to Andrew Carnegie or John D. Rockefeller.
In the age of the Internet why do we need to get together in one room on a fixed schedule? Why do we need to wait a month to six weeks to see progress? Why don’t we have standards for what metrics VC’s want to see from their early stage startup teams?
For angel-funded startups, life is even tougher. Data from the Startup Genome project shows that startups that have helpful mentors, listen to customers, and learn from startup thought leaders raise 7x more money and have 3.5x better user growth. If you’re in a technology cluster like Silicon Valley you may be able to attract ad hoc advice from experienced investors. But very little of it is formal, and almost none of it approaches the 50-100x experience level of professional investors.
As there’s no formal board, most of these angel/investors meetings are over coffees. And lacking a board meeting there’s no formal mechanism to get investor advice. Angel investments in mobile and web apps today are approaching the “throw it against the wall and see if it sticks” strategy.
And for startups outside of technology clusters, there’s almost no chance of attracting Silicon Valley VC’s or angels. Geography is a barrier to investment.
So given all this, the million dollar question is: Why in the age of the Internet haven’t we adopted the tools we build/sell to solve these problems?
(Next week: What changes should be made? Add your thoughts below in the comments.)