Start Up Founders and Non-executive Directors

This article explores the unique growth challenges faced by start up Founders and the role of non-executive directors in surmounting them.

The Start Up Founder's Unique Journey!

Start up Founders face a unique and daunting personal growth challenge. The successful start up Founder can expect, in the space of a very few years, to go from leaving a secure job to being the CEO of a business with dozens of staff. (A typical example from my portfolio is Rezdy, which has in 5 years gone from 2 Founders to a staff of 44!).

Typically the Founder journey starts with having to do literally everything. The Founder is the CEO, CFO, CTO, CPO, CMO, chief cook and bottle washer. He or she is a “doer” whose core skill is turning a vision into reality by building it with his or her own hands. But success changes things and they quickly need to learn how to recruit, manage and ultimately lead a growing number of staff. To remain successful as a business grows Founders have to adapt quickly to the stage of “doing nothing”, they have to grow into full time leaders and managers.

The successful start up is defined by hyper rapid growth in every dimension – staff numbers, transaction volumes, business complexity etc. This means that Founders are continually being confronted with changes and challenges that are novel to their experience. The very rate of change militates against Founders being able to keep pace with the business in terms of personal skills growth and learning.

The challenges of such hyper rapid growth are compounded when, as is often the case, the Founders are young when they start their journey. Young Founders miss out on all the “rungs of the ladder” training that one gets in a larger business or professional firm. (The Spoonfeedme Founder was a 23 year old new graduate when I started working with him and within 18 months had to confront hiring and, several months later, firing staff!) The lack of experience issue is structural for start ups because Founders tend to take the leap into start up before they have responsibilities like mortgages or children – ie Founders tend to be young.

MBAs are beginning to teach subjects like “entrepreneurship” but what Founder can afford the time or money to do an MBA after leaving work to start their start up? And, in any event, an academic course on start ups is about as relevant to real life as any other academic course is to business life. (Personally I sometimes recommend the Udacity “Lean Start Up” course and some selected reading to greener Founders.) The truth is that the only way to learn to be a Founder is through actually doing it. The best help you can get is ongoing guidance from non-executive directors who have done the whole journey before and are prepared to do it again with you.

How Directors Differ from Mentors and Consultants

Non-executive Directors are accountable (by law) for the decisions they facilitate. Through on-going regular involvement they develop a deep understanding of your business its issues and its stakeholders. Unlike other advisors non-executive directors share legal responsibility for the decisions they participate in coupled with a broad and on-going responsibility to help you grow your business.

The ability and responsibility of non-executive directors to help the businesses they work “on” (ie not “in”) is greatly facilitated by the existence of routine processes that ensure directors stay in touch with all the key success factors of the business. For example, a non-executive director will normally suggest monthly Board meetings with an Agenda covering all major strategic aspects of the business and a Board Pack containing all the KPIs needed to identify business trends. This process, especially if a non-executive director is in the room to bring an external perspective, is hugely valuable to Founders by helping them regularly step out from working in the business to working on it.

Non-executive directors have a very different function from other business advisers like accountants, consultants and lawyers who are involved only intermittently and/or in a narrow specialist role. Unlike the non-executive director other advisors have a deep but narrow focus. Their role is to solve specific problems not to set strategy. Strategy setting is the role of the Board! Also professional advisors rarely have structured long term relationships with a business and its Founders. Without the structure of regular board meetings and data such as that in a Board Pack they perforce tend to be reactive rather than strategic in their view of the business.

Mentors, although often helping with a broader range of issues than professionals and advisers suffer from similar constraints. It has become so fashionable for Founders to seek out mentors that this has been the theme of a Hollywood movie – “The Intern”. However, whilst there are many good mentors (often provided through incubator and accelerator networks) they simply have a different and more limited role than the non-executive director who is legally charged with working on the whole of business strategy via a Board process.

Why are Good Start Up Directors so Rare?

The start up journey is fundamentally different to those familiar in our society. There is no shortage of advisors who understand listed companies and family owned companies, but, very very few directors have experience with start ups that fit neither category. Founders tend to behave like owners yet start ups quickly build an entourage of unrelated (ie angel and/or VC) shareholders and directors. (At the coalface I have more than once suffered trying to explain to bank managers why it is not appropriate for a director representing an angel or VC investor to give personal guarantees on things like merchant facilities!).

The start up is a new phenomenon with its own patterns of hyper rapid growth, ownership, and funding which differ markedly from traditional business models. Academic research into start ups is still in its infancy and legal systems are just beginning to adapt to the start up phenomenon (eg by amending the Corporations Law capital raising rules to allow for “crowd funding”).

For all the above reasons very few professional directors actually have experience relevant to the needs of start ups. The start up phenomenon has only gained scale in recent years so the number of people who have long and varied board level experience in start ups is very limited. The challenge for a Founder seeking suitable non-executive directors is exacerbated by two additional factors:

·     early stage start ups do not have the funding to afford the rates charged by the big professional firms; and

·     Founders are often impressed with the credentials of Directors who have public and/or institutional experience inappropriate to the needs of a start up.

Where is the Market Falling Short?

In recognition of the unique needs of Founders many incubators and accelerators offer a variety of mentoring and training services. Helpful as these may be they are generally only part of the solution.

·     Firstly, the services provided by incubators/accelerators usually cease just when the start up begins to scale and the Founders require even more, not less, experienced guidance.

·     Secondly, many of these services are provided as part of a funding package and/or in exchange for sweat equity. This means that the service provider has its own vested financial interests that may conflict with those of the Founders.

·     Thirdly, the advice given by mentors and consultants from professional backgrounds is usually problem or skills based. It is rarely given from the broader perspective of what works in the unique start up context. (A good example is recruitment – the typical recruiter will try to recruit senior staff for a start up from big name corporates. This impresses many inexperienced Founders despite the fact that both the academic research and my own practical experience suggest that not only do job roles and titles not translate this way but those who have spent a long time in a big corporate are actually less likely to succeed with the same title/role in a start up!).

The best non-executive directors for start ups are generally found amongst the partners in the VC firms. Because VC.s often take a Board seat when investing the partners of VC Firms tend to have the longest and broadest experience in helping start ups to grow “from whoa to go”. However access to this valuable expertise is limited to the start ups they invest in and their advice (being perforce from the perspective of the investors they represent) may conflict with the interests of the Founders.

In the public company sphere the number of non-executive directors seeking lucrative roles and status greatly outnumbers the Board seats available. By contrast the start up ecosystem is desperately short of relevantly experienced non-executive directors. This is despite the fact that access to first-rate non-executive directors will often be the fulcrum for success or failure.

Start up Founders with limited experience in running and growing a company stand to reap the greatest benefits from engaging non-executive directors. Founders can generally manage OK when they are still boot strapping. But once the business has more than a handful of staff the strategic insights and other benefits which an experienced non-executive director can bring to the business become increasingly important.

What Expect From a Non-executive Director

A non-executive Director should bring experience, expertise and contacts to your business. The benefits to look for include the following:

•      More efficient and productive Board meetings with better preparation and follow up.

•      A strategic sounding board to provide an objective and experienced view on business strategy and tactics such as pricing models etc.

•      A strategic & long term perspective helping to identify the right business priorities and setting up measurement of the most critical KPIs.

•      Enhanced credibility with financiers, employees, investors etc.

•      Substantial time and cost savings (especially in relation to financial and legal matters) through “in-house” advice at Board meetings.

•      Better identification of compliance risks such as payroll tax, FBT, WC, GST, etc.

•      Better identification of legal risks such as IP protection, employee issues, etc.

•      Better awareness of grants and incentives such as EMDG, R&D, ESIC, new employee incentives, corporate backing for start ups, etc

•      Introductions to appropriate professional advisors from their network.

•      Access to a broader view of strategic alternatives such as outsourcing, etc

•      Commercial introductions to potential partners, customers and suppliers.

•      Tapping into a new external network of business contacts and skills.

•      Experienced guidance with capital raising through up to date knowledge of funding trends and players.

•      Improved financial management and reporting through experienced input on financial modelling and what to measure and how best to do it.

What do Start Up Non-executive Directors Cost?

It is useful to remember the old adage – “what you pay for is what you get”. I recommend to Founders that they look for the “right” non-executive director(s) rather than the cheapest. Measure candidates by the totality of what they bring to the table. Look for experience, cultural fit, knowledge of your business model (eg if your business is an online marketplace or a SaaS business look for someone who has “done it before”) and perhaps industry knowledge and connections.

A common mistake is to assess the value of a non-executive director by reference to the hours they spend at Board meetings. This totally misses the point that the value of the non-executive director lies in their experience and networks. A single introduction or key strategy recommendation can massively alter the growth trajectory of a start up so look for the director likely to provide insights and don’t stress over hourly cost.

Paid professional non-executive directors are very rare in start ups. The main reason is that at an early stage start ups struggle to justify the cost of a non- executive director who really has the skills and experience to help. This is a “catch 22” because making the wrong strategic decisions at an early stage is a bit like getting the foundations of a building wrong – it is expensive to fix, if it is fixable at all.

A professional director for a start up should cost in the range of $2,000 - $4,000 per month. It is often even better if you can find someone who is prepared to be paid with sweat equity (usually in the form of options) because this proves their faith in the Founder and the business and their ability to add value to it.

Les Szekely

[email protected]