A Bad Board of Directors Can Ruin Your Company
By Neal Dempsey
Note: This article originally appeared on Entrepreneur.com on February 2, 2018. It has been republished here with the permission of its author, Neal Dempsey. You can find the original article here.
Companies live or die by the people who run them. The product is almost insignificant compared to the influence of humans, good and bad. That includes the board of directors. Founders should take great care when choosing their board members because an inexpert board of directors can bring a company down.
Not every company has choices about investor money or the board members assigned by the investors. However, think of investors and board members like a marriage. You’re going to be together for 7-10 years, so you’d better be sure it’s a good match.
While investors perform extensive due diligence on companies before giving money, founders don’t often take the time to scrutinize investors. That’s a mistake. It’s not only your right, but it’s your fiduciary duty to research your investors. Spend time with them - get to know them. Understand their strengths and weaknesses, just as they understand yours. Make sure you call other companies they’ve invested in and get a good understanding of how they work with their investments, function as a board member and interface with the CEO and management.
Just because an investor has previous successes doesn’t mean he or she is a good match for your company. Your board members need to understand how fragile companies are in the early days. They need to know how to move the company to a more secure position in the market. Maybe the board member has a big name with a big company, but that may not be what your company needs. Chances are, that person will give advice based on what a big corporation would do, and that can drain your resources and cash. Small companies need to be lean and act quickly. Big companies function on big revenues and slow, bureaucratic decision-making. If your potential investor or board member doesn’t understand the difference, he or she may not be right for you.
Early stage board members need to be more hands-on with the company. For example, one investor I know sat on the board of an early-stage company that was about to run out of cash in 30 days. Giving advice wasn’t enough. He worked with the founders to develop a tactical plan that would bring in the customers and cash they needed to survive. The founders drew a 30-day calendar on a white board. They labeled each day with a minimum new revenue number required to meet the 30-day survival plan. The investor was in the office every day during that time, helping them navigate challenges and find additional customers and revenue sources. Investors need to be big picture, strategic thinkers. But sometimes, they need to be doers and make things happen for the company. Investors and board members may not manage the company day-to-day, but in the early stages, board members are almost part of the executive team.
Choose board members with a breadth of experience that rounds out your management team. If you’re a technologist, bring on advisors who are good at sales and marketing. If the CEO is a sales expert, include a product development or technical advisor. Seek a human resources specialist to think through strategic hires. The board should complement the founders’ skill sets and bring needed expertise for growing and pivoting the company as needed.
On the other hand, the board shouldn’t run the company in place of the CEO. The CEO still needs to have the final say. One founder I know deferred to the board’s insistence on a particular hire to lead the North American office. The CEO did not think this person had a good understanding of early-stage companies, the market or his customers. The board liked this guy because he had successfully run divisions of big companies. In fact, the board all came from big corporations, so they were most comfortable with like-minded, big company people. The founder hired the person despite his apprehensions, solely on the recommendation of the board. That hire almost ended his company. The new hire spent most of the company’s investment money on all the wrong things and accomplished none of the company’s goals. The hire set the company back years because they couldn’t get a second round of funding. The board misguided the CEO because they didn’t have early-stage experience. Today, the founder says his big regret was not only choosing a board who didn’t understand his business, but blindly following their advice.
Conversely, one of the companies I invested in had a CEO who was quite skeptical about taking investor funding. She carefully interviewed each potential investor. One venture capital (VC) firm pulled what we call a “bait and switch.” They put their top leader forward while courting the company, and then when they were ready to close the funding round, assigned a younger, inexperienced associate to sit on this company’s board. The VC firm thought they had the deal locked in, but the CEO did not respect the inexperienced board member and as a result declined the funding deal. Stunned by her decision to leave them out, the VC firm begged to repair the relationship. The founder only let the investors join the funding round once she noted in the contract that the young associate would not be allowed to sit on her board or advise her company, and the most senior partners would be the only ones to interact with her. That was a brave decision, but she knew over time, that board member would be fatal to her company. A lesser funding round might make things harder in the short-term, but avoiding a toxic board member was the right long-term decision. In the end, by standing up to the investors, she got everything she wanted.
Be as selective with your investors and board as you are when choosing a spouse. Find investors with experience in your market and early-stage companies. Don’t worry about getting the flashiest name you can get. Make sure advisors truly understands your vision, business and bring real value. Get reference checks from their portfolio companies, customers and employees. Learn what they’re like in the heat of battle when things are tough, because there will inevitably be hard times. How do they solve problems? How do they mentor founders through the difficult trials? Turn down a bad investor or board member if necessary. Most importantly, be the driver of your company, even after you’ve selected your board. Follow your gut. Chances are your instincts are right.
Neal Dempsey is the managing general partner at Bay Partners. He joined Bay Partners in 1989 and focuses on SaaS, software, enterprise, Internet and eCommerce companies. He created the Dempsey Foundation and founded the Center for Innovation and Entrepreneurship at the University of Washington Foster School of Business. He had 3 IPOs in 2012 with Eloqua (which was acquired in 2012 by Oracle for $871 million), Enphase Energy ($242 million) and Guidewire Software (market cap: $2.09 billion). Dempsey is an adventurer who has climbed six of the seven tallest summits in the world. He says of his propensity for risk: "My philosophy is to always do something that scares you, which includes investing sometimes. But that's when I feel most alive."