Choosing advisors and directors for a startup is much more complicated than most founders realize. A very high percentage of startups pick advisors for the wrong reasons and end up regretting their choices.
If you were trying to find the best doctor to perform LASIK surgery on your eyes, wouldn’t you find the one who has performed the most LASIK procedures? Or at least one who has performed more than 10 or 20,000? The top surgeons have performed as many as 50,000 procedures.
What is the equivalent for startup companies? Believe it or not, there are people who have had extensive experience in creating new companies, and they know what is involved in “company-building.” They haven’t performed 50,000 surgeries, but they may have helped to build dozens or maybe even a few hundred successful businesses.
“You can design and create, and build the most wonderful place in the world. But it takes people to make the dream a reality:” —Walt Disney
What exactly is “company-building” and where do startups get it wrong?
Many important steps in creating a successful startup involve tasks that are unique to this process. They require skills that can only be acquired by working with startups. Here are examples:
- Hiring the right lawyer to form a corporation and create effective articles of incorporation and shareholders’ agreements.
- Identifying and recruiting a founding team.
- Deciding how to allocate founder shares to the initial team.
- Creating a first business plan for a new business.
- Finding other resources such as accountants or people with expertise in technology, manufacturing, marketing and public relations.
- Providing necessary leadership in the early stages when a company has no capital.
- Understanding investment deal structures and raising seed capital under terms that won’t undermine future fundraising.
- Knowing how to hire and fire top executives, including the CEO.
- Knowing and following the rules of proper corporate governance.
- Understanding the mechanics of electing or appointing directors.
“Does experience help? No! Not if we are doing the wrong thing.” —W. Edwards Deming.
Where Do Startups Get it Wrong?
The mistake many founders make is to confuse “business experience” or raw intelligence with “company-building experience.” The problem is that it’s possible to have extensive “business experience” without having any “company building” experience.
Another mistake is to pack the board of directors with “domain experience,” people with experience in the company’s specific industry. Domain experience is invaluable, but the best domain experts are ones who also have extensive company-building experience.
I frequently see startup companies that have loaded their management teams and boards of directors with luminary executives from large companies in their industry. But they don’t have a single advisor with real “company-building” experience. These companies often make fatal mistakes such as:
- Retaining the wrong kind of attorney.
- Not using stock properly to attract an initial team.
- Not creating a strong business and strategic plan.
- Not leading with creativity when things get tough.
- Not changing management when necessary.
- Failing to create and manage a powerful board of directors.
By “product” we mean the entire package of the problem the company is solving, including its product concept, and the extent to which the product solves the problem in a cost-effective way. The best way to create “product” value is to build the initial product in a manner that demonstrates that it works, that it solves the intended problem, and that it can be made for a cost that will permit the company to have a profitable business model.
“Building a baseball team is like building a house. You look for the best architects, the best builders – and then you let them do their jobs.” —Pat Gillick
Who has the most company-building experience?
It’s difficult to see how anyone would get more hands-on company building experience than the top-tier “value-added” venture capitalists. “Value-added” venture capitalists usually serve on the board of directors of their portfolio companies and they use their experience and extensive networks to move companies closer to a highly profitable exit.
How do the “value-added” VCs get this experience. Many of them start their venture capital careers after years of management experience, often as the CEO of a significant company. As VCs, they lead their partnership in 2-3 investments per year, and they almost always join the board of directors of their portfolio companies. So, after 10-20 years in the venture capital business, they may have been actively involved with more than 50 companies. This is an enormous amount of experience, and it usually involves a wide variety of products and industries.
A “lead” angel investor could develop similar experience, but let’s be clear about what we mean by “lead.” A “lead” angel investor is not a passive participant in investments. He or she is primary person representing their angel group and they serve actively as members of the board of directors of their investments. Over a 10-20-year period, a lead angel investor might deal with 20-40 companies, but this is very difficult to do. The “lead” role usually gets distributed within an angel group and it would be unusual for one person to have this concentration of experience.
Note how this breadth of experience compares to that of an entrepreneur who has had one or two highly successful companies (typical of many angel investors), or even a “serial entrepreneur” who has had a handful of successful companies. A value-added VC probably has at least 10 times as much experience. Returning to the LASIK surgery analogy, this is the equivalent of 25-50,000 LASIK procedures.
“Big companies have trouble with innovation. Innovation is about bad ideas, or ideas that look like bad ideas. That’s the fundamental thing.” —Ben Horowitz
Does Big Company Experience Qualify?
Can a CEO with large-company experience possess the resourcefulness and problem-solving skills to work through startup issues? Some may, but a leader who has dealt previously with these issues will almost always do a better job than one who has not. It’s one thing to write a business plan for an ongoing business when you simply update last quarter’s, or last year’s, business plan. It’s very different when you have to create a business plan starting with a blank piece of paper. These are not skills that a CEO normally acquires in the context of a large company, because the CEO of a large company would probably never have to perform these basic startup tasks.
“Great vision without great people is irrelevant.” —Jim Collins
Where do you find people with this kind of experience in building startup companies?
The most obvious place is in the top-tier “value-added” venture capital firms. There’s not much reason for the successful partners to leave their partnerships. This is an important argument for trying to attract a top venture capital firm to invest in your company. Startups that make every effort, through crowdfunding, friends and family, and angel investing, are missing this extremely valuable resource. The top-tier value-added venture capital firms deserve their reputations; they sometimes add enormous value to the companies they invest in and actively support.
There are also many service providers who—while they may not have been a direct participant in a startup—have extensive experience in helping to build startup companies.
You may not find the equivalent of a surgeon who has performed 50,000 LASIK procedures, but it’s important to make the distinction between business or domain experience and “company-building” experience. When evaluating advisors and directors, find out how much “company-building” experience they have. Look for people who have been actively involved with successful startups.
Remember, your primary purpose is to create a team that knows from experience how to create maximum value for your startup.
About the author
Dr. Fred Haney is the founder and President of the Venture Management Co., a firm that provides assistance to high tech companies. He is the author of The Fundable Startup: How Disruptive Companies Attract Capital published on February 6, 2018, by Select Books of New York.
About the book
In The Fundable Startup, Fred M. Haney, an experienced VC, angel investor and company founder, explains startup strategies that will help you to:
- Understand the thinking of investors
- Create initial value in a product or prototype
- Recruit management that will help you raise capital
- Build a “virtual team”