Reinventing the Board Meeting
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 1900’s.
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.
Reinventing the board meeting may offer angel-funded startups – which because of geography or size of investment typically don’t have formal boards or directors – to attract experienced advice and investment outside of technology clusters (i.e. Silicon Valley, New York).
Because We’ve Always Done It This Way
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.
Why Have a Board Meeting?
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?
Angels In America
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?
A Hypothesis – The Boardroom As Bits
Startups now understand what they should be doing in their early formative days is search for a business model. The process they use to guide their search is customer development. And to track their progress startups now have a scorecard to document their week-by-week changes – the business model canvas.
Yet even with all these tools, early stage startups still need to physically meet with advisors and investors. That’s great if you can get it. But what if you can’t?
What’s missing is a way to communicate all this complex information and get feedback and guidance for startups who cannot get advice in a formal board meeting.
We propose that early stage startups communicate in a way that didn’t exist in the 20th century – online – collaboratively through blogs.
We suggest that the founders/CEO invest 1 hour a week providing advisors and investors with “Continuous Information Access” by blogging and discussing their progress online in their startup’s search for a business model. They would:
- Blog their Customer Development progress as a narrative
- Keep score of the strategy changes with the Business Model Canvas
- Comment/Dialog with advisors and investors on a near-realtime basis
What Does this Change?
1) Structure. Founders operate in a chaotic regime. So it’s helpful to have a structure that helps “search” for a business model. The “boardroom as bits” uses Customer Development as the process for the search, and the business model canvas as the scorecard to keep track of the progress, while providing a common language for the discussion.
This approach offers VC’s and Angels a semi-formal framework for measuring progress and offering their guidance in the “search” for a business model. It turns ad hoc startups into strategy-driven startups.
2) Asynchronous Updates. Interaction with advisors and board members can now be decoupled from the – once every six weeks, “big event” – board meeting. Now, as soon as the founders post an update, everyone is notified. Comments, help, suggestions and conversation can happen 24/7. For startups with formal boards, it makes it easy to implement, track, and follow-up board meeting outcomes.
Monitoring and guiding a small angel investment no longer requires the calculus to decide whether the investment is worth a board commitment. It potentially encourages investors who would invest only if they had more visibility but where the small number of dollars doesn’t justify the time commitment.
A board as bits ends the repetition of multiple investor coffees. It’s highly time-efficient for investor and founder alike.
3) Coaching. This approach allows real-time monitoring of a startup’s progress and zero-lag for coaching and course-correction. It’s not just a way to see how they’re doing. It also provides visibility for a deep look at their data over time and facilitates delivery of feedback and advice.
4) Geography. When the boardroom is bits, angel-funded startups can get experienced advice – independent of geography. An angel investor or VC can multiply their reach and/or depth. In the process it reduces some of the constraints of distance as a barrier to investment.
Imagine if a VC took $4 million (an average Series A investment) and instead spread it across 40 deals at $100K each in a city with a great outward-facing technology university outside of Silicon Valley. In the past they had no way to monitor and manage these investments. Now they can. The result – an instant technology cluster – with equity at a fraction of Silicon Valley prices. It might be possible to create Virtual Valley Ventures.
We Ran the Experiment
At Stanford our Lean Launchpad class ran an experiment that showed when “the boardroom is bits” can make a radical difference in the outcome of an early stage startup.
Our students used Customer Development as the process to search for a business model. The used a blog to record their customer learning, and their progress and issues. The blog became a narrative of the search by posting customer interviews, surveys, videos, and prototypes. They used the Business Model Canvas as a scorekeeping device to chart their progress. The result invited comment from their “board” of the teaching team.
Here are some examples of how rich the interaction can become when a management team embraces the approach.
We were able to give them near real-time feedback as they posted their results. If we had been a board rather than a teaching team we would have added physical reality checks with Skype and/or face-to-face meetings.
Show Me the Money
While this worked in the classroom, would it work in the real world? I thought this idea was crazy enough to bounce off a five experienced Silicon Valley VC’s. I was surprised at the reaction – all of them want to experiment with it. Jon Feiber at MDV is going to try investing in startups emerging from universities with great engineering schools outside of Silicon Valley that have entrepreneurship programs, but minimal venture capital infrastructure. (The University of Michigan is a possible first test.) Kathryn Gould of Foundation Capital and Ann Miura-Ko of Floodgate also want to try it.
Shawn Carolan of Menlo Ventures not only thought the idea had merit but seed-funded the LeanLaunchLab, a startup building software to automate and structure this process. (More than 700 startups signed up for the LeanLaunchLab software the day it was first demo’d.) Other entrepreneurs think this is an idea whose time has come and are also building software to manage this process including Alexander Osterwalder, Groupiter, and Angelsoft. Citrix thought this was such a good idea that their Startup Accelerator has offered to provide GoToMeeting and GoToMeeting HD Faces free to participating VC’s and startups. Contact them here.
For startups with traditional boards, I am not suggesting replacing the board meeting – just augmenting it with a more formal, interactive and responsive structure to help guide the search for the business model. There’s immense value in face-to-face interaction. You can’t replace body language.
But for Angel-funded companies I am proposing that a “board meeting in bits” can dramatically change the odds of success. Not only does this approach provide a way for founders to “show your work” to potential and current investors and advisors, but also it helps expand opportunities to attract investors from outside the local area.
- Startups are a search for a business model
- Startups can share their progress/get feedback in the search
- Weekly blog of the customer development narrative
- Weekly summary of the business model canvas
- Interactive comments and questions
- Skype and face-to-face when needed
- This may be a way to augment traditional board meetings
- This might be a way to rethink our notion of geography as a barrier to investments