Why boards don’t add value to startups and how to make them do so

Lawyers and investors will help you set up a board of directors. This post will not. Instead it will do the opposite. It will deconstruct startup governance into what really matters. In the process many board members of startups will dislike me. My intention is to ask the right questions and improve the way we built startups. Questioning is power. Use it.

Most startups have boards. Investors demand them. Founders feel they should have them. Everyone knows that a real company has a board. Founders want to build a real company. They are right. Real companies have boards. There is just one problem.

The problem is this: startups are not real companies. They are startups. They are potential companies. Boards work for companies. Do they also work for startups?

The answer is no. After doing two startups and three years of startup investing at Accelerace Invest, I know why. Lately, I have decided to tell people the truth about boards. And it begins a long time ago…..

Boards were invented to solve a corporate governance problem

Once upon a time companies were owned by individuals, families or small groups of partners. Then something was invented in the mid 1800th century that changed the world forever.

The invention was the modern Corporation. It was a huge success. Corporations allowed people to invest in companies without assuming personal liability. It became attractive to buy company stock. And people did.

As more people bought stocks, the number of shareholders rose. Companies were no longer owned by individuals, families or small groups of partners. They were owned by hundreds or even thousands of people. The shareholders. The money from stock offerings helped companies grow big. But a problem was born: Corporate governance.

In essence the corporate governance problem was simple. Before the corporation, the owners and the managers were mostly the same people. And they were few in number. They could fit around the kitchen table and have productive conversations. They knew each other intimately and understood what everyone was doing.

With the Corporation things changed. Not all shareholders could be part of the management. Only a few were. Sometimes none were.  But the shareholders still wanted to have a say and be informed. After all, they were the owners. But the kitchen table was too small now. So they had to rent a big event space and serve drinks. It was a lot of work. But an even bigger problem arouse.

The meetings were a chaotic. Everyone wanted to speak. Everyone had questions. Each topic got debated forever. No clear decisions could be made. It was frustrating.

Shareholders and managers started to hate these meetings. But the meetings were necessary. In the end everyone agreed on a solution: To limit these dreadful meetings to once a year. They called this meeting: The General Assembly.

The problem was solved. Managers and shareholders met once a year. The chaos was contained. However, a new problem emerged. An even bigger problem. Much bigger.

Now the shareholders only got information at the general assembly. Suddenly the shareholders felt uneasy. They didn’t really know what was going on. But they heard rumors. And they didn’t like what they heard.

They heard that one of the managers bought a yacht. Or the brother of the CEO won a huge contract from the company. Distrust started to surface. Distrust was bad for both managers and shareholders. Everyone needed a solution. Luckily, an ingenious solution was found. A solution that has lasted until this day.

The solution was: The Board. It was brilliant. The board was small enough to meet regularly. Shareholders could choose board members they trusted. These board members could assert influence and make sure the management served the shareholders’ interests.

Managers felt relieved. Now they could inform and interact with shareholders in a structured way. No more chaos. It was a win- win. It worked like magic. Until a new invention came along: The modern tech startup.

Conclusion: boards works well for companies

Startups do not have a governance problem

The modern tech startup was invented in Silicon Valley. Not by the entrepreneurs. They have always been around. Also other places than Silicon Valley. The modern tech startup was invented by another invention: Modern venture capital.

Modern venture capital was invented in the late 1940s. Second World War created a huge pressure to develop superior military technology. The epicenter of military research was Silicon Valley. Here brilliant people invented ground breaking technology.

Some people saw the value in these brilliant minds and their ability to develop technology. These people were called Venture Capitalists. The venture capitalists started to fund the brilliant minds. They didn’t just buy stocks. They invested.

The venture capitalists provided lots of cash a very early stage. In return, they got a large stake and significant influence. It was a small and closed party. Once again the people involved could talk around the kitchen table. And they did

And so we return to the core of the issue: The kitchen table.

A typical startup is so very different from the original corporation (I just call them companies). Startups do NOT have a large number of investors. Investors do NOT have limited access to information. Investors do NOT distrust the management (I hope not).

Everyone involved with the startup can fit around the kitchen table. And they should. The problem solved by the board is gone. The board becomes a medicine to a non existing problem. And taking the wrong medicine can have severe consequences.  Any doctor knows this.

Conclusion: boards solves no problem for startups

The problem in startups is fundamentally different from that of companies

Many startups have adopted the concept of the corporate board. Founders and investors think it’s “professional”. That’s how a real company does. And they are right. But startups are not real companies. The difference is fundamental.

The difference is best illustrated with an analogy. Ships.

A startup is like a treasure ship in unknown waters with icebergs are floating around. It’s risky, but the crew hope to find gold. It is a treasure hunt. And the investors are in it for the bounty.

A company is a cargo ship carrying goods from one port to another. It’s sailing a fixed route in a well known environment. The shareholders are in it for their part of the cargo. They know the worth of the cargo and just want to protect it.

The difference between the two ships is their environment and mission. And the difference demands two very different types of governance. The wrong approach can have fatal consequences.

Conclusion: startups and companies have very different problems

Startups need a Mastermind

If you were captain on a cargo ship sailing a known route between two harbors, how would you organize meetings?

I suspect you would do something close to a board meeting. You would have scheduled meetings. The crew would report to you.  You would just want to know if everything goes as planned. In most cases it does. If not, you would ask the crew for corrective actions. The cargo must arrive in time.

But what if you were captain of a treasure ship in unknown waters? The weather is rough and icebergs are floating around. Then, how would you then organize meetings?

I suspect you would do frequent status meetings. You would evaluate every new turn of event and constantly calibrate your plan. Everyone would have full attention of the situation and collaborate. Everyone’s lives depended on it. The treasure would be worth it.

When startups mindlessly adopt the traditional format of the board, they apply the wrong tool. They are trying to steer a treasure ship like a cargo ship. It will lead to frustration and mismanagement, at best. In most cases, it leads to something much worse. They sink.

Instead of a board, startups need something closer to a Mastermind. Not an evil individual as portrayed in James Bond movies. But a combined mind made up by smart people with a relevant and diverse set of skills. A mind that evaluate every new event and can make rapid decisions. A mind that works independently from individual shareholder interests.

The Mastermind can be called a board. I understand if you prefer that name. It can have any name you want. It can have rules of procedure. It can meet at fixed schedules. It can have an agenda. It can have any attribute optimal to do the job. But it cannot be established without first completely disregarding the traditional ideas and formats of the corporate board.

The mastermind must be built from the ground up. It must be constructed to fit the purpose. To go treasure hunting. Only then, are managing startups right.

And here I will leave you. I know. I have not adequately filled the void I created with my post. I have not provided a proper description of the Mastermind. I have given no guidance on how to construct it. But I will. I am thinking. And my conclusion will be posted in my next post. How to build a Mastermind for your startup.

Conclusion: startups need to rethink the concept of the board and built a mastermind instead

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Conclusions made in this post:

  • Boards works well for companies
  • Boards solves no problem for startups
  • Startups and companies have very different problems
  • startups need to rethink the concept of the board and built a mastermind instead
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