Labcast: How to build a great board of directors
June 17, 2011
While an effective board of directors is critical to a young company’s success, putting one together is often easier said than done.
In this episode of Labcast, venture capitalist Jarrett Collins joins OpenView Venture Partner Firas Raouf to discuss some of the factors that go into creating a quality board of directors for companies at the expansion stage. In addition to his work at NeoCarta Ventures, Jarrett is also the CEO of BoardSpring, a company focused on promoting board-related best practices for venture-backed organizations.
How to build a great board of directors
PODCAST TRANSCRIPT
Brendan Cournoyer: Hello again everyone and welcome to Labcast. In this episode, venture partner Firas Raouf sits down with Jarrett Collins. Jarrett is the CEO of BoardSpring, a company aimed at improving
the effectiveness of venture capital-backed boards of directors. In the first of this two part conversation, Firas and Jarrett talk about some of the considerations for building the best board of directors for early-stage companies.
Firas Raouf: Welcome everybody. This is Firas Raouf from OpenView Venture Partners, and I’m here with Jarrett Collins, CEO of BoardSpring. Jarrett, great to have you here.
Jarrett Collins: Thank you, my pleasure.
Firas: Maybe we’ll start very quickly with your telling us a little bit about BoardSpring.
Jarrett: Sure. So BoardSpring is a company that I’ve started. The idea is to help venture capital-backed boards manage what they do more effectively and ultimately add to those boards by adding talented, independent board members. I’ve been in the venture capital business for about 20 years. It seemed to me that there was an awful lot of room for improvement on venture-backed boards, and that’s really the mission of the company.
Firas: So we’re here today to talk about how to build the best early- stage board of directors. Maybe before that I’ll tell you a little bit about OpenView. We’re a Boston based venture capital firm. We invest in early-stage technology companies and help them get through the expansion stage to become really big companies. One of our key differentiators is the amount of operational support that we provide our portfolios, primarily through our consulting team, OpenView Labs.
So Jarrett, maybe we can get to the topic and start talking about how to build a great board of directors. Maybe you can lead us off.
Jarrett: Good, I love that. So I’m very interested to know when OpenView Venture Partners makes an investment, what’s the board look like right after you close that investment? Who’s around the table?
Firas: Right. Well, typically, right as we make the investment, the board of directors tends to be the founders of the company. It could be anywhere from one person to four. It may or may not have an existing early-stage investor. It may or may not have a representative of angel investors, and it may or may not have an early advisor to the company as an independent board member.
Post investment, what we try to do is to begin formalizing, if it’s not already formal, the role of the board of directors. We like to a see a board of an odd number of seats. The odd number is critical to basically be able to get to the point where, on any topic, you would get a resolution of decisions. So an even number can end up getting stalled. An odd number, if you have to get to a vote, you can reach a conclusion.
Jarrett: Is that common in your experience? Do you see split votes or decisions on boards?
Firas: Not really. I have not run into anything like that, but I think that the idea is to have a balance. So to have the odd number, three is too few and seven too many for an early-stage company. So we tend to recommend five – two representing management, two representing the investors, and one being an independent board member.
Jarrett: So of those five, if two represent the investors, would OpenView take both those seats?
Firas: If we’re the only investor, we tend to take both seats. What we have been doing though recently is allocating one of our board seats to an additional independent board member. Granted, that independent would be sitting in an OpenView seat, so he or she is not completely independent, but the idea is to use that seat to bring in a person who can bring a talent and experience that can add value to the board, because there’s really no need to have two OpenView members on the board.
Jarrett: Okay. So let’s drill down if we can. I’d love to understand what you look for when you’re thinking about independent directors. It could be the independent director for the OpenView seat. It could be let’s say a pure independent director. But if you in the management have agreed that it’s time to add an independent director, how do you get started?
Firas: Right. So I think to answer that question we have to start with, what is the role of the board? And it’s absolutely imperative that the CEO and the board in general understand, what is the role of the board, outside of pure governance? The role of the board in an early-stage company also needs to be about adding value, helping the management of the company execute. So the board needs to assume certain operational responsibilities in helping the company.
Jarrett: Now, that’s counterintuitive to me. I always thought, “Well, gee, you’ve got management over here and you’ve got governance over here.” Now I’m hearing that governance may have an operational role?
Firas: You do need to separate the governance from the operational role. But I think that a board of directors in an early-stage company, that’s purely focused on governance, purely focused on reviewing financial results is a horrible waste of talent and a horrible waste of a vehicle to bring a tremendous amount of insights and expertise to the management of the company.
Jarrett: So I’m hearing you say, Firas, that part of the reason the board is taking on more operational flavor, if you will, is because of the size of the company. This is not a 15 person board at Proctor & Gamble or Coca-Cola.
Firas: Right. Even in these large boards, you will have a mix of people who are bringing in pure governance and people who are actually bringing in some expertise to the table. But in early- stage companies, expertise is desperately needed at all levels of the organization, and the board should be one of them.
Jarrett: So give me an example, if you don’t mind, of some kind of operational role or capacity a board member might play.
Firas: So your question was, “How do you think about bringing in independent board members?” The way I think about it is you need to really start with a definition of what additional value should board members bring, which then begs the question, at this point in time of the company’s evolution, what expertise or market insight does the company need?
Jarrett: Okay.
Firas: So that’s one place we start off with, which is, given a market segment that we’re targeting, given the overall solution that we’re providing, the persona of the buyer that we’re targeting, what kind of market expertise are we missing in the company and at the board?
Jarrett: To make this more tangible for the listeners or viewers, can you give me an example, maybe from your own portfolio, of a target market and the kinds of skills you might bring in to help address that market?
Firas: Right. So for example, one of our portfolio companies is called Exinda. Exinda is a solution provider. They provide a solution for companies to optimize their wide area networks. So it’s an appliance based networking solution. One of the things that we needed at the board is an independent board member that can bring significant experience in the networking market. So we found a great independent, his name is Rob Scott, significant experience in the networking world and currently is a senior person at Hewlett-Packard. He brings to us quite a bit of insights to what’s going on in the market, an extensive rolodex of people that we can recruit from, as well as an understanding of what large strategic players in this space are looking for from early-stage companies.
Jarrett: Did you know when you found Rob Scott, leading up to that, did you have some kind of a, maybe, very specific analysis of the skills you were trying to bring on that board, and even translate that into a job req or a job description for someone like a Rob?
Firas: Yeah, absolutely. So in my mind there are three key personas that you’d want to think about bringing to the board. The first persona is what I just described, which is the market expert, the market influencer.
A second one that we have recruited for is the CEO mentor. Now typically, CEOs look to their VCs to provide mentorship, and obviously that’s what we do at OpenView, and we pride ourselves as being very operationally savvy and being able to mentor a CEO. But at some point the CEO may evolve his or her skill sets where perhaps a more operationally experienced board member can come in and take over.
For example, we’ve done that at a couple of companies, and it tends to be a founding CEO where this could be his or her first CEO experience. Even if it’s the second one, even if it’s the third one, a CEO in an early-stage company will always need help, will always need mentorship, and it’s imperative for the CEO to have some kind of a mentor. So if you can bring that mentor to the board, then you’re really expanding the role of
the mentor to providing value at the board level and then coaching the CEO on how to manage the board, how to work with other board members, and to be sort of a voice at the board level that is supportive of the CEO.
Jarrett: I’m reminded for, Firas, that when you mentioned that the CEO, who might be taking in this mentorship or this advice, could have done it two or three times already. Nevertheless, it’s been said that being the CEO of a company is the loneliest job in the world, and perhaps this CEO’s mentor, frankly, is a bit of a companion on the journey and a sounding board, not just someone who’s going to impart Yoda like wisdom before each board meeting.
Firas: Very much so. Then the third persona I think about is the CFO persona. This is where you start touching upon more on the governance side. So the idea of a CFO persona is one, from an operational standpoint, to provide the current head of finance, whether it’s a VP of finance or a CFO, mentorship. So this would be a more experienced peer to the CFO, a more experienced mentor to the CFO. From the governance side, the CFO persona at the board level can formalize more so the governance of the board. So for example, at some point the early-stage company’s board will need to start thinking about having an audit committee. Having an audit committee, well, what’s best then is to have the CFO persona assume the lead on that committee.
Jarrett: Yes. Good, okay. Well that makes sense. All right. So we’ve got these three key personas. Presumably one or some combination of them now makes up a job description. Is there literally a formal job description that you think makes sense for a company to create?
Firas: Absolutely. I mean, this is a key hire into the company. That’s how you need to think about it. And a very, very senior hire. So how do you typically approach hiring a very senior person into the company? (A) You have to have a very specific role description and a persona that you’re aiming for. You need to leverage the network of all the board members, and in many cases we recommend using a high-end recruiter.
Brendan: That concludes Part One. Stay tuned for Part Two of this conversation with Firas and Jarrett, where they expand more on how to find and hire that perfect member for your board.
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