Schrödinger’s Mongrel (and pricing equity in early-stage deep-tech)

I’m one of those annoying people that thinks Schrodinger’s Cat is an apt substrate for pretty much any old mixed metaphor that I can drag in. Apologies in advance.

It’s an age old question – how do you support valuation, at the point of seeking investment in a tech company that has zero, or very little, revenue, but shows exceptional promise. The reason it’s an old question is because it’s hard to answer, but here’s a clunky stab. The exceptional promise/ the pot of gold/ the cat is either alive or dead – which of these states it is in has simply yet to have been observed. It hasn’t been observed yet because we perceive time in a linear manner, but to a super-dimensional observer, the cat is, right here and now in spacetime – either alive or dead.

The mission for the entrepreneur looking for a strong valuation is to ensure that the likelihood is that it is alive. To put it another way, the business leader destined to chaperone the cat into the future, must be able to demonstrate to investors that the path through the fog-shrouded woods towards the goal, is well understood; that all the threats along the way have been considered, strategized and mitigated long before they jump out; and that the cat’s future wellbeing is a natural product of the work that has already been done to plan and manage risk. Risk in this context can be conceived of as existing on a series of spectrums such as technology, scaling, market, economic, investment, counterparty etc. An investor looking to push back on a valuation will generally be doing so by applying risk multipliers. Sound strategic commercialisation seeks to manage future risk through today’s action by pushing these spectrums ever closer to proven.

Good commercialisation therefore drives valuation, because it drives down risk. Bad or non-existent commercialisation is akin to leaving the future to chance. To put it another way, curiosity may actually save the cat…

Regardless of the state of the cat, I fully acknowledge that the metaphor is now as dead as a parrot.

Thoughts on Crypto Assets, Initial Coin Offerings, and the Utility Value of Blockchain Technology

Thoughts on Crypto assets, Initial Coin Offerings, and the Utility Value of Blockchain Technology

New to Bitcoin, blockchain, and cryptocurrencies? Read this primer

A new asset class

I am a believer, or maybe I just want to believe. Is this Amsterdam in the 17th century? My view is: no; a new asset class is emerging, and we are about 45 seconds into the evolution of the species.

I have read yet another sceptical article on Seekingalpha this morning, specifically focussed on the Bitcoin (BTC)/Bitcoin Cash (BCH) split.  The author’s supposition is that there is evidence of a bubble in Bitcoin because the combined value of the two coins (BTC and BCH) straight after the split did not closely equate to the value of Bitcoin before the split. Discuss.

It is a reasonable argument that someone coming from equities perspective would (or perhaps should) make. However, there is a large debate to be had around the utility value of the new coin (and the original coin) – this is not a stock split, after all.  Then there is a further debate to be had regarding the value of an asset that is perceived to be neither created in significant quantities, nor destroyed or consumed in significant quantities; this is the gold (aka ‘store of wealth’) argument.

As I see it: Bitcoin (as well as other cryptocurrencies) is currently acting as a store of wealth; the bet you place is that in the future it will remain worth something to someone who also wants to store wealth (or to whom Bitcoin has utility value). From the wealth manager’s perspective, I can also see the portfolio diversification argument: to date, cryptocurrencies have not moved in line with any of the major asset classes (unless we make the argument that quantitative easing related asset value expansion-which appears to have taken place in most asset classes in many major markets- has driven cryptocurrency values upwards).

From a personal perspective, I agree with the portfolio diversification and store of value arguments.  From a professional perspective, I continue to seek to understand how this emerging technology fits in with businesses, which for me, is anywhere it has utility value.

A view on utility

Over the last three years the investment community has made an argument that value lies in the underlying blockchain concept as much, if not more than, the individual ‘currencies’ – and that blockchain use cases can drive value in cryptocurrencies/assets/ tokens (some of the many terms applied – and from here in this article, ‘crypto’) through giving them utility.  Off the back of this narrative we have seen a diverse group of businesses emerge where the phrase ‘blockchain’ appears, to some extent, to be relevant to their business models.  That word alone has led to millions of dollars of capital has been raised through initial coin offerings (ICOs), preselling crypto before its utility value can be unlocked – normally because the environment for its application has not yet been created.

The value of these ICOs has become so significant that major regulators have taken an interest in the market.  I would argue that the prior lack of interest related not so much from a failure to recognise some of these ICOs as ‘pump-and-dump’ schemes, but more because the value involved is low with very few (retail) investors involved.  Not a place to deploy the limited resources of any national regulator.

The first thing that readers should understand is that, as I currently perceive this technology class, there are two aspects that provide utility to businesses: one is as a currency, i.e. as a tool for enabling transactions.  The second is through the crypto token concept, where ‘tokens’ represent a play which is either equity-like (so get regulated if you want to participate here), or as single use objects that can be applied in a specific ecosystem.

Initial coin offerings

These tokens are interesting: one could use these purely to raise capital for a business, and in fact with good governance regime it may make the concept ‘shares’ significantly less relevant – why seek to operate an international business, yet confine business ownership to those who can access the confines of a single regulatory domain (which may not be easy to access to all those who wish to participate in the business)? Instead, one can buy-in at the inception of the business via a token (usually exchanged for Bitcoin), which is subsequently easily transacted on exchanges in the major markets i.e. China and the United States.

Tokens also have a single (/limited) use utility model, i.e. as a non-equity type instrument, enabling an entity to buy in bulk a token at an ICO that will provide utility in markets that currently do not exist, and through doing so providing upfront capital to enable that community to come into existence.

A key part of the process for those seeking to raise capital through an ICO is the ‘white paper’, and I see no likely change to this approach soon.  Somewhat like a share prospectus, a white paper demonstrates to readers how a team (primarily a technology team) intends to use crypto technology (blockchain) to create a marketplace, often to replacing existing markets. The quality of this white paper cannot be understated – it is critical to raising capital in an increasingly educated market.  Other critical elements that support capital raises are emerging to support the white paper – particularly a detailed track record of those on the team (because now some individuals are into their second or third crypto business), as well as the existence of a quality advisory board (and the existence in that team of those with significant experience in the proposed market operation adds considerable weight).

One challenge I foresee for the ICO marketplace is that of credibility – we will have a bust, or a series of busts, because many of the teams who have raised tens, if not hundreds, of millions of dollars in funds will either squander the capital (or incompetently deploy the capital, depending on perspective) whilst seeking to create markets. Investors will lose confidence on many occasions.

Practical application within growth technology businesses

Coming back to the companies I work with, the concept of blockchain and crypto is less interesting from the perspective of ‘imagining’ a new business (and running speculative ICOs), as it is to supporting businesses that already exist.  Many companies, although they will not be aware of it today, will need to implement this type of technology in the future.  This will be either to retain competitive advantage or to source new funds.  Where I believe companies that I work with can leverage significant advantage is where they have an existing business and a proven business model.  Given the nature of crypto tokens – they can be created, destroyed, and traded – and the enthusiasm that exists around ICOs today-they represent an extremely interesting way to propel a business forward.

Yesterday I presented one company I work with to a group involved in fundraising for crypto.  To say that the response was ‘enthusiastic’ would be an understatement.  What they saw was a valid application for blockchain technology (as opposed to paying ‘lip service’ to the concept), along with a significant number of market participants already working within the defined ecosystem – which to me is what these blockchain-based technologies best enable, given their role as a medium of exchange.  To someone seeking differentiation during fundraising in a market dominated by ‘get rich quick’ scheme noise  selling ‘ vapourware’, seeing a real business is something that creates significant excitement.

My subsequent call with another business I am working with moved to crypto.  Within two or three minutes we were discussing how this type of technology could apply to his business – where two days previous there was an awareness of blockchain, but no detail around how support could be provided by the technology class – and within five minutes we had identified how blockchain technology could be leveraged by their business (again, a business with a considerable number of customers, and a strong blockchain applicable model foundation) to provide differentiation, and utility.

The Future

I am a strong advocate of blockchain and crypto, and will continue to be so.  The ICO market is increasingly hard to ignore – if only because of the vast amounts being raised through these crypto sales.  It is certain the crypto market will go through a few booms and busts, but where there is utility value within well understood marketplaces there is a significant opportunity for businesses.  I expect to be working with several companies over the coming months of projects to investigate how this emergent area can bring value to their work.

 

Are financial models for early stage businesses of any value?

It’s not a surprise that CEOs of early-stage companies can have little regard for financial models. Possibly made by someone not full-time in their business, the financial model is viewed as being of limited value in decision-making; as something that is created predominantly to satisfy investors.

Business models for early-stage companies that I have seen frequently have one or more of the following characteristics:

  • It’s not easy to see what the key assumptions and drivers underpinning the business model are
  • Costs and revenues are not linked, which means you can’t see what happens to the business if the revenue assumptions are changed
  • They fudge the answer to ‘but when do we get the money?’
  • They are not at all easy to read through
  • They’re over-elaborate: there’s too much conjectural detail relating to revenue streams that might happen some time in the future

Above all, I see models that are not aligned to the business narrative and objectives. It is no wonder that management don’t feel like their models are relevant in how they understand their own business.

So what then should a good model for an early stage business be/do?

Much is uncertain in an early-stage business. To quote Steve Blank, ‘the primary objective of a startup is to validate its business model hypotheses’ – i.e. they are just that, hypotheses. Yet it can feel to CEOs like they have to depict certainty in a financial model in order to give investors assurance.

An early stage business model should contain just enough detail to represent the central cash-generating dynamics and dependencies of the business.

At a minimum (and probably a maximum!), the model should set down and link:

  • What the key revenue and cost drivers are for the business
  • What needs to be true for the business to succeed – i.e. the key assumptions
  • What determines the timing of money into and out of the business

If the model does this, then it can help the management to understand the relative magnitude of the different drivers and assumptions on the development of business, see what scale they need to be as cash-generative as they aspire to be, and understand how long their cash runway is.

Above all, a financial model should mirror the way that management describes its business and objectives and better enable the management to articulate – for both internal and external consumption – the flow of their business model.

In my next post, I will start to set out some fundamental steps for building such a model.

To VC or not to VC

My colleague Aaron came in this morning having attended a TechHub event last night.

Wow, and I thought some of my ideas were bad.  Aaron gave us a long description of a series of ‘companies’ he’d met (I put that in inverted commas because I’d call most of them ‘ideas’) – and some of them were truly depressing, and only one did not evoke the question “but…why would you want to do that?”

Most depressing of all is that the majority of these people are looking for venture capital (VC) investment.  Now, I’ve looked through a lot of VC portfolios and worked with a number of the businesses of which they comprise, and I am always shocked by the quality of some of the investments – and it leaves me asking the question “how?”

In reality the answer is all too obvious: many ‘ideas’ chasing too much cheap capital, brought about by low central bank interest rates.  The sad fact is: most of these companies will fail.  Why?  Because a) they should never been offered investment in the first place, and b) the ‘entrepreneur’s’ motivation for taking investment is misguided.

The first problem I cannot solve – if investors make obviously poor investments, and have access to the money with which to do so, then it will continue to happen.  However, I’d rather that entrepreneurs’ energies were put towards creating useful outputs.

The first mistake is for an entrepreneur to take an idea then go out looking for VC investment in the misguided belief that it is the end-state they want to achieve.  It doesn’t exist to boost egos – it’s there to support company growth.  It is no more than the enabler.  Your idea may not even need VC investment – and let’s face it, it may not need the strings that a lot of modern VCs attach to their investments in order to de-risk them (although you could question why they’d need to do this if they, as an industry, hadn’t had their fingers burned making stupid investments in the past).

VC investments in London these days often constrict the very companies they are supposed to be helping through capital.  They use debt instruments and clauses to take over companies and make the entrepreneur do what the VC thinks is right.  Do entrepreneurs really need / want that?  The only time you should be taking VC investment is when you do not need it.  I was taught that lesson by a very impressive US entrepreneur called Tim Wallace.  You don’t need the money, but it will enable you to do things faster than without it.  At the end of the day, if you need something – you are going to get screwed.

A properly planned business will take account of the trials and tribulations it may face – ‘courses of action’ and ‘actions on’ – it will consider all possible options before piling around the local VC community boring the good investors to death with rubbish, or convincing the incompetent investors to part with (what is often) someone else’s cash.

The rise of the accelerator model

Traditionally business incubators have been physical spaces in which fledgling businesses can rapidly develop with access to important resources at a significantly reduced cost.  This model still exists, but has been surpassed in popularity by the accelerator model, which has risen in prominence over the past 3 years.  The accelerator involves a fixed period of time with a more intensive program of activities for each startup involved and sometimes there is a small input of funds.

Why has the accelerator overtaken the incubator?

Accelerators essentially batch produce companies.  They create a pressurized but inspirational atmosphere by putting multiple startups in one place and have them build their companies alongside each other.  They can learn from each other and exploit each other’s networks, whilst also benefiting from mentoring and workshops provided throughout.  Often the focus is on the final day where an expo is held to showcase the startups that are ‘graduating’ from the accelerator.  This takes the form of each company pitching to investors.  The incubator certainly serves a useful function in the startup ecosystem too – keeping overheads low and giving access to a network of some form, but companies can stagnate within them and become too comfortable without any set goals.

Sign of the times

The increase in number of accelerator programs worldwide is a sign of how many people are turning to entrepreneurship as a career path.  The proportion of graduates starting companies straight out of university is higher, and the accelerators are the natural place for them to take their ideas to develop further.  Some even argue that a stint in one of these programs is a better investment of time (and money) than an MBA course.  It has also been said that the increased number of places in these programs decreases the quality of the candidates being developed further and that this is a waste of resources which should be focused solely on the best start-ups.  I think there is value in taking forward a larger cohort of companies though, as some of them need the extra help early on to get to the growth stage.  The startups that really aren’t great will then be weeded out when it comes to the early funding rounds.  In the future I think we’ll see a dominant set of accelerators which are deemed credible along with a few specialist accelerators whilst others will fall by the wayside.

Funding

From a funding perspective accelerators provide an excellent filtering system.  Not only do they filter out the lesser companies and ideas, but they then coach the selected ones up to a certain standard.  As an investor I would be much more comfortable investing in a company that had been through an established accelerator as it almost guarantees a certain standard.  Increasingly I think this is the case, and all the different types of investor are showing a preference towards companies that have been ‘trained’ via an accelerator program.

Post by John Sherwin

Entering the Age of Crowdfunding

As Monty Munford observes in the Telegraph Online, “Crowdfunding is hot at the moment.”

Although the idea of crowdfunding has been around for a while, it is only now coming into its own as method of funding to be taken seriously. ‘Escape The City’ for example, a London based web start up eschewed an offer from a VC while their crowdfunding proposal was still incomplete – meaning that if it did not reach full funding, they would have received nothing. A website devoted to its community though, ETC comfortably reached their target (£500,000) and even extended it to allow more people the chance to invest. This example proves not only the efficacy of crowdfunding, but that it has come far enough for a startup to consider it a valid alternative to venture capital.

Crowdfunding platforms can be divided into 4 self-explanatory categories:

– Equity based
– Lending based
– Reward based
– Donation based

Kickstarter could be considered the most famous crowdfunding platform today, and it uses the reward based model. Investors receive rewards, like recognition on a website for their contribution or limited edition T shirts made by the company for example. This model is popular because it’s legal and accessible to virtually anyone, but what’s even more interesting is the growth and development of platforms which are equity based.

Equity based platforms have been slower to gain traction because of laws in place to protect investors that pre-date the internet and crowdsourcing. The SEC in the USA is currently reviewing the JOBS act which will legalize this form of crowdfunding in 2013, so the battle lines are being drawn as many companies rush to build platforms ready to take advantage of legalization. The UK also has legislation in place but it is navigable, allowing companies like Crowdcube and Seedrs to exist here already.

To return to Mr Munford’s quote: crowdfunding is hot at the moment, but a lot of the hype is around the reward based platforms like Kickstarter. The real proving ground for startups will be in the equity based models and it’s difficult to gauge what might happen there until companies in the USA enter the fray. It is however an idea ‘whose time has come’ so we can expect to see rapid growth with some big successes and even bigger failures thrown in for good measure.

Post by John Sherwin

The Investment Game: how to choose your investors wisely

Tony O’Shaughnessy, founder of ABS, gave us some key points to consider when looking for investors for your company:

“I think the very first thing you need to understand is why you are looking for investment in the first place. It sounds really obvious but you would be amazed by the number of people who think ‘if only we had investment we could do x, y and z.’ Thinking about money problems alone is a very naïve viewpoint. You should really make sure you know exactly why you want the money, what you’re going to do with it, and that what you are going to do with it fits with your strategic direction. This is absolutely key.

You also have to think about what the role you want these investors to play:

  • Do you want them to be equity holders?
  • Do you want them to be proactive?
  • Do you want them to have valuable employment in the business?

The minute that you have investors it will affect the culture of your business and your employees directly. You need to know that it is a great idea because it allows you to build a new product, etc., but also what it means in terms of the way you operate.”

 

London Web Summit – an excellent networking event, but “Where’s the Beef?”

Hats off to Mike Butcher: he runs a great event. London Web Summit, held yesterday at The Brewery, this time brought together with Paddy Cosgrave of Dublin Web Summit, drew a wide range of entrepreneurs, investors and ‘glue’ people in a day packed full with panels, interviews, discussions and startup presentations. There was a ‘coding dojo’ for kids. There was even a band, just like on The Tonight Show. The networking was excellent – there was a matching platform for surfing the delegates and booking meetings in advance. In terms of rallying the startup ecosystem, to quote the song, “nobody does it better”…

Content-wise, there was lots on cool new ideas, and, as ever, much focus on getting VC funding and whether there is enough of it, and a session on exits. I couldn’t help feeling though that the bit in the middle – i.e. building and scaling the business – was completely glossed over. Finding out from practitioners the answers to questions like “How are you changing your organisation as it grows?”, “How have you created a scalable model and what did you need to learn before you were ready to scale?” and “How are you structuring your sales and marketing efforts to ensure you deliver your growth milestones?” can only be instructive and thought-provoking to anyone going on the same journey.

There was a fair amount of attention given to hiring the right people, but the implicit assumption is that if you get the right people, then all of this will be taken care of. If exactly the right people exist, then maybe it will be, but in practice, very few people have all the right skills, and even then, there is so much that can be learned.

With Sonali de Rycker of Accel Partners saying that it is normal for up to 8 out of 10 of their investments to fail, the odds of success post-funding are still only 1 in 5, which means that getting funding is only the start of the journey (even with a world-class VC). In this case, why would you not want to devote a huge amount of time to learning about how to navigate the course and mitigate the risk?

Quite possibly it’s not the point of an event like this to look at how to generate and manage growth. Perhaps it’s felt that it wouldn’t make for an interesting discussion – maybe it’s too detailed and too specific. But if not here, then where?

Interview with Ascendant: the current trends in UK tech investment

Stuart McKnight is the Managing Director of Ascendant, a technology and media focussed Corporate Finance house that specialises in growth stage companies. Ascendant also has experience in fundraising for buying and selling businesses and technology licensing deals. RIG’s Managing Director, Shields Russell sits on Ascendant’s Advisory Board.

Ascendant has tracked all growth-stage investments in technology companies in the UK and Ireland since 1996. Their definition of technology is broad – covering software, telecoms, Cleantech, semiconductors, and internet/wireless services – but excluding life sciences and most medical devices, as well as Management Buy-Outs and Private Equity deals.

What are the growth-stage investment trends that you look to cover?

“We keep track of five key questions in the growth-stage technology sector in the UK and Ireland: how much money is being invested; who’s writing the cheques; what they’re investing in; the stage of the companies; and whom they’re co-investing with – that’s very important as well.

“2011 was a very interesting year – we saw good growth in the total amount of investment (£786m up from £620m in 2010) and the capital was more concentrated – there were 193 deals greater than £0.5m in 2011 compared to 213 in 2010.

“228 different investors participated in those deals last year. That number 228 is important because if you speak to the many of the London-based VCs and ask them how many different people are investing they typically say 20-25 – or a maximum of about 40 – but nobody imagines that it’s closer to 250.

“There is a geographical locus in terms of where VCs are based but not in terms of what they invest in. Most of the most active VCs in the UK and Ireland are based in London but many look at companies throughout the UK and at deals in Europe too.

“There are also a large number of trade investors looking to invest. In 2011, there were 34 deals in which trade investors participated. So financial VCs are not the only solution.”

How do companies perceive VCs in the UK compared to overseas?

“If I had a pound for every person who came to me saying that they were looking for a US investor, I’d be a very rich man.

“Companies can spend a lot of time looking for a US investors as there is a perception that they are better at Tech investing than the Brits. For a company that’s grown well in the UK the obvious next stop is the US and so picking up a US VC whilst you are there seems like a good idea. Add the belief that there is a big pot of gold waiting for them over there and you get an army of UK companies getting on planes to head for the US.

“Initially many find that there is a lot of interest. It’s easy to get meetings in the US – anyone can line up two weeks of investor meetings of 45 minutes to an hour each. However many US investors see these as a ‘fishing trip’ to see what’s going on in the European market. But it’s much more difficult to get serious, hour-and-a-half meetings where investors are really thinking about you as an investing opportunity.

“Companies and their shareholders have to be really sure that the US is right for them They need to be realistic about the chances of getting US money – only 11 UK tech companies received money from the States last year.

“Europe’s actually been a much more fertile ground, and it’s much more enthusiastic on mobile/internet companies. The VCs in Munich, Paris, and Brussels have been active in the UK, and the Nordic funds have recovered a bit but they’re still not back to the position they were in about a decade ago.”

Which sectors are getting the most interest at the moment?

“There’s been a strong sector bias – the three primary areas of investment were Internet/Wireless services, Cleantech, and Software. We find that in many cases investors tend to hunt in the same packs: they follow the same trends and look for the same ideas. There’s a cohesion about what investors look for at a certain time.

“Cleantech is interesting because it’s still strong but we’re beginning to see it wane. I could go to a Cleantech conference every day of the week but in truth there was a dramatic drop in Cleantech deals last year, even taking a broad definition of Cleantech that includes solar, fuel cells, electric motors, and so on.

“In Q1 last year there were hardly any Cleantech deals – perhaps 2 or 3; Q2 was very busy then Q3 and Q4 were very low. There were only 31 Cleantech deals in total compared to 45 in 2010, which compares to typically 60-70 deals per year in Internet/Wireless services and 45-50 in Software.

“Investors in Cleantech are making bigger gambles on later-stage companies than they were when Cleantech started to become popular and we started tracking it in around 2004/5.

“A lot of these businesses are still effectively early-stage because they are struggling to get meaningful orders from customers or even just getting a customer even though they’ve been going for many years. For most LLP backed VCs, when an investment holding period extends beyond 5 years, the IRR on the investment starts to get difficult. Many funds are starting to realise that in some cases Cleantech can be like semiconductors in needing lots of capital and long holding periods. Hence the rapid reduction in the number of active investors in the sector.

“Cleantech companies are starting to look for other options like funding through the balance sheet investors or ‘green funds,’ and we’ve seen a larger participation from non-standard VC funds like trade funds or family funds that can take a longer-term position.”

The majority of deals last year had more than one investor. Why do firms co-invest?

“Co-investment can be a bit of a magic trick for investors and for companies. Not all investors get the same deal flow – some get a lot of high-quality deals; some get a lot of average deals; and some struggle to find the right opportunities.

“Well-established firms like Index, Balderton, and Accel see a high-quality deal flow, whereas for the others a bit further down the league table it can be a rational business development strategy to build up relationships with other investors and look to co-invest with them.

“It’s in the investors’ interest to network. The relationships between VCs are partly personal and partly corporate. The relationships are primarily personal but there is such a thing as corporate memory – people will remember joint successes and they’ll remember joint failures.

“In the UK around 60% of deals have more than one investor. This is one indicator that the market is in ‘good health.’ Just before the ‘internet bubble’ burst in 2000-1 less than 40% deals were done jointly – reflecting the misplaced sense of confidence VCs had at that time – they were so sure that they had the best deals that they did not want to share and wanted everything for themselves. Fortunately many of those folks are no longer with us.”

What advice would you give to growth-stage companies looking for funding at the moment?

“Before a company speaks to investors, they need to have a significant opportunity, a clear differentiated plan to exploit it, a good team, and realistic expectations in value and the amounts they want to raise.

“For Ascendant to take on a deal, we would need to comfortable on all these points and be certain that we could identify 30-40 potential investors who would actively consider the opportunity. We are happy to give some guidance to companies looking at funding options – it is a tricky market out there. ”

For more information on Ascendant contact Stuart McKnight at smcknight@ascendant.co.uk

RIG CEO roundtable finds boards of early stage companies rarely give entrepreneurs the support and challenges they need

RIG recently hosted a CEO roundtable dinner to explore what it takes to make a board work.

The discussion revealed that only one of the CEOs had ever had a board that had functioned well and pushed the company forward. Overall the level of dissatisfaction with boards was high.

The main sources of dissatisfaction for the CEOs present were:

  • Not having a board that could contribute or challenge them sufficiently on strategic issues‬
  • Particularly for first time entrepreneurs, having a board made up mainly of executives/founders, making it difficult to switch out of operational mode into a more strategic mindset‬
  • Finding that board meetings had become reporting sessions to professional investors. While the financial rigour of professional investors was valued, it tended to take precedence over strategic discussion and the investors often expected to be treated as first among equals‬

So what kind of capabilities and composition would they like to have (or have had) for their boards?

  • At early stage, people with contacts – essentially high-level salespeople or door-openers‬
  • Closer to exit, a board that can spot and generate exit opportunities‬
  • At all times: people who have done it before – who can challenge and whose experience can be leaned on.

‬There was much lamentation in particular at the lack of sales experience among virtually all the boards – it was felt by all that this is an essential part of the balance that is generally missing.

Above all, there was agreement that a board has to have a clear purpose that fits with the needs of the company at its stage of development. Because the early stage environment is one of change, the composition of the board may need to change more regularly than would be the case for a more mature company.

How then to put together a board that is a good fit?

  1. ‪Understand the needs of the company at each stage – this should determine the purpose of the board
  2. Select board members accordingly: try to strike a balance between externally facing board capability (sales, marketing, PR) and internally facing (strategy, operations, planning)‬
  3. ‪‪Decide what the board and its members should be spending their time on‬
  4. ‪Choose performance criteria against which to measure the board and its members
  5. ‪Give voice to the founder executives without needing necessarily to have all on them on the board‬
  6. Recognise when the company’s needs are changing and see whether the board needs to change and adapt to better serve them