How Diverse is Your Startup Board?



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On MLK day, the subject of diversity comes alive. And while we address diversity in Startup Boards via the axis of gender, it does not minimize racial challenges. The following post applies to diversity without diluting the premise of competence.

As Startup Board’s book cover design was being finalized, Brad nudged for a change of the cover. He didn’t yell, with dramatic flourish, “Stop the Press” ( which I have always wanted to do icon wink How Diverse is Your Startup Board? ) but quite simply said –  “we need more women on the cover – more than just one.”

Startup Boards Cover 300x300 How Diverse is Your Startup Board?

I didn’t even realize that we had a cover with a “male dominated” board. Call it “business as usual” lazy thinking, call it carelessness “whats the big deal anyway” or any other name – I am embarrassed!  And I am glad Brad asked for this change. Because if he didn’t ask for it, the status quo would prevail. That’s unacceptable and we need your help to change that. Here is why:

1) Business as usual will not get us there:  All male dominated startup boards  = business us usual. These boards have worked for the large part but we dont know what we are missing. And what got us here will not get us there! In Startup Life Brad and Amy write about “Lack of Diversity” in startups and believe that in 20 years, the gender ratio would be equal. Thats realistic. But it should also make us wonder – why so long? Why can’t we do better? Do more faster? And what are we missing by accepting the status quo?

2) Our brains become ossified: At least, mine has. Otherwise I would have stopped to ask the same question Brad did? We reached out to a number of women (Startup CEOs and VCs alike) to find out more on this lack of diversity. Cindy Padnos of Illuminate Ventures told us a fascinating story of how, while serving on a startup board, the question of adding a new board member came up. This was a male board + Cindy being the lone woman. Several candidates were proposed. Cindy recommended the name of a woman, who by far, was the most qualified. The rest of the board members readily accepted the recommendation. Cindy pointed out that “It was more of a top-of-the-mind issue – everyone readily agreed to bring her on, but hadn’t thought about her.” The other board members even knew her. But its kinda like the book cover design – till Brad pointed out, I thought the cover was fine.  We see this in society on a number of different levels – its not necessarily by design, but by subconscious patterns of generational behavior.  Do you think a women can play a trombone?

3) The heartbreaking story of Abbie Conant: Abbie Conant applied for the position of a trombonist at the Munich Philharmonic.  Candidates auditioned behind a screen – a blind audition — and she was judged the best amongst 32 men.  When she stepped out from behind the screen, the judges were shocked – a woman? Then begins her ordeal. They suddenly felt she did not have enough physical strength. Or nerves. Or empathy. She could not play because she did not have enough lung capacity. But Abbie Conant was a true fighter. Thirteen years after she entered the orchestra with a blind audition, the German courts ruled that Ms. Conant be placed in the same pay and seniority group as all of her male solo-wind colleagues. Read her heartbreaking story here. And now ask yourself, what if Abbie was your mother? Your wife or daughter? Would this all-male ossified behavior – women cannot play trombones – make you mad? If we dont watch our patterns, we wont progress.

4) The business case for diversity: There is plenty of data for publicly traded companies that show how women make boards better. “Gender Diversity and Performance” – a report released by Credit Suisse (Aug 2012) shows some interesting data.  In an analysis of 2360 companies using over 14,000 data points,  publicly traded companies with more than three women on the board, had a market cap 3X higher than those with no women. What does that say about value of women? Three times smarter ? Return on Equity is 4% higher when you had at least one women on the board. Debt was lower….no matter which index you used, the business case is evident. Granted its with larger / public companies and but its hard to argue that such benefits cannot be seen with startups. Diversity of thought, experience, intellectual horsepower counts. Yet it starts with our ossified thinking – the data is there but we need to break our own patterns. We need to try harder.

5) The Yin and the Yang:  Wendy Lea, CEO of GetSatisfaction says, “Its a sign of an evolved CEO who balances out the yin and the yang. At the end of the day, we are talking about the feminine energy and masculine energy – how these two can help the startup grow and become successful.” Indeed, the emotional side and the analytical side are equally important. But at times, an all male board can become self congratulatory. Lucy Sanders, Founder of National Center for Women in Technology (NCWIT) has been on several boards and reminds that “its about performance at all times yet women can raise some issues quickly.” Lucy pointed out a board situation where in an all-male board cast, the VP of Sales continued to miss his targets. Yet he doled out great punchlines and smooth talk – the board bought it all along till Lucy raised her hand. (She was the solo woman on that board). That VP of Sales was ultimately fired – that action may have saved the company.

In summary, its upon all of us to make a conscious effort to improve the diversity ratio – we need comptent people to help entrepreneurs. No compromises there – but we need to make a direct, thoughtful effort to attract board members of diverse backgrounds. And we need to prove Brad wrong that it will take 20 years to change the ratio. It took Abbie Conant only 13 years, after all, to fight those hardscrabble German philharmonic dudes.

 


Startup Boards: Would you like a flatscreen TV with that termsheet?



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In November 2008, T.A.McCann, (or TA) an entrepreneur based in Seattle was getting restless. (We’ll save the Sleepless in Seattle analogy for another story icon wink Startup Boards: Would you like a flatscreen TV with that termsheet?

It was time for him to raise his first round but what kept him up at night was (besides the funding) the board-CEO chemistry. This was TA’s sixth startup, and he wanted to make sure he did what his gut told him – seek out those investors who understand the business and not just bring money. And can stand alongside and support his entrepreneurial roller coaster ride!

TA did not start searching for money and made a few moves that show his entrepreneurial acumen. And a lot of entrepreneurs can draw some lessons from his story – he is one of the few we know who proactively built his board.

TA did his homework well and knowing Brad is an avid runner, asked him via a tweet for some suggestions on places to run in Boulder, CO.  A few weeks later, on a cold December morning, Brad and TA, not necessarily dressed in their best attires meet at 6:00 am  and head out for a run. Five months later, Foundry Group led a $6.75 million Series A investment in Gist alongwith Vulcan Capital. (Read the WSJ blog on how Gist’s new funding began with a twitter message)

Brad joined the board along with Steve Hall of Vulcan Capital and a classic three member startup board was formed. As we interviewed TA for Startup Boards book, we found a simple theme that governs and creates a good startup board dynamic:

1) Startup boards function like a team: All three were actively involved in all decisions and walked alongside – there was no hierarchy. “It would have been very weird if we had the formal stuff of motions, votes, call to order and such” says TA. We were like a team.

2) No painful board slides:  TA would prepared a pithy 2/3 slide presentation where the board would discuss top 3 issues and how they could help. “It was not a presentation in my view but more a framework for discussion – 80% of time was spent in discussing the hard issues —- and yes, it was productive” says TA.

3) Making tough decisions and delivering strong outcomes: The board and TA (as CEO) would often not agree on everything. “For example, I wanted to find a way to get some revenues and the board wanted to push for adoption  - we were split straight in the middle on this decision. But we picked a path and the board supported me at every step. I had to earn their trust by my actions – these are accomplished only after you deliver meaningful outcomes” TA says.  “The hardest part for any CEO is to admit I dont know” he adds, but if you build a trusting board-CEO relationship, this becomes easier.

With TA, it was a text book case – a great CEO, a supportive board and good market timing – in late 2011, Gist was acquired by RIM / Blackberry. Three years after the first round of investment, everyone celebrated the outcomes. Read TA  views here in his blog How VCs can be awesome board members

As CEO, you need to know how your investors can

(a) function as a part of your team,

(b) how they behave in the time of crisis,

(c) how they can support you when you are missing milestones – rest assured you will miss plenty of milestones.

If you build your board proactively, you can be assured of supportive behavior in tough situations.  We all have had our share of bad relationships – screamers and unstable minds who crumble under pressure, or worse threaten to fire / sue / emotionally blackmail you. One CEO we know was threatened of shareholder action after a down round. Entrepreneurs who focus too much only on the money (scoring a high pre-money) and not enough on the board-CEO chemistry run this risk – a non-trivial issue by any means.

In such situations, you get the money but end up dealing with all kinds of unknowns.   Its like getting married only for the dowry (lots of cash, a flat screen TV, some gold or even a convertible beemer) and having no emotional connection with your partner. So if you chose to focus only on the money, at least follow the best practices of dowry — ask for a flat screen TV with that term sheet!

 


Why Do Startups Even Need A Board



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Lets face it. As founders and entrepreneurs, you have much to do – getting to your minimum viable product, developing customer interaction, hiring team members (when you have no cash) and managing the accounts/books (when you have some cash).  Sooner or later, you have a board of directors, three to five (or even seven) Type A personalities who seek your attention and at times will tell you what to do. What a pain in the rear! Or are they?

A Board of Directors is formed as soon as you raise your first outside round – if its a smaller amount from angels, crowd-funding or F&F (Family and friends, or in some cases fools and friends), you can get away without forming a board. But we strongly recommend establishing an objective outside group that would:

(a)  understand your startup’s milestones

(b)  help you get to your milestones faster

(c)  hold you accountable if you don’t get there.

Prior to funding, this could be a mentor, or a smaller group which acts like your training wheels for a formal board setting. We will get into some of these “corporate governance” nuances in greater detail in the following blogs.

Lets take a step back and understand how humans behave.

1)  We believe our own hubris much too often: As an entrepreneur, you are the one to change the world. But when do you know it’s hubris versus progress? More often, entrepreneurs are strong headed and do not take ‘no’ for an answer. But this very attribute can become a detriment when the markets change, competition becomes stronger, or regulatory forces can kill your startup. An outside individual is  not as vested – they can see the forest and are not caught up in the minutiae. Take the example of a researcher who invented a cool technology – having received rave reviews in business magazines and featured in the “Best of…” columns, this founder felt like there was a billion dollar opportunity here. After two years of playing around and having burned over one million dollars, the researcher still believes there is a billion dollar market. Product development status is stagnant, markets have moved on, competition has invented products that are 10X cheaper and in all practical realms, the opportunity is over. But this is the founder’s baby and he still continue to try and make it work, when every indication says, its done.

A good board member, who is honest and bold will call this out and save the researcher from his own hubris. Families go bankrupt and entrepreneurs lose it all when such paths are unchecked. Consider former entrepreneur and VC Jeffrey Bussgang’s example (quoted in his excellent book, “Mastering the VC Game”). When his sales pipeline did not turn into contracts, one of his board members pulls out a pen in a board meeting and says, “All I want to know is which of these prospects / companies would you have signed contracts with…by the next board meeting” – that push, writes Jeff, focussed the team. “I don’t think I spent a moment over the next 30 days without wondering how the heck I was going to close those contracts we had promised. Fortunately, we closed them all”  writes Jeff. Now, that’s the value of a good board member – he pushes you without being a pain. And you as the CEO gets the spotlight and the glory.

2)  We are not as rational as we think we are: Hiring decisions, go-to-market and other decisions can often be made by the seat-of-our-pants. After all speed matters so why get into a protracted process interviewing or doing personality tests. Your dorm mate and beer buddy are great “Ruby on rails” ninjas – go get them and throw in a bit of stock options as well. But more often than not, such decisions lead to losses and delays in product development / launch. Its even more painful to fire your beer-buddy – you have never done it before. A good board will help with process, ask the right questions, and develop guidelines. They could bring in a rational approach and slow that bullet train down…. just a wee-bit so there are  no proverbial train-wrecks.

3)  We like to stay in our comfort zone: By far, this is the one challenge which affects individuals more than anything else. You might be able to code but may not be people-persons – or have no idea how to manage a team. People have egos, emotions, dreams and aspirations – machines don’t. Its a lot easier to deal with machines.  On the other hand, a people-Pollyanna entrepreneur could be on off-site treks and kumbaya all day without meeting the key milestones. In either case, we do not like to always grow, learn, and get out of our comfort zone. Staying in the warm pool is easier than getting out in the cold. In such a situation, a board can objectively point out that the team needs to be complemented.

4)  We lie too often and then rationalize it: In his classic book, “The Honest Truth About Dishonesty: How We Lie to Everyone—Especially Ourselves author Dan Ariely narrates a number of fascinating studies to show that “locks are put on doors only to keep honest people honest” – it took a while for us for that statement to sink in. And as bizarre as that may sound, consider his research which shows most of us lie every now and then. We need to save face, look smart or keep the peace. We pretend its fine as long as no one is looking. But a good board member is looking with eyes wide open. And when someone is looking we behave differently. Let your board be your guide and “keep you honest.”

Such can be the immense value of a good board – keep you on track, call you out when you flail, help you and in some cases save you from yourself. Such human behavioral challenges are primal – this is not meant to be critical of our behavior but an educational forum where we try to get better.

Do you know of other such challenges when our hubris exceeds our intelligence?


The Value of Startup CEO’s Sitting on One Other Startup Board



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I recently wrote a post titled All CEOs Should Be An Outside Director For One Company.

Mark Suster from GRP historically disagreed, saying “I’ve always believed startup founders need extreme focus on only their company to succeed.”

But my post changed his mind and today he wrote an awesome post today titled Should You Really Sit on Other Boards When You’re a Startup Founder?

If you are a startup founder or a CEO, I encourage you to go read each post and think about it, especially the day before and the day after your next board meeting.