Critical success factors for startup boards
At Nesta Impact Investments, we have the privilege of investing in exciting, early stage businesses that aim to improve the lives of the people around us.
At the stage we look to invest, the businesses we speak to are at a pivotal point in their development. They have launched their product, secured their first users, and are looking to use investment from us to really kick off their growth and measure their impact.
When we invest in one of these businesses, it’s important for us to have a seat on the board of directors. We’re not unique in that, startups will find that most venture investors ask for a board seat. There’s a good reason for it: the board is responsible for supporting the business in making strategic decisions, such as fundraising, hiring or firing key people at the company, prioritising development opportunities or selling the business when it’s ready. These issues require careful deliberation with decisions taken in the interests of all stakeholders, but too often, the board is not managed in a way that enables the members to deliver the desired value to the business.
We recently got together as a team to reflect on our collective years of experience in investing, both at Nesta and in previous roles, to ask ourselves: “What makes a good board?” We’ve taken our whiteboard notes and summarised them into five areas: purpose, structure, transparency and culture, preparedness, and people.
Five elements of a good startup board
1 - Purpose
We believe the purpose of the board of directors is to both support and challenge executive management teams to enable them to achieve their potential as they grow their businesses. Directors direct. They identify destinations, set goals and measure progress. They advise on strategy and guide management teams through the ups and downs of growing a business.
The board isn’t there to run the business, but it equally isn’t just for friendly chats. Too often boards are perceived as an encumbrance to a management team, imposing unhelpful process and information requirements on the business, or setting moving targets that complicate reporting. Executive and non-executive directors share a responsibility in finding the right balance, with executives proactively engaging with their boards, and non-executives ensuring that their requests from management are relevant, proportionate, and constructive.
2 - Structure
The typical structure of a board includes a chair, a number of non-executive directors, and at least the CEO of the business, but should ideally include other executives as well. Broad participation provides a more holistic view of the business, brings together insight from outside experience, and sets the tone for the board as a place for constructive discussion.
There is no right answer for the number of directors, but as a general rule, an odd number can prevent the risk of a tie if decisions come to a vote. Startups can manage the number of board members by carefully considering investment terms, creating separate committees to deal with the more administrative matters that require director input (such as a remuneration committee), or encouraging interested non-investors to join a thematic advisory board instead of becoming directors.
Once the board has been created, the roles of the people involved need to be clearly defined:
The chair’s primary role is to manage the board, ensuring that board meetings run smoothly, intermediating between executives and non-executives and holding individual directors including the CEO accountable for their performance. The CEO and chair should communicate regularly outside board meetings as well.
The CEO communicates information to the board about company performance as well as challenges and opportunities to equip directors with the knowledge needed to take decisions effectively.
Other executive board members, such as a COO or CFO, contribute to this upward information flow and represent their specific areas of delegated authority.
Non-executives should not only attend every board meeting, but also dedicate sufficient time to prepare for the meetings to be able to ask meaningful questions, celebrate successes, highlight concerns, and offer help where they can.
Finally, boards should agree upon a regular schedule for meetings, with each meeting following a clear agenda. We ask the boards of our portfolio companies to meet monthly, for at least two hours. Whilst this structure might not fit all boards, what matters is for sufficient time to be given to the meetings for them to be genuinely meaningful to the business and executive team.
3 - Board preparedness
Board meetings are only as good as the information shared within them. The management team should compile a consistent board pack for each meeting and distribute it early enough to allow for a thorough review of the information by the directors. We think that board packs should, at a minimum, contain:
The minutes from the prior board meeting, which should include any follow-up actions that had been agreed.
CEO/management report on significant information that has changed since the previous board meeting, ie updates on product development, sales and commercial performance, customer experience, hiring, and any other major changes.
Management accounts for profit and loss, cash flow, and balance sheet. The accounts and other operating performance information should be reported on a consistent and accurate basis over time.
Performance on agreed-upon impact metrics according to the impact plan for the business.
Any other ad hoc items that the board should be aware of or needs to discuss.
Too much information can cause as much inefficiency at board meetings as too little. In our experience, directors have a limited amount of time to review the packs, so board meetings can be vastly improved when management shares consistent and relevant information, which clearly identifies change from month to month.
4 - Transparency and culture
Establishing the right culture with the board from the outset leads to success in the long run. Executive and non-executive directors should work together to build a culture of trust to allow for open, honest, and sometimes difficult conversations with a clear understanding that everyone involved has the best interests of the business and its stakeholders in mind.
By taking a board seat, investors and independent directors are signing up to a statutory responsibility to look after the interests of the stakeholders of a business. Board members should think like owners and be aware of the needs of customers, staff and management, pitching in to help when the business needs it and knowing when to leave the management team to do their jobs.
5 - People
The effectiveness of boards ultimately comes down to the people. The ability to capitalise on the previous four points in our list depends entirely on the level of commitment and engagement from the people involved. We have seen businesses thrive when the executive and non-executive directors on the board are engaged and aligned on the strategic direction of the business, and we have seen them falter when the board splits into factions. It is incumbent upon each person to commit the time and energy needed to make the board work for the benefit of the business.
When it comes to boards, everyone will get out what they put in. Resource and manage a board with intention, and the business will reap the rewards.
We recognise that we don’t have all the answers, so we’ve included links to other resources that provide helpful insights, and we’d appreciate hearing your thoughts as well.