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Recruiting Outside Directors: Get off the Dime

January 17, 2011

Brad Svrluga

Devil boardroom

I was talking recently with my good friend and mentor Pete Willmott about building great boards.  Pete’s got a decades long career of success as a CEO and entrepreneur that started with his role as the original CFO (and then a Director for three decades) at FedEx.  He’s served on a ton of corporate boards.

Pete is a master strategist and a real student of good governance.  And he believes, like me, that truly great boards can be amongst a company’s most powerful assets.  We also agree that boards cannot be great unless they have exceptional outside directors.

In my experience, startups too often fail to make it a priority to find great outside directors.  While sometimes you bring that perfect person on coincident with a financing event, more often the right candidate isn’t yet known, and a seat is held open for a search that likely never gets done.

Why is that? It’s a classic example of the tension between urgency and importance.  Finding that director is accepted as important, but it’s a long way from urgent. You’ve just closed a financing and you’ve got a hundred urgent pots on the stove that need tending to. So the important/not urgent list never gets tended to and that board seat sits empty.

Shame on all of us who let that happen.

Some of my peers in the venture business argue that outside directors are in fact not even that important, and rarely add value.  In fact, one of our companies was recently raising a later-stage financing round and the new lead investor tried to insist that we would never have any outsiders, because he thought they were consistently useless.  Lunacy. If you haven’t had good experiences with outside directors, you’re just bad at picking and recruiting ‘em.  Try again.

So why, as an investor or entrepreneur, should you get religion on this topic?

  1. You’ll need a disinterested party somewhere along the way to vote and opine on inside financings or other complex issues.
  2. You don’t ever want to be in a position where it’s just the investors vs. management in a key debate. These things happen, and a third party in the room makes all the difference.
  3. As a CEO, you deserve a safe haven for conversations that you might not feel comfortable having with your investors, or at least a place to dry run an idea or complicated issue before having to go to the investors with it.  As an investor, you want your CEO to have this sort of outlet.
  4. Getting consistent, focused help from experienced business-building superstars is always a good idea. And when you make them real stakeholders, they’ll give you that much more focus and attention.
  5. The deep industry perspective of someone who’s operating in your industry can increase the company’s odds of skating where the puck is going in a very different way from your investor board members.
  6. Last I checked, hanging out with folks who have high-level relationships at strategic partners, customers, or potential acquirers of the company never hurts.
  7. If they’re very well known and/or very relevant to your industry, they can add real credibility, which can help with attracting investors, customers, or employees.

And the list goes on.

Trust me – you’re going to really want that outside perspective for one reason or another eventually. But if you don’t bring it to the table right away, by the time it becomes more urgent (like, you could really use an outsider with industry ties to help guide an M&A process) it’s too late to start looking.

Ideally, we should do these things concurrent with a financing, when we can ride the PR and momentum of that event to support recruiting. But there’s no excuse for not starting now, regardless. If you have a seat open, get to work on filling it. And if you don’t have any seats designated for outsiders, have a serious discussion about creating one or two.

Like anything, someone needs to own the recruitment process. Here I say put ownership of this on one of your VC board members, and make him report regularly on progress. The CEO will have to be closely involved, but she’s got enough other things to worry about and this can easily be managed by another director.

Finally, when looking, don’t let perfect be the enemy of good. The ideal candidate is rarely attainable, if they even exist (I, too, would love to have Steve Jobs on the board of one of my companies). Sometimes it makes sense to find everything you want through two people. I’m a fan of pairing one outsider with deep expertise and relationships in our industry with one from outside who’s just a killer company builder and strategist. That pair will almost certainly elevate the dialogue around your board table by a notch or ten.

So get off the dime and start looking. To help focus those searches I’ll share some thoughts on things to look for and to avoid in director candidates in a post next week.

Good luck!

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5 Comments

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  1. January 18, 2011

    Thank you for the post.
    Great Read

  2. January 18, 2011

    Brad, great post! I would go so far as to say that the VCs should be trying to make themselves redundant on the board as the portfolio company develops into a larger company. This is not an easy task, but well worth it…as with any role, it takes work to find great people to fill the role and the trick is to find people with the right DNA who also have the time and inclination to truly participate. Clearly the VCs lose some influence, but the right board members truly add value to a company!

    • January 18, 2011

      Amen. The sooner you get to the point where outsiders are equal in number, if not outnumbering, the VCs, the healthier the company you’ve got!

  3. January 23, 2011

    I agree, but often for a startup, especially pre-revenue, it’s very difficult to get a well-known star for a Board of Directors, but they are available for a Board of Advisors, which has none of the same legal responsibilities but can give equal substantive advice and connections. Until raising a $1mm + A round, it’s unlikely that there will be investors on the board. So my advice would be to offer Advisory Board positions (still with a little stock as a show of appreciation) while the company is young, and if that relationship blossoms, you have already an outside Director ready to be moved into a proper BoD.

    • January 24, 2011

      Absolutely. Advisory boards can be great, especially early on. But I encourage folks to not wait too long before getting serious about getting outside directors involved. They don’t need to be industry luminaries, necessarily – just smart minds who can bring some different and informed perspective. Look for my upcoming post on this.

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