May 8, 2019 –
Startups typically follow a well-worn path when it comes to building their boards. Each time they raise money, they add someone from the firm leading the round as a director. Only in the run-up to a public offering do they add independent directors.
Some startups are now breaking from that mold. And I think it’s about time. In fact, I encourage the startups I work with to add independent board members early if it makes sense for their business. I also encourage them to emphasize diversity when they do.
In my experience of having served on boards of about 50 companies, the ones that have diverse boards end up performing better in the long run. The perspectives provided by board members with different backgrounds, experiences and networks help accelerate success of companies. For example, the board of one of my firm’s portfolio companies included a serial entrepreneur who served as a sounding board for its first-time CEO and pushed for a focus on customer success, which ended up being critical as the company successfully pivoted to find product-market fit. Another of its board members helped the CEO understand the software ecosystem and provided guidance and best practices on scaling the business, helping set the stage for the company’s acquisition later.
In my experience, founders make better decisions when they’re able to consult trusted outside board members with different backgrounds and experiences. I also think having independent and diverse board members sends valuable signals to employees and future investors.
One of the arguments against adding board members really early is the ability of a CEO to recruit world-class board members to dedicate their time. The CEO of one company I work with said he waited to add independent board members until his startup had product-market fit because he thought he’d attract higher-caliber candidates as a more proven company. He tapped a former mentor as his first independent board member. Even though they had worked together before, it took several months of getting to know the company before the mentor joined the board. It then was easier for the CEO to add his second independent board member.
Another company I work with provides a contrarian example. Its CEO and founder added independent board members shortly after raising its series A nearly three years ago. Its leader, a first-time CEO who is creating a consumer category, explained that his company needed all the expert help it could get so early in the process. The founder said their independent board members do a lot of work and have helped the company get product-market fit, among other things.
An independent board member can also provide a different perspective from financial investors. In addition to just adding non-investors, I think it’s important to add women and members of minority groups to boards.
Diversity is an easy idea to get behind. A recent PwC survey of corporate board members found that 94% said diversity brings unique perspectives to boards, and 84% said diversity enhances board performance. Yet that abstract appreciation doesn’t translate to action: Women hold just 22% of board seats at S&P-listed companies, according to that survey, and members of racial minority groups hold just 16% of Fortune 500 board seats, according to Deloitte.
One reason change has been slow is that founders and CEOs tend to find board members from their networks. That’s especially true at startups, which don’t often engage search firms that can help bring diversity. They also tend to over-index on former founders and people who have “done it before.” For a variety of reasons, these filters tend to reduce the number of women and minority candidates who receive consideration.
I believe this lens is too narrow and that founding experience is not the same as operating experience. There are plenty of talented people out there who have led marketing, growth and operations in highly complex industries who were never founders. These people could all bring valuable expertise to founders in areas of real need. Better yet, many of them are women or members of minority groups, who can bring different perspectives to problems.
Building diverse boards early in a company’s evolution should be a priority. Diverse boards not only provide different perspectives and networks, but also help enhance performance of the company. Further, adding women board members is critical for understanding the gender diversity of employees, customers and the broader ecosystem a company plays in.
Originally published on Forbes.