These documents are designed for the Boards of Directors for start-up, angel-funded, and venture-capital funded technology companies. Recently, corporate governance issues and the roles of Boards of Directors have come under greater scrutiny. The success rate of early-stage companies is approximately 10 – 20%, (depending upon the definition of success). The technology industry has recently come to appreciate that a properly structured and functioning Board in these early-stage companies is critical to their success. Improving the effectiveness of Boards could significantly improve the success of companies.
2.0 Challenges Specific to Early Stage Tech Companies
There are several factors which challenge the success of early stage tech companies:
2.1 Inexperienced management.
Many tech companies are founded by entrepreneurs in their 20s and 30s. Many are looking to exploit a technical innovation they have developed or envision. Some see a market opportunity needing a new technology to fill. Typically, these entrepreneurs lack experience in the many facets of growing a successful technology company: planning, budgeting, human resources, finance, sales, marketing, governance, risk management, etc.
2.2 Under capitalized.
Most technology companies, particularly in Canada, do not have anywhere near enough capital to hire the experienced senior executives they require, or to invest in sales and marketing, where the battles for markets are won and lost. Consequently, many founders perform many functions in the absence of an experienced team around them. They are stretched too thin and are performing many tasks for which they are not trained, and worse, ill-suited.
2.3 Rapid change.
The technology industry moves quickly. Opportunities present themselves quickly and unforeseen problems can spring up. Decisions must be made quickly often without all of the information required. Inexperienced management teams often make the wrong decisions.
2.4 Large consequences and small margin for error.
Often, an opportunity or a problem can have significant impacts, positive or negative. Whereas larger, more mature companies can diversify their risks, early stage companies are often confronted with a single, “bet the company” decision. Because the companies are small, the margin for error in the decision is also small. Experienced advicel is crucial in improving decision-making.
Also called “Founder’s Syndrome”, technology entrepreneurs are typically high-energy, confident people, or else they never would have taken the risk to found a company. While this strength of character is essential to driving the Company through the many challenges to success, it has a dark side. Many entrepreneurs believe they have all the answers and resist advice. They also want to make all the important decisions themselves, and frequently over-rule decisions with which they do not agree. This behaviour typically prevents the company from growing larger than a small size defined by what can be accomplished by a single, driven founder. Usually it causes the company to become one of the 80-90% that fail to achieve their expectations. Worse, founders often realize that they need to take advice and delegate decisions, and resolve to do so. They hire senior executives and strengthen their Board. Often, they may cede the CEO position to an experienced manager. However, as well-intentioned as these actions are, when confronted by an important decision with which they do not agree, they may grab back the controls, cursing the day that they listened to people who didn’t understand the situation. Please see related document Founder’s Syndrome.
These are a few of the problems that distinguish early stage technology companies from later-stage companies. Whereas mature companies typically have experienced management that can anticipate and mitigate problems which manifest themselves over time, and draw upon ample internal resources and the experience of a seasoned Board, early stage companies have few of these advantages.
3.0 Typical Boards are Ineffective
Typically, Boards of early-stage companies are not well-equipped to help. Frequently, there is no effective Board at all. At start-up, it may consist of the founders and perhaps a couple of senior executives. As they begin to raise financing from friends and family, one or more of these people might join the Board. However, none of these people are independent of the founders and cannot provide the detached oversight that the company needs. Few could challenge the founders if they believed they were acting in error. If the company grows and is able to attract angel or venture capital investment, the Board will gain strength from the appointment of angels who have operational experience or VCs who understand governance issues and provide oversight. However, stronger Board members do not always lead to a stronger Board. Too often, the directors are extremely busy, dividing their time among many investments. They cannot spend the time required to assist management in evaluating the information and exploring options, so their value is not realized. When faced with the determination of a mis-guided founder, many will defer, or resign; neither of which helps the company.
4.0 Improvements are Happening
Early-stage companies have a greater requirement for the oversight and advice that an experienced Board can provide, yet rarely is this present. Fortunately, informed by the growing expectations of Boards of large public companies as the implementation of the Sarbanes-Oxley proceeds, many technology industry veterans are now also focusing on the role of the Board in early-stage technology companies. In the context of the challenges described above, there is a consensus that these Boards need to be more proactive and to exert a greater level of oversight than has been the case up to now. The jobs of Directors, and particularly of Chairman, now require more time and effort.
5.0 Other Help Boards Can Provide
In addition to the oversight and mentoring of management which are the focus of this website, Boards can help early stage tech companies in other tangible ways:
- Networking and contacts to accelerate business development, financing and recruitment.
- Credibility that comes with the active support and involvement of respected industry veterans.
- Strategic thinking to inform the company direction in the longer range, and its eventual exit.
6.0 Closing Thoughts
I have assembled this compendium of documents to assist entrepreneurs, directors and companies to structure and operate a Board of Directors. These Boards will be proactive and operate at a much higher level of governance than has been typical to date. The goal is to improve the performance of the Board, in order to improve the performance of the companies and their management teams, and to increase the success rate of early stage technology companies.
Although these materials may be useful to directors and managers in many jurisdictions, they are written on the basis of Canadian law and practice.
1 For more information on the stages of company growth, please see the seminal article: “Evolution and Revolution as Corporations Grow”, Larry Greiner, Harvard Business School press, http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name=itemdetail&id=98308.