Guest Blog Post by David Unsworth, a Partner with RBC Venture Partners. The views expressed in this post are his own.
Raising a new round of financing is a difficult and highly distracting exercise. Having a well functioning board helps your company make a great first impression, facilitates valuable introductions, and ultimately helps negotiate a successful financing that allows you to get back to the business of growing your company and creating shareholder value.
Before I discuss their role in the fundraising process, I’d like to share the some of the main characteristics of a well functioning board. This particular list was adapted from Fred Wilson’s blog, AVC. You can read more of his work here.
1. Boards work best when they become deeply engaged in the important issues (operational, leadership and strategic) facing the company.
2. The board should not run the company but should make sure it has the best team to do so.
3. A great board is not a rubber stamp; it asks hard questions that occasionally push the CEO and the management team out of their comfort zones.
4. A great board member speaks candidly and listens carefully to opposing views.
5. Every director must put the interest of the company first and their interests second.
With a good governance structure in place, you should expect the following from your board during the fundraising process:
Vetting the Case
The board should help the company craft a compelling story to prospective investors. Since each director was initially drawn to the board for their own reasons, they usually possess unique insights on what makes the company attractive to an outside investor. I’ve often found that the perspective of board members, often one level removed from the operational weeds, can help sharpen key vision messages.
In addition to the message, expect the board to ask tough questions on the rationale for financing. This honest back and forth will help you articulate the reasons for a money raise and identify clear uses of the proceeds. Prepare to make the case that your well thought out use of the investment proceeds more than offsets the inevitable dilution to the existing shareholders.
While the onus is largely on the CEO and CFO to run the process of identifying prospective investors, board members should use their networks to effectively broaden the list of potential candidates. Board members should make “warm introductions” to VCs and other investors who have co-invested with them previously, especially if past deals were successful. Independent board members are often retired senior executives of significant-sized industry players that could be potential strategic investors and potential acquirers. They may also have strong relationships with investors that previously backed their former ventures. Warm introductions from board members help shorten the investment cycle by adding an element of familiarity, trust and transparency as a result of these pre-existing relationships.
The Negotiation Process
It is quite common for relationships between management and prospective investors to become strained during the negotiation process. Board members can be used judiciously to help navigate through complex issues. Carefully coordinating with your board to reinforce key messages can often help break logjams and create favourable compromises. This strategy needs to be precise and highly coordinated between the board and the CEO, as multiple tracks of dialogue with inconsistent messaging will only hurt the process.
Evaluating the Options
The board has the ultimate authority to approve a potential financing. When the company attracts an offer that values the company at a higher valuation than a prior financing event, the decision is often easier than if the offer is at a lower valuation or has other terms and conditions that are not friendly to existing shareholders. If the latter case is true, the board must ensure the company has exhausted every reasonable effort to get the best value, terms and conditions and that other superior offers are not available to the company.
Two of the key characteristics of a good board are particularly important here – Fiduciary Responsibility and Independence. When an existing investor is also a board member it can be hard to separate personal interests or the interests of the limited partners they represent from what is actually best for the company. Such trade offs are often not so obvious to appraise. This is where an independent director, with no capital or personal ties to the business, can objectively evaluate the best interests of the company.
All these key facets involved in raising capital serve to illustrate that one of the most important roles a board director assumes on behalf of a growing enterprise is supporting the management team in preparing and ultimately securing its next round of financing.