How Setting Up A Board Can Convince Potential Investors To Invest In Your Startup
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It’s not about your product, service or people. At its fundamental core, business is really just about one thing: making decisions. For a startup in search of funding, demonstrating how you make your decisions is the key to convincing investors to sign on- and the obvious and most important way to do that is to set up a board.
“Boards are crucial, to say the least,” says Pawel Iwanow, Managing Director at the Dubai-based office of global venture capital and private equity firm Mountain Partners. “It’s the investors barometer for the health and development of their investment.” A board is simply a way of structuring a decision-making process to ensure a sound future for the business in all potential scenarios. A board of directors represents the interest of shareholders and have authority to execute their will, while a board of advisors could be paid or receive a percentage of equity for their advisory contribution but don’t make decisions for the company. If set up and structured properly, Iwanow explains, boards fulfill many functions such as steering and guiding an entrepreneur in important strategic matters like product development, fundraising, operations and sales, as well as mentoring, reflection and establishing proper corporate governance.
Forming a board of investors is also about weighing up the stakes from all perspectives, says Patrick Thiriet, Chief Strategy Officer at Middle East media firm Choueiri Group. “As soon as you start having meaningful equity stakeholders in the company, my view is that you can’t do without a board to balance the interests of all parties involved and provide guidance to the founders,” Thiriet explains.That said, practically speaking, startups don’t need to have a formal board setup from day one. Thiriet, who leads Choueiri’s corporate investment arm, says: “Having a board governance during this early stage can even be counter-productive, as it will absorb part of the founders’ energy at a time where they mostly need to prove their model fast.”
For example, entrepreneurs will typically rely on some seed investors in the first few months in order to reach certain agreed KPIs and confirm that their product can generate traction. This could include small equity chunks taken by friends and family, convertible debt provided by venture capital funds or support from incubators. “But as soon as you’re talking funding for growth, you’ll need to anchor some core investors into an equity round, and you can’t expect them to sign a blank cheque without having some say in important decisions, now that they own a piece of the company.” Of course, this doesn’t mean the entrepreneur is giving away operational control. After a Series A and even a Series B equity round, most entrepreneurs in the region typically keep a majority at their board, Thiriet says. But having a board means there’s a place for decisions to be discussed and challenged.
To fund or not to fund?
There are exceptions however, Thiriet says, when asked if an investor might still fund a startup without any board setup. “We also occasionally invest in earlier stage startups, usually under the form of a convertible debt,” he says. “No such board structure is needed there: the deal is more ‘Hey, we’re ready to trust you as an entrepreneur, we like your idea and believe you can execute, so here is some money to prove your concept; keep us abreast of your progress, and let’s meet in six months to discuss a proper equity round if you’ve made it."
This is always more “risky”, Thiriet admits. “But our experience is that, as long as you have at least two co-founders with complementary skills and personalities, this can work pretty well,” he says. “There is usually a clear KPI associated with such early stage investments – build a minimum viable product and confirm you can get traction from the market – and no board setup is really useful during that phase.” However, he adds, once there’s a real business in place, with various strategic options and funding priorities to manage- matters such as product enlargement, geographic expansion, annual budget and recruitment of senior people- this is where it becomes “dangerous” for founders to decide everything on their own.
Iwanow adds that an investor would, typically, always try securing a board seat alongside their investment. “It depends on the investment amount, the startup stage, the investors requirements – for example, some minority investors do not seek board seats,” he explains. “In general terms, having a board seat is definitely an important investment term, the earlier and younger a startup is, the more crucial is the board role of an investor, in case he or she is hands on and can provide adequate support to the entrepreneurs running the startup.”
From an entrepreneur’s viewpoint too though, a board shouldn’t be mistaken for a watchdog or chore to coax investors into writing a cheque. “It definitely helps [to have a board], especially for founders who have had no or only limited exposure to funding rounds,” says Ben Kuehn, CEO of Dubai-based lead generation firm Heroleads Ventures. “A board of directors and advisors often can provide a set of experiences complementary to the ones of the founders. For example, a founder might have a prepared a business plan based on certain assumptions. If a senior advisor or director has already experience in this particular industry he or she might be able to correct or enrich those assumptions even before the proof of concept phase. That saves time, costs and reduces risks.”
Kuehn, whose company is backed by Mountain Partners, adds that support from industry veterans with a relevant track record might also bring interesting spin to the funding pitch. With the right directors on the company´s board, certain doors open easier, he says. “Never underestimate the power of strong personal networks of the board. Making connections often leads to win-win situations.” Moreover, an “external view” of the company´s performance and direction is valuable in order to “reflect, validate and fine-tune battle plans where necessary”, Kuehn adds.
To simplify, Iwanow recommends having a board of advisors as early as possible to be fill in knowledge and skill gaps, while a board of directors is good to have once external capital has been raised and a professional setup is required. Thiriet adds that investors like seeing startups with advisors and mentors to challenge them and help them see if they’ve missed something important. “Smart entrepreneurs tend to rely on a group of advisors from the very early stage, whether it’s formalized or not,” he says. “We like seeing that, as long as such advisors are more than a bunch of pictures displayed on a pitch deck.”
Dubai Startup Hub is hosting a board of directors simulation workshop in September 2018. If you are interested to attend the event, check out more details here.
This article was originally published on Dubai Startup Hub and has been reposted on Entrepreneur Middle East based on a mutual agreement between the websites.