Raising funds, building a team, designing a breakthrough product, and taking that proof-of-concept to market are some of the many hurdles startup founders have to overcome in their nascent entrepreneurial journey. With such a daunting list of tasks to tackle, it comes as no surprise that building an independent board of directors is seldom a priority for multitasking bosses.
However, setting up a formal board may be a beneficial move for startups at every stage, especially when founders are fortunate enough to attract experienced, well-connected directors. The emerging organisation may benefit from the directors' objective advice, and uncover new opportunities that were previously out of reach.
“Sometimes, founders and investors can be biased due to their vested interests, and having an independent director to nudge them in the right direction helps tremendously,” notes Hau Koh Foo, Director of the SMU Institute of Innovation and Entrepreneurship (IIE). “The advice of a board is impartial, so the independent board members make for good ‘sparring partners’”
Recently, Mr Hau authored an article, Steering Startups: From Adviser to Director. IIE is responsible for the overall innovation and entrepreneurship development at SMU through education and extracurricular activities such as student clubs, competitions, networking events and incubation programmes.
Here, Mr Hau shares expert advice on what to look for in a director, and the challenges faced by startups in getting the right directors on board – since there may be reputational risks involved when it comes to aligning oneself with early stage startups.
Oftentimes, startup boards mainly comprise founders, angel investors and venture capitalists because such investments are high risk in nature, explains Mr Hau. The early investors would want to be more hands-on to both protect their investments and to provide guidance to the founders. Moreover, founders typically appear on the board because they are usually majority shareholders of the company during the early stage phase, and would rightly want to have a say in the company’s direction and governance.
That said, establishing an independent board may have its advantages — even for startups at an early stage. A strong board of directors brings along professional knowledge, a coveted network, and experience such as legal expertise, to advise the startups on best practices typically only found in public companies.
Having a reputable board also leads to another plus: greater visibility for a young company. Most startups struggle to garner credibility and trust from prospective customers and potential investors. A board populated by respected industry players demonstrates a company’s ability to get powerful, respected, and knowledgeable people to believe in the vision, mission and values of the business.
As Mr Hau explains: “This sends a message to other investors and industry experts that their startup is credible and has a bright future.”
For startups planning to go public or gearing up for a large, private shareholder base, the role of the independent director may then be to represent the interests of smaller shareholders, and focus on the startup’s value creation for the group.
Mr Hau suggests that startups should look for directors who have strong experience or domain expertise. A high level of credibility and someone who’s “been there and done that” will help founders navigate the often rocky startup landscape and lend credibility to would-be customers that the startups can deliver.
“These directors ideally should also come with strong network connections in the market, ready to help with warm introductions to potential customers or partners, coaching the founders and assisting with fundraising,” says Mr Hau. “The ideal board director should be prepared to get hands on. The nature of startups is that they move extremely quickly and in uncharted terrains, and directors should help the founders navigate.”
The role and expectations of board directors also depend on the startup’s stage of development. During earlier stages, a director’s expertise in areas such as customer discovery and product development would be highly beneficial. As the startup starts to grow, experience in scaling and internationalisation would be useful. Further down the road, legal, compliance and corporate finance would become increasingly complex, and professional expertise from the board would also be helpful.
New founders just beginning to make their mark on an industry may, however, face challenges in meeting the right directors. Mr Hau advises startup founders to attend startup events regularly and build a presence within the community. This will enable them to build a database of potential future board members. Also, it might be worthwhile to conduct research on prominent industry bigwigs that they may want on their board, be it via LinkedIn, YouTube or other social media platforms.
“Importantly, founders should examine these potential directors’ areas of advocacy,” says Mr Hau. “Getting the buy-in of an experienced industry player to join your board is easier if the individual shares commonalities in values and vision that the startup is also trying to work towards.”
If the startup has received institutional investment, the key investors will typically have a seat on the board of directors and hence can provide their connections in the search for independent board members.
“Do not simply angle for big names, but directors who can help with your biggest near-term challenges,” adds Mr Hau. “For example, as the startup begins to generate revenue and expand, they will probably need experts in areas such as internationalisation, legal and finance, and human resources.”
Unfortunately, the networks of startups that are first starting out, such as those embarking on building their first proof-of-concept, are often rather limited. This is where incubation programmes such as SMU IIE’s Business Innovations Generator (BIG) are extremely useful.
“A highly structured, coaching heavy incubation programme such as BIG will allow founders to be part of a wider network of ecosystem players and meet new people along their journey,” shares Mr Hau. “Mentors that are introduced to the startup at this stage, can evolve into investors and then board directors further down the road.”
For startups in their infancy, being able to convince industry veterans to join their boards may be another challenge in their journey towards building a dream team of directors.
“Founders need to be able to convey a compelling vision of the startup with passion: What is your story? Why me? And Why now?,” says Mr Hau. “It will be easier to convince someone to join your board if the vision and mission resonates with the director whom you are trying to reach out to.”
One approach startups may consider is by tapping into a potential director’s desire to learn and grow. Particularly in the fast-growing tech sector, directors may be motivated by condensed and curated learning — by absorbing as much knowledge as they can in a short amount of time through their interactions with the startup.
“The director can teach and guide a startup using existing expertise and experience, while simultaneously learning about new aspects of a business they may not have been exposed to before,” shares Mr Hau. “This combination makes it a richer experience for directors and a strong motivator to accept that board seat.”
Survival and the bottomline may be key concerns for startups when the economy is rocky. But beyond dollars and cents, it can be very beneficial for startups to have a strong board in times of uncertainty and turbulence, such as during the Covid-19 pandemic, observes Mr Hau.
He says: “First, a strong board inspires confidence in the prospective customers, who may be wondering if the startup would still be in existence 6 months down the road in a challenging environment.
Second, a strong board can help ensure that founders and management are able to operate well in a crisis. The board members had experience navigating troubled waters and these lived experiences are particularly valuable as sounding boards for startups to plan amid high uncertainty.”
The board’s priceless network of business partners and contacts can enable the startups to be constantly well-informed about navigating their business in a volatile and evolving environment — ensuring greater longevity and sustainability, even when the going gets tough.
To find out more about BIG and how you can become involved as founder, or to volunteer as mentor, visit https://iie.smu.edu.sg/incubator.