Most of the start-ups I have had connection with have had great ideas and passionate founders working to bring those ideas to fruition. Yet many of these firms fail – either to get to market or even to get financing. It’s not usually because they lack smarts or heart. In fact, those are probably the most common things that founders of start-ups have. A contributing factor to firm’s lack of success and under-performance is connected to how strategy is developed and executed in the firm (otherwise known as decision-making process and implementation).
Whose responsibility is strategy in an early venture – founders, management or board? We think that at the end of the day it’s really the joint responsibility of the Board and CEO to set strategy, relying on strong recommendations and information gathering by the founders and management team. So what are some of the common strategy development mistakes at venture-backed firms? We think there are four key areas to look at:
1. Lack of Role Clarity – Often Boards are not clear on what their role is in determining strategic direction of the firm. It’s common that Boards of Directors rely on the CEO and his or her team to develop and implement strategy with the result that Board meetings are about communicating pitfalls and progress. While this approach is common and not without merit, it doesn’t take full advantage of the Board’s knowledge or of their responsibility for strategy development and decision-making. If thoughtfully selected, the Board will have members with deep industry knowledge, or at least deep knowledge of the issues the firm will face. Boards should focus on developing the strategic direction of the firm with significant input from the management team. All should be involved with the process in order to surface the best ideas, gain a diversity of perspective and maximize buy-in to the strategic plan. Strategy development should ideally be viewed as a partnership between the Board and Management.
2. Limited Board Agenda – Boards at private companies tend to meet six times a year. The time together is valuable and it’s often under-utilized. At one firm we have worked with the CEO sets the agenda for the Board meetings and is the driver of discussions. It seems he is trying to prove how smart he is to the Board, rather than engaging the Board with an open mind toward higher level strategic decisions. The exchange is primarily uni-directional, rather than more even among all the Board members (not a good sign, by the way). More importantly, the quality of information focuses on reporting what has happened (financial reports, progress on business development and the like). This information is important, but it should take about one-third of the meeting at the maximum with two-thirds of the time spent on strategic issues (how should we grow, which product or service do we focus our efforts on, should we expand our geographic footprint now or wait?). Effective Boards spend most of their time on strategic issues and direction for the firm.
3. Lack of Strategic Information – This can particularly haunt start-ups as access to strategic information may be limited or inaccurate. Much information can be private or not easily accessible. Many of the industries move rapidly and strategic information changes at a fast pace. Nonetheless, it’s imperative that the Board get the appropriate information they need to help set strategic direction. This is where it’s really imperative that people with industry knowledge are on the Board. Ideally, it’s good to have several people with deep knowledge. Early stage venture-backed firms are often dominated by venture capitalists. While many VCs have great industry knowledge, most have not been operators of businesses. Make sure to get independent directors with operational experience and a working network that can access the right strategic information (what are the alternate solutions trying to solve the same problem(s) your firm is trying to solve, where is the regulatory climate going and how will that affect your firm’s strategy, which financing strategy will best match the firm’s business strategy?)
4. Dysfunctional Boardroom Dynamics – We can’t underscore how destructive a dysfunctional board can be to a company’s success. We are not talking about low level dysfunction where people are talking too much or not fully engaging due to over-commitments. No, we are talking more about second-guessing the CEO after strategy has been agreed at the Board level, being overly critical about personal quirks and withholding ideas as a result of being scared to sound dumb or being criticized by others on the Board. Let’s be clear: the Board meeting is intended to air ideas from diverse thinking individuals so that ALL the realistic options can be considered in strategy decision-making. Any activity that supports that process is welcome. Trust and respect for people on the Board (and in management) are the foundational elements for a high functioning Board. Work towards that goal in every meeting and the Board will set the stage for high performance.