You’re a founder-CEO with deep technical expertise but little business experience. VCs tell you that they’ll help guide you through the treacherous business issues you’ll face as you grow your business. (In fact, you are having trouble finding any VC firms whose Web sites don’t tell you they’ll do that.) Do they, indeed, provide such mentorship when it’s needed?
In contrast to boards of directors in public companies, which play more of a monitoring role (evaluating the CEO and top management; making decisions about senior hiring, compensation/promotions, and firing; reviewing major decisions), boards in new ventures need both to monitor and to mentor their CEOs and top managers. Compared to the relatively stable and complete management teams in public companies, the boards of new ventures need to play a key mentoring role and can potentially add more value to the company by doing so.
Broadly speaking, the following factors can increase the need for mentoring in new ventures:
- External challenges - e.g., rapid changes in competitive landscape, technological change, need to get initial customers.
- Internal challenges - e.g., high rate of hiring, the need to formalize some processes without endangering company culture and operations.
- Holes in founding team - the founders might not be experienced in growing new ventures and the team may have holes in key functions (e.g., CTO early on, CFO later).
- New non-founders - executives hired to fill holes or “upgrade” key positions (e.g., a new CEO who replaced the founder-CEO; see “Founder-CEO Succession” posting) who aren’t as familiar with the new venture or its people.
In work that I have been doing with Warren Boeker, we have begun examining the functioning of boards in new ventures. Our focus has been on how the CEO’s characteristics affect board characteristics, focusing on 3 board characteristics that should reflect the amount of board-level mentoring and monitoring:
- Board composition - In particular, the percentage of the board who are VCs. (We assume that VCs will play a disproportionate role in board mentoring and monitoring.)
- Frequency of meetings - The number of times the board meets per year (controlling, as well as we can, for the amount of informal interactions between the CEO and the board in between formal board meetings; see Note below).
- Board size - The number of people on the board.
We are examining the following 4 CEO characteristics to see how they affect the amount of board-level mentoring and monitoring:
- Amount of prior work experience - # of years of full-time work experience before joining the company.
- Functional background - whether the CEO had a technology background versus a sales/marketing background.
- Founder - whether the CEO was a founder of the company.
- Equity holdings - the percentage of company equity held by the CEO.
Our initial hypotheses assume that the first 3 CEO characteristics (prior work experience, functional background, founder status) will affect the amount of mentoring that the board should contribute. Consistent with past research (which has focused on how executive equity holdings affect the degree to which boards have to monitor executive actions), we hypothesize that the last CEO characteristic (the CEO’s equity holdings) will affect the amount of monitoring that the board will do.
Initial results show that each of the 4 CEO characteristics affects the 3 board characteristics, but that they do so in different ways. The table below summarizes the results. (Blank cells indicate a lack of statistical significance.)
In summary, two CEO characteristics – years of prior work experience and a Sales background (which should both affect the degree to which boards have to provide mentorship) - have an effect on all three Board dimensions, with CEOs with Sales backgrounds having fewer VCs, meetings, and directors than CEOs without Sales backgrounds. The other CEO characteristics have more varied linkages to the board characteristics. On the mentoring side, boards meet more frequently when their CEOs have Tech backgrounds (fulfilling that promise they made above!), and Founder-CEOs have a higher percentage of VCs on the board. On the monitoring side, the CEO’s equity holdings affect both the VC % and meeting frequency, but not the board size.
Note #1: Given that “meeting frequency” only captures formal board meetings and ignores the crucial informal interactions between meetings, we wanted to see if our results held up if we added to the model a proxy for informal interactions. To create a proxy for the degree of informal interactions between the CEO and the board, we took the subset of ventures that had a separate chairman and used the # of hours that the chairman (as the “lead” director) spent each month on company business. Adding this variable to the meeting-frequency model did not affect our core results.
Basic questions, in addition to any other thoughts you want to post:
- Are there other CEO characteristics that have fundamental impacts on board composition, meeting frequency, and size?
- Do the relationships between CEO characteristics and Board characteristics make sense to you (i.e., do any of the cells in the table conflict with your experiences or intuition)?
Note #2 (posted 9/22/05, in response to comment posted by Tim Connors): The results in the table above are after we control for the stage of company development, which is a key driver (in varying ways) of all three board characteristics. The issue deserves its own post; I’ll do it by the end of today.
I assume you’ve heard this one: “VCs are like Martinis. one is good, two is better, three or more is trouble”the stage of the business has the biggest effect on mentoring frequency, in the first two years as the team is being built, the strategy is getting set, etc, it is many times per week. some email traffic, some instant messenger, some calls, some in person 1:1s. board meetings tend to play a small role in the mentoring process and are more frequently opportunities to make sure that the 1:1 feedback the ceo is getting is all on the same page.On board meeting frequency, i tend to do board meetings once per month with every other one in person. the phone based meeting is a shorter business update. for local companies I tend to do one every 45 days. once the business is well metriced, is firing on all cylinders, has a complete team, 60 days between meetings works.i wonder if stage of company is indirectly influencing the outcome of your study. more meetings earlier and less later as the business progresses. More companies have technical founder ceos early, more go to market heavy ceos later.
Yup — my colleague Bob Higgins (who moonlights at Highland :->) loved to use that line when he taught our Entrep class.Thanks — as always — for the great feedback, Tim. You are absolutely right about the stage of the business; in our analyses, we use several metrics to control for company stage and a couple of them are, indeed, statistically significant. The results in the original post’s table are after we control for those variables (# rounds of financing, dollars raised in last round, company revenues, company age, number of employees). Sorry I didn’t mention that; I’ll update the original post to do so. Are there other “stage variables” we missed that you think are key?Your details about the informal interactions — and how the formal board meetings are affected by them — are extremely helpful. I’ll make sure to incorporate that into the paper.
Keep in mind my comments are based on startups or small businesses that are not necessarily VC funded. Having that, based on the business owners I have met in YPO and my own experience, I would be surprised if a Board could mentor a CEO in any meaningful way in operations. I think a Board could be very helpful in giving a CEO a better understanding of how the VC/Private equity community looks at the value of business, and how to structure and execute M&A activity, but the time it takes to make someone a better operator seems to me far beyond the time commitment most any board would be willing to make. I suppose individual board members that make a substantial time commitment would be able to provide strategy guidance and facilitate introductions to key stakeholders, but this strikes me more as the role of an active investor than a board member. I should also disclose that I find nothing troubling about three martinis.
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