In my experience as an angel investor for new startups, I’m always surprised by how many entrepreneurs are looking for funding without outside advisors. An experienced Board can give them credibility, as well as advice on the many pitfalls of starting a new company. Especially if you are a first-time business owner, the payback for this initiative is well worth the effort and cost.
In fact, the cost may be minimal, if you do your networking and build a relationship with an experienced business executive or two in your domain who are willing to share and give back for a nominal retainer, perhaps one percent of your new startup equity. The payback can be a pointer to a winning strategy, introduction to key investors, or a line of credit for your beginning inventory.
Here are some key reasons why I believe every entrepreneur should create a formal Advisory Board or Board of Directors before they ask for funding, or even build their business plan:
- We all need a bit of reality to balance our passion. Unfortunately, I see too many new entrepreneurs who let their passion for a new idea or invention blind them to the stark realities of customer need, opportunity size, or pricing and cost implications. The sooner you face these issues, the more success you will garner from investors and customers.
For example, I once was approached by an entrepreneur, passionate that his new algae strain would cure world hunger and make him rich. He seemed to ignore the fact that hungry people rarely have money, and governments are very unpredictable customers.
- Board members provide inexpensive expertise. Building and managing a business is a wholly different world from building an innovative solution. Unless you have a co-founder or two with the business skills to complement your technical ones, you need a friendly Advisory Board. The cost of a co-founder is usually fifty percent of your equity.
Even if a board member won’t work for equity, and demands a monthly stipend, the value of their contacts can easily make the difference between a successful rollout, versus an expensive pivot. Remember that people make a business, more often than a product.
- Key board members multiply your networking efforts. Starting a new business is all about establishing relationships with investors, suppliers, channels, and future customers. You need all the help you can get to find the right ones early, and nurture them to closure. Learn how to budget your time and select productive relationships.
In this respect, who you know is often more important than how much you know. At the very least, these board members extend your bandwidth to provide a presence at more industry events and networking conferences. Bandwidth is a constraint we all feel.
- Learn how to build and manage a small team. Communication and team organization is a challenge for every new entrepreneur, so I recommend that you start with only a couple of advisors. Over time, this may grow due to “observer” members, including investors, or other contracting requirements. What you learn will apply to employees.
Key advisors may be your first “team” to manage, but their value is multiplied as you apply what you have learned, with their guidance, to the larger teams you need to operationally grow the business. People management is key to every business success.
- Advisory members are Board of Directors candidates. Once your business is mature, and you are contemplating going public, you legally must establish a Board of Directors. An early Advisory Board is the best way to evaluate candidates for this formal Board, to be your boss, and accountable for business reporting. Skip insiders, friends, and family.
Bad board members can make running your business very unpleasant, and they can jeopardize your CEO position (you can be fired from your own company). I’m sure that Steve Jobs wishes he had started earlier in recruiting his first board member for Apple.
Thus, I find that many investors make their investment decision based on the presence and reputation of committed outside advisors, more so than the appeal of the solution, or the experience of the entrepreneur. In today’s rapidly changing business environment, you need every advantage to stay one step ahead of the market, and your competitors.