Advisory Boards for Start-ups

Posted by Warren Bergen on Friday, December 30, 2011 Under: Business
For three years I managed an angel/venture capital investor group that specialized in technology start-ups. During that time, I saw over 600 technology deals. I was in the thick of deal flow and everyday was filled with meetings with entrepreneurs and investors. And because a lot of entrepreneurs knew that I was a connection to a lot of investors, I often received calls from entrepreneurs from outside the tech space wanting to know if I could "introduce them to a couple of guys". One afternoon I received a call from "Doug". He had started a manufacturing company about two years prior and it wasn't going all that well. 

"We're running low on cash. Can you help us find an investor?" He asked.

I knew Doug quite well, so I agreed to meet with him to learn a little more about the situation. In the lounge and over beer, Doug told me the whole story. They had gotten into the business with an assumption that customers would prefer them over existing competitors because they could take orders online and take delivery of the product much more quickly. The quick delivery capability was the direct result of some very expensive equipment they had purchased that helped them to crank out product at a very high rate with very good quality. The payments on the equipment were very significant. Add in lease costs, employees and administration and the monthly tab was a big hit. After two years in business, they were still losing money every month with no real indications of increasing sales or cost reductions. Clients didn't seem to care about ordering online, but liked their speed and quality.

So I asked Doug, "Would you invest?"  

"What do you mean? Well, sure I would but it would depend on how much of the company I would get." 

"It's losing money every month and there is no plan to turn it around." I countered. "How is that attractive?"

"Oh. I see your point. I guess I wouldn't invest either." He said. "So what do we do?"

"Make a plan to reduce costs and drive sales. If you can turn this around, then you will be much more attractive for investment than you are now. But you will have to cut costs and sell your way out of this."

I helped them to build an advisory board of three members. We found a savvy CFO, someone who knew how to build and manage a focused sales team and someone who had built and sold a company in the same sector. They met every second Tuesday evening for 90 days and once a month for the next 90 days. Given that the company was nearly out of cash and credit, employee headcount was reduced and equipment contracts were renegotiated. The sales team was organized and compensation models reworked to reward over-achievement. At the end of six months, the company stopped bleeding cash. There were still issues, but the crisis had been averted and the advisory board meetings continued as quarterly events. 

I've heard some venture capitalists become critical of entrepreneurs that use advisory board members that haven't put any money into the company. This is as dumb a statement as I've ever heard. Without this advisory board, this company would not have lasted another 90 days and there are a lot of stories just like this one. The other forgotten benefit of advisory boards is that they are prospective investors. I know a few investors that will first join the advisory and use that interaction as a significant portion of their due diligence process. These are not small investors that do this either. These are deep pocketed investors that invest in amounts similar to venture capitalists. If they don't like what they see in the company, the entrepreneur or the deal, they simply resign their post after a time and walk away. If they do like what they see, they have a real inside working knowledge before they invest. Then they open their list of contacts for the entrepreneur and get involved. 

Entrepreneurs are often alone. It's their neck on the line. Employees may emotionally buy into the vision of the company, but it's not their cash at stake. They often work so hard and so long that they sometimes lose perspective in a forest-for-the-trees kind of way. So when things so off plan, they do not have an experienced group with them to talk through the issues. Even if this doesn't describe you or your situation, why not assemble the advisory board simply for feedback? It's not a board of directors, so they can't fire you. In fact, you don't even have to take their advice. Although, if you're looking for these people to invest, they'll be watching to see if you listen or are open to coaching. This is an advisory board only, but it is a very worthwhile effort to talk through the plan with experienced people. I'm sure you too are experienced, however, people who are willing to share their experience, knowledge and insights will save your money and speed your plan. If you perform exceedingly well in front of a group of successful advisory board members, they will very likely invest.

 And don't be concerned about cost. You will also find that some prospective board members, for a time, will help out without compensation. Their reason for doing this, is so that they can give back. This is their voluntary service. Some of these people are nearing the end of their careers, have a lot of knowledge to share and would simply like to be helpful to entrepreneurs. Just make sure that you treat the meetings like a proper board of directors meeting. Get the financials and updates out to the members well in advance of each quarterly meeting so that they will have time to come prepared for discussion and with questions. Take minutes and capture the action items that are agreed upon and distribute the minutes to the members after the meeting takes place. 

There are more people out there that are willing to help you than you think.  


In : Business 

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