CVC #1: Selecting Board Representation
The success of a start-up/venture is often correlated to the strength of its board and advisors. An experienced board can serve the company in many directions from helping with long-term growth of the company (opening client doors, leveraging network, hiring, reputation, capital raise, etc in particular in challenging times), to steering strategic direction of the company & its product offerings as well as providing strong governance (supervising management team, upholding of good conduct, etc). Selecting the right Board representative (member or observer) in the interest of the start-up/ venture is therefore an important aspect. Often, the selected board representative is the lead investor/ partner responsible for the deal. While it is the obvious choice, I believe as strategic Corporate Venture Capital investor, there are more options at hand which deserve some consideration. From my perspective, it is valuable to consider in a simple two-step approach (1) the right profile for the Board representative and (2) selecting the right candidate within the organization to join the board room.
STEP 1: The right profile the board representative
Lack in current board:
One of the first things to look at, when selecting a board representative is the composition of the current board as well as potential additional structures such as advisory board or client boards of the start-up/ venture. Assessing the background and expertise of each board representative to see what the existing board representative are bringing to the board room table. It is good to check with management as well, how active the board members in reality are as there might be Board gaps which are not obvious at first glance.
Question to ask: What is the current board lacking and what you as a CVC investor can add? These could be topics like lack of voice of customer/ product knowhow (see below), governance expertise, risk expertise (incl. data protection, cybersecurity), regional knowhow, commercial knowhow, network, specific domain expertise to name a few.
It is also helpful to discuss with CEO what the board lacks from his/her perspective. However, sometimes the focus of CEOs is on Board representatives adding in particular growth to company and sometimes less concentrated on the risk management side of running a business, while there are many examples of failed startups/ companies due to lack of proper risk management and governance.
Product focus and regional expertise:
Understanding the core business and main market(s) of the portfolio company is critical to add value in the board room. As CVC there is often the benefit of having subject matter domain experts for the various products. As such there is the option, to have a true SME on the board. Moreover, larger companies offer as well global network with client and international market accesses, which can be complementary to the startup.
Question to ask: What knowhow and network is required from a product (subject-matter-expert) as well as regional perspective, to be most valuable in board discussions? The focus here is on the core business of the venture.
Voice of customer:
As a strategic CVC, the plan is often to use the product of portfolio company in the organization - particularly in area of Enterprise Technology. That’s a huge benefit in terms of hands-on knowledge of the product and service with its strengths as well as its limitations from a client perspective. Such knowledge is very valuable in the board room and is sometimes rare in early growth companies. Selecting the executive as board representative, who is adopting or overseeing the adoption of the solution within the corporation, could add such voice of the customer to board room.
Question to ask: How is the client view currently being brought to the board e.g. is there already a client representative on the board or does a Client Advisory Group exists, which reports to the board?
Strategic direction of portfolio company:
When selecting the right board representative, it is important to take the strategic direction of the portfolio company into consideration. Such strategic directions can be product expansion, change in commercialization/go-to-market (B2B, B2B2B, B2C, etc) or regional expansion for growth companies. In case of a major strategic shift/expansion, adding as CVC a board representative with such specific knowledge and experience is very beneficial to support and advise the company in the board room on the journey.
Diversity:
By assessing the current board, a look at diversity of the board is beneficial as well. Diversified team are assessing situations more rounded and come to better results. The same holds true for diversified boards. It’s an aspect often forgotten and therefore I put it into its own category instead of including it in “Lack in current board” section. Gender diversity is often the first aspect to come to mind (and too often I still see pure male boards), but here all aspects of diversity play a role.
STEP 2: The right candidate
Based on the board representative profile drawn in the first step, its time to select the right candidate within the organization. HR can often be a very helpful partner here as they have often a good overview of the talent base across the organization. In addition to mapping candidates to the profile, I recommend taking into account 3 additional aspects:
Motivation and interest: Working with startups is exciting, innovative and rewarding for some, but for others it’s not their cup of tea at least not for the moment. This could be due to personality or current work priorities. Selecting someone, who is really excited about becoming a board representative, has the capacity and is very interested in the company is a must have.
Corporate politics: Corporate politics can play into the selection of board representative. Nominating a board representative can for example win over a critical colleague or incentive an business area to make the project (adoption of the product from the startup) an success. Considering, who is important for the investment and CVC function overall, is important to have in mind as well.
Conflict of interest: Conflict of interest can occur when for example selecting “voice of customer” candidate as board representative. While interest are in most cases aligned, there can be differences in particular when negotiating vendor agreement between organization and the portfolio company. A strong governance in terms of managing the conflict of interest (e.g. candidate will not negotiate vendor agreement, not approving costs/budget for project) is required. Identifying potential conflict of interest early is important.
In case a Board representative outside the CVC function is selected, a close teamwork is required in particular on topics of strategy and financial performance & fundraising. It might make sense as well to team-up and join selected Board meetings together e.g. when discussion fundraising and potential new investor base. Finally, reviewing the board representative on a regular basis (annual / every other year) is recommended as the company is developing and as such the needs in the board might change as well.
I hope this is helpful to select the right board representative, which will allow the venture to reach its full potential.
Disclaimer: The views and opinions expressed in this post and under Corporate Venture Capital newsletter are solely mine as the author and do not necessarily reflect the official policy, position, or opinion of my employer. Any content provided are my personal views and not investment advice.