Ask the venture folks

Q&A for the world of early stage startups and venture capital

This is the first issue of our new Q&A format where we answer pressing questions from founders, LPs, emerging vc managers and startup employees. If you have a question you’d like to submit to our panel of VCs, LPs, founders, coaches and therapists, please use this form: Q&A Form

How do you encourage your investments to design & extract value from their advisory boards, and are there any advisor-related problems that you frequently see your investments deal with?

- Dan @danhightowerjr

Hey Dan, great question and I love the way you frame it as designing and extracting value from your advisors as it highlights two of the most common problems we see.

• Most advisory boards are overly large and full of dis-engaged big names who don’t actually provide support.

• Most advisory boards are a hodgepodge of big names without any thought given to complementary skill sets.

The cure for these problems is to sit down and think about where your business is weakest and where it doesn’t make sense for you to bring on an employee or executive to address that weakness. Consider making a list of these gaps. Now think about all of the people you know and respect who may be relevant for your business. When you make this list, don’t worry about the fame of anyone on the list, focus entirely on the skills, networks and talents each of these people could bring to the table.

Now take your two lists and figure out which potential advisors can actually plug your current gaps. Once you’ve identified the candidates go out and recruit those advisors just like you would a key hire. Sit down with them, get them excited about your business, be absolutely clear where you think they can provide support and get their buy-in.

Just like you would with a key hire the next step is to give them equity and tie it to specific performance targets. This ensures that expectations are clear up front on both sides and it makes sure your advisors are bought in.

At the end of this process you should have designed and built an active advisory board that is appropriately incentivized to deliver real value to your company where you need it most.

There are two other common-ish problems which have more to do with problematic advisor archetypes.

• The overly-involved advisor who doesn’t have a day job.

• The service provider advisor who is there mostly to up sell you.

If you followed the above process you probably won’t have any problems with either of these two archetypes. If you do though the solution is simple… tell them you appreciated the help during their brief tenure as an advisor but you don’t need their skillsets at this time in the company’s life cycle. Cancel the advisory agreements to recapture any equity you gave away. Life is too short and you have too much good to do in the world to be saddled with unnecessary problems.

p.s. VCs will skip or discount your advisory board slide by 95% so make sure the value your advisory board brings isn’t just their name on a slide because that isn’t actually worth anything.

“How should I validate a pre-launch CPG beverage? Pre-COVID, I’d socialize with it and take samples to people. That’s much more challenging right now, but maybe it’s still the right thing to do?”

- Pre Launch Patty

Patty, this is a tough one. You’re absolutely right, in food and beverage real customer feedback is absolutely essential for tweaking the final product, learning more about your target customer and validating potential distributor/buyer interest.

We’ve evaluated several companies in the food and beverage space since Covid-19 placed us all into lockdown and we’ve done it via remote tastings. If possible I would suggest shipping your product to potential partners and scheduling a tasting via video chat so that you can get something of the same experience you would have had pre-Covid. It isn’t ideal but these days we’re all making do.

Finally, assuming that direct to consumer (DTC) will likely be a piece of your distribution mix, particularly early on, we suggest you do some lightweight digital ad testing (ie: A/B tests) to start to understand CAC and nascent consumer demand for your offering. 

“As an individual who has worked with a number of Founders over the years, it seems that there may be a pattern linked to specific pivot points in business scaling where the original Founder CEO can no longer deliver on what the business requires to become a long-term sustainable business entity. I would like to see if my ancedotal perspective holds any statistical merit - So as a VC (among the many portfolio companies you have managed over the years) what is the average % of Founders you remove from their CEO role, and what is the average business year (or distinct pivot point) that this removal occurs in?”

- Pondering Pivots

Thanks for the question Pondering. I have never removed a CEO BUT I did have the conversation once with a CEO that I thought needed to resign due to unethical behavior. Ultimately he refused to resign and the company imploded as a result almost immediately thereafter.

To your broader question it is true that the skillset (and passion) for 0 => 1 company creation is poorly correlated with 1 = 1M value creation. When the 0=>1 stage is close to completion founder CEOs need to begin having a really honest conversation with themselves around whether or not (a) they have a desire to make the leap and (b) they currently possess the skillset to make the transition. One of the things we do at www.Atlasq.com is help founders confront these questions honestly. In an ideal world VCs don’t want to be in the position of removing a CEO, we want to either help the founder CEO grow into the role or we want to help them realize that what they’d rather do is step aside, manage a transition and seek out what they’re most passionate about next. e.g. I know that I personally have zero interest in ever running a public company.

We find these types of introspective conversations need to happen at different times for different CEOs. As you might expect everyone brings their own capacities to the role and each business is unique meaning that founder CEOs tend to hit their ceiling at different times. You’ll know when it happens because the business stalls out, the CEO loses passion for the work and in turn ceases to inspire the team and/or the CEO no longer has any ideas for how to push the business forward or recruit talent who can. If I’m forced to generalize I’d say this happens either right before a company needs to raise a series A or 6 months after a series A when the team has scaled substantially (due to the capital influx) but the business is stuck and not approaching the next milestone.

For what its worth (and as my track record suggests) I think its a terrible idea to forcibly replace founder CEOs in all but the most extreme circumstances. Additionally, the data suggests companies are better off sticking with their founding leadership. https://hbr.org/2016/03/founder-led-companies-outperform-the-rest-heres-why

Founders, emerging managers, limited partners and startup employees If you have any questions for the next newsletter please submit them here: Q&A Form

You can ask to remain anonymous or use your real name. Each question will be answered by either a VC, a therapist, a founder, limited partner or executive coach.

Finally, if you’ve enjoyed this Q&A please share!