Building an effective Advisory Board can help startup founders fill key expertise and experience gaps. But what is an Advisory Board? What should entrepreneurs do to build a high impact Advisory Board and make sure they get the most value out of it? To understand those questions, we interviewed Bob Wallach. Bob Wallach has been a C-level consumer products executive and also a successful entrepreneur. He is an active angel investor, Board of Directors member and Advisory Board member for multiple startups in the Pacific Northwest. Bob is also on the Board of Directors for The Alliance of Angels.
Bob, could you briefly explain what is a startup Advisory Board? What are their responsibilities and duties?
An Advisory Board is a group of individuals selected by the CEO to provide advice that is complimentary to the internal knowledge and skill set of the startup. Think of an Advisory Board as experts you can call on to make sure you’re on the right path, advise you on key decisions and provide useful industry understanding and connections.
What are the differences between a startup Board of Directors and an Advisory Board?
A Board of Directors is a more formal entity who have significant governance obligations including (1) fiduciary responsibility to the shareholders to ensure proper financial and board governance practices are followed, (2) hiring, firing, reviewing and compensating the CEO, (3) approval of annual budgets and major strategic business decisions.
Entrepreneurs are not required to take the advice from an Advisory Board in making decisions whereas Board decisions are mandatory. Also, Advisory Boards are often involved in more tactical matters than the Board of Directors…for example, in a life sciences company I was involved with the Board of Directors approved opening and staffing a new lab and then one of the Advisory Board members with deep background in the space provided input on the detailed lab requirements, location and staffing.
What are the pros and cons of creating an Advisory Board?
Firstly, successful entrepreneurs know what they are good at and where their blind spots are. For example, a CEO might come from a technical background and have limited experience in other functions such as finance, accounting, marketing or sales. Advisory Board Members can help fill those functional knowledge gaps. Or a CEO could be entering an industry that’s new to them and having someone on their Advisory Board who is deeply familiar with that industry can be very valuable in avoiding missteps and making bad assumptions. (I often see a breakdown in understanding how customer decisions are made and how long they take which could have been avoided with the right Advisory Board conversation upfront.)
A second important benefit is that Advisory Board Members often have relationships that can be leveraged by the company. Their network can be particularly valuable in supporting R & D, regulatory, IP, sales and manufacturing.
A third benefit of having an Advisory Board is that it increases your credibility during fundraising by (1) demonstrating that the CEO has business maturity - they don’t think they know everything and (2) serving as an implied endorsement from an expert who believes in you and your company. However, don’t put someone on your Advisory Board if they are not actively engaged because potential investors may well find this out during due diligence and this will hurt the CEO’s credibility
On the con side, first off creating a high value Advisory Board requires an investment of your time to find the right people. Secondly, you will need to give Advisory Board Members some modest compensation - usually stock grants or stock options that vest over time. This of course has a minor dilution effect on your cap table, but that is far outweighed by the benefit good advice can bring. Thirdly, after your Advisory Board is created you have to commit some of your time to get real value out of it. But the effort is worth it.
When might a company consider setting up an Advisory Board?
I’d say the earlier the better. As soon as you have the idea for your startup you need good advice to shape your thinking and help you build a compelling, credible business plan. In the beginning you can work with advisors informally but by the time you’re ready to raise a first funding round you should formally establish your Advisory Board.
Where should founders go to find the Advisory Board members especially when they do not have a lot of networking?
The first step entrepreneurs should take is to look at your business to determine the most critical needs/knowledge gaps. Once you identify those needs, you should think about who you know that could fill them. If you can’t find anyone you know personally then reach out to people in your network and ask them to help you identify someone with the right qualifications. If there’s a specific individual you’d like to engage, see who in your network might know them (or know someone who does). LinkedIn is a very useful tool for this.
If you still can’t find anyone through your professional and personal network, you can reach out to an advisor prospect directly through phone, email or LinkedIn. Or you can get more creative - for example, if the candidate you’re interested in does public speaking, go to one of their events and invite them for coffee to discuss your business. The direct approach takes some courage but if you’re passionate about what you do, potential advisors usually respond positively.
What kind of qualities should founders consider when selecting an Advisory Board?
Advisory Board Members generally fall into two categories – those with deep expertise in a specific functional area and generalists who bring a broader perspective. A great generalist to have on a startup Advisory Board would be an experienced entrepreneur who has been through multiple startups themselves. They could help the CEO anticipate issues to be faced at each stage of growth and empathize with the many challenges of running a startup. I find a mix of both specialists and one or two generalists makes for a good Advisory Board.
Should the composition of the Advisory Board change over the life of the company? How and why?
Yes, the composition of the Advisory Board should definitely change over the life of the company. The CEO should reassess their Advisory Board on an annual basis incorporating (1) what you see as the current and upcoming challenges the company is facing, (2) what areas of expertise are still needed and what areas are no longer needed, and (3) how you are feeling about the value you get from each Advisory Board Member.
I’ve found that a good indicator of the value of an individual Advisory Board Member is how you feel after a meeting with them. If you come away thinking their advice was valuable and you’d like to spend more time with them then that’s a signal they are adding value. On the other hand, if you felt it was a chore to connect with them and little was gained then that’s a signal their utility as an Advisory Board Member has probably run its course. If that’s the case, it’s OK to gracefully part ways.
What steps can founders take to ensure that the board will be effective?
As mentioned, a lot of companies create an Advisory Board but barely use it. A few things you can do to avoid this:
First,align expectations with your Advisory Board Members – what contributions are expected, time commitments, frequency of meetings, etc. Regarding meetings, typically CEOs meet with Advisory Board Members one-on-one. (In most cases, a full Advisory Board group meeting tends to be a waste of time because you rarely have a topic that’s relevant to all of the Advisors – and no one likes to sit in on long meetings where they don’t participate in most of the discussion.)
I find it valuable if the CEO sends out an email before one-on-one meetings outlining what they want to discuss so the advisor can prepare in advance. I also suggest copying your Advisory Board Members on the company’s Investors Updates so they stay up to date. Better informed advisors give better advice.
Of note, it’s important for advisors to hear their advice has had an impact, so you want to let them know what happened with the advice they gave you and to show your appreciation.
Lastly if possible, give your Advisors the opportunity to meet the rest of your leadership team to give them a broader perspective on the business. For example, you could have your advisors meet at your office or have an appreciation dinner with your advisors and key managers once a year.
How often should founders connect with Advisory Board? How can they get engaged?
With some advisors you’ll want to have regularly scheduled meetings…i.e. with a generalist advisor a regular schedule of meetings makes sense. For other advisors the business needs will dictate the timing, frequency and duration of meetings. For example, if an advisor is an intellectual property expert, you’ll want to structure the interactions around the IP planning and execution timetable.
I think entrepreneurs should talk to most advisors at least once a quarter. If you have nothing to discuss with them, you may want to review why they are on your Advisory Board.
What mistakes does a company need to avoid?
The biggest one is setting up an Advisory Board but not effectively utilizing it.
Are there other reflections/suggestions you want to share with founders?
Investors are often wonderful resources to connect you to an advisor. At the Alliance of Angels www.allianceofangels.com, we have over 160 members spanning a wide range of industries and functional backgrounds. Our members are always glad to help entrepreneurs find the resources they need to be successful.
Bob Wallach has been a C-level consumer products executive and also a successful entrepreneur. He is an active angel investor, Board of Directors member and Advisory Board member for multiple startups in the Pacific Northwest. Bob is also on the Board of Directors for The Alliance of Angels.
The Alliance of Angels (AoA) is the largest angel group in the PNW with 160+ members. AoA members provide invaluable business support and connections to help our portfolio companies succeed. To learn more about the Alliance of Angels go to https://www.allianceofangels.com