Tough Love: What You Really Want From Your Advisory Board

The scene was the quarterly meeting of the advisory board for NetMarquee, the online direct marketing agency I co-founded. My partner, Paul Baudisch, and I launched into reports about the company’s progress. We were eager beavers because, for the first time in a good while, cash flow had turned positive, and we could actually report a profit for the year. After a 45-minute summation, we sat back expectantly, awaiting the accolades.

“I have a question,” said one of the advisory board members, a part-time CFO. “Where is your business plan for next year, along with your financial projections? This is the time of year when growing companies have these documents ready for the board.” Another member, an assistant professor of entrepreneurship, added, “I’d like to see your mission statement. I still don’t truly understand your mission.”

This was definitely unexpected—but not entirely surprising. In the four years we ran the company, one of the constants about using an advisory board was the extent to which its members not only kept us from becoming complacent but also directed us toward the issues that were truly important.

Pick With a Purpose

Recruiting an active advisory board was one of our first actions after incorporating in 1995. We needed some serious executive input but couldn’t afford to hire top-notch consultants. So, we used our local network of business associates as our talent pool, offering selected candidates a generous amount of stock as compensation.

Our selections were based on the fact that we saw several “holes” to fill. First, we needed deep financial expertise, because neither of us had sufficient experience in this area. That led us to invite Mike Gonnerman, the part-time CFO, who was a former Arthur Andersen accountant. Second, we wanted someone with a great sense of strategy, to keep us from getting mired in the minutiae of running the business. Julian Lange, whom we knew from his teaching days at Harvard Business School and later at Babson College, could give that to us. Finally, we wanted an expert in family business, which was one of our initial target markets. We had gotten to know Richard Narva, the principal of a leading family-business consulting firm, Genus Resources, while doing research.

The board of advisors didn’t have legal standing in making decisions, but Paul and I took its recommendations very seriously. Our board continually challenged us—in terms of our tactics, strategy and overall business philosophy. Its challenges benefited us in three primary ways.

Preventing Dumb (and Costly) Mistakes

Our board proved its worth almost from the beginning. Back in 1995, we had what we perceived to be a huge opportunity—to be a content provider for the new Microsoft Network, which was envisioned as a proprietary alternative to the then-nascent Web. We thought it would immediately propel us to the major leagues. There was just one hitch: Microsoft’s fee of about $2,000 for becoming part of the network, plus untold other expenses to hire and train a programmer in a special programming language so that our content would work on it.

The board listened as we insisted this $2,000-plus was all that stood between us and everlasting glory. Strongly implied: You guys, our smart advisory board members, should be able to help us figure out how to make it happen. Then the CFO spoke up: “If you don’t have the money, you can’t do it.” The other two nodded their agreement. “Next item!”

My partner and I were stunned. Why couldn’t they see the vision? As it turned out, MSN, as originally conceived, was a big flop. Content providers that hooked up with it took huge financial hits. We escaped the carnage, which might have destroyed our fragile company, thanks to our advisory board.

Staying Focused on What Really Mattered

When we started out, we charged consultants and professional service providers anywhere from $1,500 to $5,000 to build a Web site stationed on our main site. We obtained a slowly growing stream of customers, but the more clients we landed, the more money we seemed to be losing.

It didn’t take our advisory board members long to conclude that we weren’t charging enough for our services. At first, we didn’t get it—if we had a growing stream of customers now, how would raising our prices increase the customer flow? Our professor of entrepreneurship had the answer: The more you charge, the more clients value what you say and do, provided that your basic offering is of real value.

Mike Gonnerman, the CFO, predicted: “Within just a few years, you’ll be charging hundreds of thousands of dollars to build Web sites. It’s all getting more complex and there’s a tremendous need for expertise.” By 1999 we had several clients that were paying us a few hundred thousand a year for our services.

Keeping Us from Getting Gloomy

Building a growth business is something like riding a roller coaster. There are some great highs, but there are also some terrible downs. As tough as our advisors were, they knew when to let up and act as cheerleaders. When we were at our wits’ end about how to build sales sufficiently to grow the business, they would tell us, “You guys don’t realize how far you’ve come. You are building the basis of a real business.”

For Love or for Money?

When we launched the board, we asked the three original members how they wanted to be compensated and how much, offering stock and options because we were a cash-short startup. They wanted stock, so we gave them about one percent each of the stock then outstanding. After a couple of years, we felt they deserved additional compensation, so we provided options. As time went on, our three-person advisory board proved to be so useful that we add two additional members in 1998. When NetMarquee was sold, they cashed out of their stock and options (as did all shareholders and option-holders) on the same basis as everyone else.

Their reasons for signing on were not merely financial. A big part was confidence in us, the entrepreneurs. Another was an opportunity to be involved in an emerging company in an emerging new industry. Gaining experience, plus sharing and teaching what they knew, provided satisfaction beyond the prospect of making a fortune on their stake in the company.

Without the board of advisors regularly challenging us and our thinking, it’s doubtful we could have achieved the kind of growth necessary to make us an attractive acquisition candidate. Having a great board enables a start-up company to do more, do it faster and do it a whole lot better.

More like this: Legal, Entrepreneurial Life, Planning and Strategy

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