Startup Boards: Advisory vs Supervisory, with Edwin van Houte

When Dr. Blagburn stated in her presentation that “70-80% of venture board members add negative value to scale-ups in their advising” it drew my attention, being an investor in scale-ups. Other examples, like a study from KPMG1 shows that only half of the interviewed scale-ups would choose the same board again. If this is the case, why should a startup or scale-up need a board anyway? The main purpose of the founders and shareholders of a scale-up, including the investors mostly, is (or at least should be in my opinion) creating a company that’s performing well on all different relevant organizational aspects and eventually grows to a mature organization. The question that comes to mind is: do scale-ups need a (supervisory or advisory) board anyway, if 70 to 80% of the board members add negative instead of positive value to a scale-up?

Supervisory vs Advisory Boards

A supervisory board in general has to fulfill three tasks:

1) being an employer

2) holding strategy oversight and being a sparring partner

3) the formal governance tasks / duty of care like approving the budget, annual reports and significant investments.

An advisory board is – on the other hand – a more informal board. The purpose of most advisory boards is to help the organization gain new insights and advice to solve business problems or explore new opportunities by stimulating robust, high-quality conversations. The role of an advisory board is not to make decisions, but rather to provide current knowledge, critical thinking and analysis to increase the confidence of the decision-makers who represent the company. They provide non-binding strategic advice to organizations and hence are informal in nature. This gives greater flexibility in how they are structured and managed, when compared to a supervisory board. In summary: An advisory board can provide the strategic advice and complementary skills required to take a scale-up to the next level.

Different perspectives

I’ve been an impact investor in innovative start- and scale-ups for eight years now. The

startups/scale-ups we’ve invested in are mostly in the early stage or in the transformation phase to enterprise. Most founders tell me that what they need when we discuss the topic of installing a board is they need a ‘think tank’ of people who keep him/her on track and open their network to the scale-up. Otherwise: they seem to need an advisory board. They work their ass off and don’t like giving priority to prepare formal board meetings, but just need sparring partners. It’s in the common interest of founders, investors and other shareholders that the founders can spend their scarce time to do the right things. This is of course always the case, but especially in the early stages of the company, because a lot of things have to be done and the team is still very small, so there’s a lack of delegation options.

A lot of investors claim a board seat in a supervisory board that needs to be installed as soon as they become a shareholder, not rarely during series A or sometimes even during the seed funding phase. From an investor’s perspective, it usually is all about controlling the (behavior of the) CEO/MT and the company in general. Regularly, they put a team member of the investment firm in the board seat. In my opinion, it doesn’t make much sense to install a supervisory board in the earliest stages of the company, especially when one acknowledges 70-80% of the boards seem to create negative value. And by assuring veto rights on subjects like hiring and firing the C-level and other high impact events in the shareholder’s agreement, an investor can also influence and control certain undesirable behavior of the founders without having to install a supervisory board prematurely.

Conclusion

In my opinion, “the best of both worlds” is installing an advisory board which contains board members with fitting profiles in it as soon as possible, to take advantage of the benefits of having this type of board in the early stage. It’s recommended to use a strategic recruitment approach based on predefined profiles to select the right advisory board members, instead of selection from close networks. It’s also recommended to create a charter or other type of agreement, where the rules of engagement of the advisory board are written down, including remuneration. An advisory board is less formal, however not without obligations.

By doing so, scale-ups can get used to having a board in a more informal way, and the board members can help the company to successfully scale. When the company is in the late scaling phase, politics come in and there will be more need for professional governance, the advisory board can be transformed into a supervisory board, in consultation with all shareholders and the advisory board members, of which some will leave the board at that point. It’s recommended to agree upon the departure of some advisory board members when the transformation to supervisory board is made in advance. My message to investors is: don’t install a supervisory board too soon, but don’t wait to install an advisory board in the early scaling phase, so the scale-up can use the advantages of an advisory board in the earlier stages. Then the scale-up can grow to a suitable size (series C/D or maybe series B funding, but only if there’s a very good reason) before transforming the advisory to a supervisory board.

Remember: once a supervisory board is installed, there’s no way back.

Author Bio

About Edwin van Houte

He is an experienced Impact Investor at Impuls Zeeland (Regional Development Agency). Edwin holds a MSC in Economics and a MBA in Strategic Management. He is also a Class 10 alumni of the ScaleUpBoard program.