In 2023, the Startup Genome completed a five-year study of some 10,000 global startups and found that companies using five or more advisors grew seven (7) times faster than companies with no advisors:
Even if the company had just one or two advisors, the startup doubled its growth rate compared to companies with no advisors. It should be noted that Advisory Boards are non-fiduciary; i.e. they are not the same as a Corporate Board of Directors. Advisory Boards serve the founder(s) of the startup, covering critical execution areas or weaknesses that are important to growth and success. Advisory boards are at the discretion of the business owner and are not required for a startup business.
|
Board of Directors |
Advisory Board |
|
Has authority to
make decisions such as approve investments, set executive compensation, etc. |
Lacks authority,
non-binding recommendations are made directly to the CEO |
|
Serves long term such as 10 or 15 years with an emphasis on financial
results |
Serves
short term such as two years to assist the CEO in solving various problems |
|
Meets for a full
day on a quarterly basis |
Meets every other
month for 1 or 2 hours |
|
Shareholders vote to form board members |
CEO
selects board members based on skill gaps that are not filled by existing
personnel |
|
May be liable for
company results and thus, Director and Liability insurance is needed |
No liability, not
required or regulated by government agencies |
|
Part of a formal corporate structure, serving the shareholders of the
corporation |
Not part
of corporate structure – serves the founders or CEO |
“We know for sure that fast
growing companies have advisory boards. Only 8% of companies use advisory
boards and about half of those companies using advisory boards are not using
them correctly.”
-
Cathy Fischer, The AB Platform
Advisory boards bring experience
and wisdom that is often lacking with startups. Think of it this way: If you
could have access to five (5) experts to help you run your business, who would
you choose? Like hiring an employee, what are their backgrounds, experience,
and special areas of expertise that empower the company.
As a starting point, describe key advisory areas where you need help; such as industry knowledge, recruiting key personnel, obtaining product market fit, attracting customers, or developing artificial intelligence. You should think big and bold when developing an advisory board. Do not be afraid to reach out to well respected people who often are willing to help because they enjoy the challenge of adding value for startups.
Building a strong Board of Advisors will take some time and effort, but the strategic guidance and connections they provide can be invaluable for growth. This is especially true if the company lacks a strong management team; i.e. you need a core execution team to help without a lot of expense. You should also seek a high degree of diversity. For example, if a single customer accounts for substantial sales for the company, consider having someone from the customer’s company serve on your board.
Advisory boards work best when there is a firm commitment of time, scheduled for the calendar year and the group works as a team to grow the company. If possible, try to have the same level of compensation for all board members. This compensation often takes the form of advisory shares from the corporation. For small businesses that are pass-through entities (non-corporate), simply seek out some mentors or experts that can help you execute on the basics and meet on a regular basis.
“Advisory shares are a type of equity compensation that
companies use to incentivize advisors. In exchange, advisors are expected to
provide guidance, services and support to the company. Equity compensation
aligns the interests of advisors with the company. It also creates a sense of
ownership and commitment.” -Cap Board
The goal is to have a highly cohesive group, working together to grow the company. If you have board members who fail to add value after two or three meetings, then correct the situation just like you would if you had a poor performing employee. In some cases, you may need to re-launch the board if members are acting too much on their own and there is a lack of open and honest communication. You also need a designated person to schedule meetings, release meeting agendas and communicate minutes and action items from each meeting. A final point; conduct an annual assessment of your board – how effective is the board, what changes need to be made, is the board meeting the expectations of the CEO?
“The best place to find members
of your startup advisory board is within your very own network. It’s common for
mentors to become formal advisors if they’ve been valuable to you in the past
and you’ve been able to form a trusting relationship with them.” – Lena
Eisenstein, BoardEffect
The evidence is clear – advisory
boards are a powerful asset for growing startup businesses and there are other
benefits to having an advisory board such as CEO coaching, avoiding group think
and giving your company increased creditability. Don’t go it alone; otherwise,
you will only hamper your long-term growth.
