Governance Bites #102: startup governance and advisory boards, with Jon Davies

In this episode, Mark Banicevich talks with Jon Davies about governance in startups and advisory boards. He asks about the journey that startups take towards governance: their value, common mistakes, what founders should seek, and the ideal size of an advisory board. They also discuss the best way to remunerate directors, keeping them engaged and motivated, and how to deal with an adviser who isn't working out. Jon also shares advice with a founder looking into structured governance. 
Jon Davies is the CEO of InsuredHQ, an award-winning insurtech headquartered in New Zealand, helping modernize insurance companies across global markets. Jon trained in marine biology and zoology, worked as an professional outdoor guide and paramedic in the USA, and move into technology in the Bay Area and Silicon Valley. He built a career working with and inside startups, scaleups, and giants like Microsoft, NASA, and Yammer. He later served as Tech Sector Lead for New Zealand Trade and Enterprise and sits on advisory boards including the Nasdaq Entrepreneurial Center. He’s also the author of the Top 10 in Tech newsletter and a passionate advocate for using technology to make industries more human, efficient, and future-ready.
#governance, #leadership, #corporategovernance, #boardcraft, #decisionmaking, #makingadifference, #governancebites, #boardroom , #cgi, #charteredgovernanceinstitute, #director, #startup, #technology

Transcript

0:00

Hello, my name is Jon Davies. I am the CEO of Insured HQ, and today we're going to be talking about startup governance and advisory boards. Hi, I'm Mark Banicevich, welcome to Governance Bites. As you just heard, today I have the pleasure of spending time with Jon Davies. Jon, thank you very much for your time. Thanks for having me. You did introduce yourself as CEO of InsuredHQ. You have a lot more experience than that. You've been involved in startups, both here and in the US. Yes. You've been involved in funding, generating funding for startups. You've been involved in some boards as well, and you've been involved in setting up advisory boards, so a good person to talk to about this topic. To start with, why do some startups create advisory boards? An advisory board is really the mechanism to evolve thinking. So what you have with a lot of founders are lots of blind spots, lots of areas of inexpertise inside their domain of expertise. And so what you want to seek out is an advisory board that kind of flattens out that structure, gives them a more robust perspective, the ability to have dialogues about specific things, and really it's about time to execution. So they want to be able to make informed decisions as rapidly as possible, which in my opinion is the real role of a good adviser at that early stage. Right, and so a lot of it is about filling the knowledge gaps. Yes, yep. Filling in the knowledge gaps and taking advice from someone who experientially has been there before. They've been there, they've done that, they've got the t-shirt, they've wrecked the t-shirt,- They've made mistakes. - they've burnt it to the ground, they've rebuilt the t-shirt, they've made it more awesome, and then they've had success, hopefully somewhere along the way. So you can learn from someone else's mistakes instead of making them all yourself. Oh, absolutely. Yeah, yeah, that's my biggest superpower that I can, I think, bring to most. How do they then differ from formal boards? Well, the biggest thing is, there's no fiduciary obligations, right. So an advisory board is just that, it's meant to elevate a founder's thinking and focus up to a higher kind of, I call it, cruising altitude. Yes. So it would be, you know, let's bring you up to the 30,000-foot perspective. Let's look at what you're doing from a strategic, not a day-to-day kind of tactical level, so you can make more informed decisions that are best for the business, not necessarily for you. So, you know, having that friction is kind of good. Yes. Where an adviser will challenge the thinking of a founder in a constructive way. But it's all strategic, it's not tactical. They're in the weeds, they're operating all the time. Let's elevate you up to think about the business at a higher altitude. And as you say, an adviser essentially is the all care, no responsibility thing, right. They're coming in there trying to give their best advice and so forth, but they don't have that full liability of a director. That's right, that's right. But you know, you do want to incentivise them around success, right. And so providing some key metrics of what success may look like and incentivising around that at the early stages, I think, is key to keep them engaged for as long as possible. How much of that is perhaps an equity stake versus some other form of remuneration? I think it should all be equity. The biggest challenge for any startup is cash at hand. That's why they have to raise venture capital, often. They go through friends and family, they go through angel and seed rounds, pre-seed rounds before they go to even venture capital. The cash at hand is very important, especially, you know, especially when you're pre-revenue, because you don't have any revenue to supplement the capital that you have. And so you create incentives around, you know, specific KPIs [key performance indicators]. So you can have, you know, access to accruing some kind of equity within the business at different milestones. So it could be,"When we raise this, we'll create a milestone event that will mean that you accrue a certain amount of equity." Right. Or it could be time-based, after a year you'll accrue some equity, so that adviser stays around, hopefully stays engaged and gives their best to that startup and those founders. Right. Okay, what are the common mistakes that early- stage companies make in the governance space? There's a couple. The biggest one, I think, is in startup land, often times there's this thing called the pursuit of the logo, where you can acquire, you know, Nike, and then you put Nike on your website and you've got that logo there. And the same kind of mentality can also apply in the advisory space, where you acquire that person because of their status within the startup world, within kind of the advisory world, and what they, I call it, all sizzle, no meat. So you get the sizzle going on, the sizzle factor, but there's nothing of value behind there, because they may not be domain experts, they may not have the time, or they may not have the motivation to get involved properly. Right. And so, you know, behind the curtain, it all falls flat. The other part is data in, data out. So if you set up the framework for strategic success, you're going to have a lot more output if you put in the right inputs. And this is not, you know, oftentimes you'll see founders kind of roll their eyes and it's a box-checking exercise, right. But that's the wrong strategic incentive. You put in the right incentive and you can get the value out of it on the back end. Right, okay. Right. What should founders then look for in an adviser? You mentioned before the risks associated with getting a big name if they're not really buying in. What should they look for? For me, what I would look for and what I promote people to look for is the experiential scars. So it's, you know, have you built the t-shirt? Have you burnt the t-shirt? Have you rebuilt the t-shirt? What have you failed at? Yeah. But what have you failed at? What kind of resilience did you exhibit during that failure? What kind of success did you experience beyond those failures? Has it been repetitive? Was it a one-time success? So you're looking at what they have experientially to offer. And then you also look at what kind of time commitments they can make in terms of contribution to the business, contribution to you. It's not just about, you know, the cadence of having meetings, it's all those ad hoc things that add value. And then underneath that, it's what can they bring to the table in terms of actual business? So do they have the right networks that you need access to? Do they have the right connections to connect, and people? And, and you know, connectivity in Silicon Valley in my experience is the biggest currency that people have and it's traded all the time on a daily and a weekly basis. "Oh, you don't know this guy?"Let me introduce you." And there's no incentive that people have in terms of expectations back, it's just what people do in Silicon Valley, which was my biggest learning experience taking from my time there. In my experience, we do that here too, right. Yeah. You introduce people to other people all the time. Yeah. That you think they might connect with, and have some mutual benefit from. Yeah, that's right. Yeah, yeah. Yeah, right. Is there a magic number of advisers, or a point where you've got too many advisers and it starts becoming noise? Yeah, yeah. Beyond three, I think, is a mistake. And, you know, you're looking at the pillars from, you know, business development, operations, strategy. But also, there's this time-gated thing to look at, too. Like, I am not good at a company that's beyond scaling, because I don't know anything. I don't have that specialty experience. I am a generalist. I know the cold start problem. I know how to execute on the cold start problem and get them into scale mode. Beyond that, you know, my value as an adviser is very much diminished. It's time to go. Right. And get in, you know, you bring in another adviser, or maybe that's when you start formal governance, right. At that point, you bring in those people that have that more specialised expertise. So a couple of things that came out there. One was founder plus three advisers is probably about the limit of where you want to go. Yep. Well, founders - Yes. - normally, you know, a solo founder is generally considered more of a liability than having two. Right. Right. So you've got your founders plus three advisers. And you also want to be in a position to know, and this is from both sides of the equation, when an adviser is no longer in their sweet spot and adding value, it's time for them to leave and have somebody else come in. Yeah. It's a difficult conversation because there is ego involved. But, if you set your, you know, your advisory board up for success, making it about the business, not about the people, those conversations can be easier to have. And also, if you're able to have the KPIs in advance, saying, "This is the period of time for"which we need you. You've got the skill set from here to here. Once we reach here, thank you." Yep, that's right. "You've done your job." Yeah, that's right. Yeah. Yeah, right. And I'm sure in your governance roles, you may have seen the opposite true, right. Where you have CEOs that are very capable within a certain stage of a business. Once they reach that stage, it's time to move on to another more experienced CEO[Chief Executive Officer] for that part of the business and that stage of its life. Yeah, as you, similar case, you've got startup CEOs, you've got scale-up CEOs. Yeah, that's right. Yeah, definitely for the different stage of the business. Yeah. Now, we talked before about the best way to structure the engagement and equity is often the way to go because startups are cash-strapped. How involved should those advisers be in the actual decisions in the business? What's the level at which those advisers are going to operate? Yeah, so operationally, they should not generally touch operations. They should only be involved at the strategic layer. And so the general cadence, I think, should be, you meet three to four times a year, in a formal way. There will be ad hoc reasons to meet all the time, just to bounce ideas off, to consult around specific things, to provide introductions, you know, those kind of things. That being said, I do have a cadence of meeting weekly with some startups just because that process that they have of, they all go their separate ways doing the stuff, business development, product. And you bring them back in together to see where they're at. Yeah, yeah. So, you're herding them because in a business, and even at the strategic layer, there's a friend of mine that kind of developed this theory, and I think there's a book in there one day. There's three kinds of people that you need to run a business. You have pirates, shepherds and Sherpas. So, the pirates are the swashbuckler innovative leaders that are like leading the way, "Let's go." You have the shepherds that herd all the people towards this path. And then you have the Sherpas that do all the heavy lifting. Right. And so the same is true for founders and they're not, you know, composed of just one of those archetypes. They're composed of several of those. But one is more dominant than the other. Yes. And so when you bring all those pirates, shepherds and Sherpas together, you know, you can get a more balanced. That's when the magic happens. That's right. Pirates never deliver anything. They know where to go. They just want someone else to do the work for them. Yeah, absolutely. They're not necessarily the best at delivering. What's worked best for you in terms of keeping advisers motivated, keeping them helpful in this process? Listening well. I think, because, you can have a session where you just want to bounce ideas off someone, right. But you also want to be in the position where you are the dumbest or the most inexperienced person in the room. And if that is true, which is what you want your advisers to be, the smartest people about this specific topic that you can get access to, you need to spend a really good amount of time listening and asking questions about what it is that they're saying. So you really understand. So show them that you value their expertise. Yep, yeah. I think that's key. We also, whenever there's events or team events or team communications that go out, they're involved. So it's giving them that sense of ownership strategically of the business and the success that we're having, but also feeling like they're valued on that relationship on a one-to-one basis. Right, right. Okay. How do you know whether your advisory board is working or not? There's a few ways, but you'll know in terms of, you are making valuable decisions. So, at a cadence that you could not do alone. So you've managed to make a decision about a specific topic, be it, you know, fundraising, which in startup land is the most important one, you're able to make these decisions and understand the implications of those decisions in a way more informed and valuable way than you would be able to do it kind of out there alone in isolation. You would feel, I think that's the main one actually. Right. What does an advisory board mean to me? It is the informed decision at a cadence that is faster than I would ever imagine doing solo. Doing it alone, right. Right, that's a really good definition. Have you ever found yourself in a position where an adviser isn't working out and you've had to let them go? And how did you deal with it? Yeah, so often times advisers are there for the prestige or for the ego or, you know, for other reasons. And often times there is a level of value that you're not getting out of that relationship, right. And so it'd be quite obvious in terms of, you know, their engagement, your engagement with them, the frequency of the meetings, and then obviously the value that they add to the business and you as a leader in that business. And there are times when you have to have the conversation with people about their role in the business and how it needs to come to an end. Yeah, right. How have you handled those conversations? Awkwardly, but in person. Right. So, you know, running a business, especially in the US, you hire and fire a lot of people and it's not that different. And in the US, it's obviously very different than in New Zealand because. - Pink slip. - "Hey, you don't work for me anymore. Thank you. Bye." Right. It is at will. And so you go through enough of those that you develop an experience where you can actually have those conversations. I don't know if a lot of founders have that experience because I've run a business where, you know, I used to run an outdoor guiding business where we would hire 120 guides a year and we would recruit all of them. And so I have this history of hiring and hiring and hiring very rapidly. What I do now actually as an adviser is coach people through that process of letting people go who are employees. Right. And so, you know, as an adviser, I'm giving experience now of like,"This is how you let people go, this is the"process that you have to follow, these are the conversations that you're going to have to have"with this person. Do you want to practice on me first?" Yeah, right, right. And one of the interesting things, I think, with an adviser, which you said before, you're often setting them up with a contract of, "You deliver this thing and we'll deliver you equity." And when you're having this conversation, it's because they're failing to deliver this thing. You may find yourself in a position if that contract is not written well, where they'd be saying, "Well, I haven't delivered that thing yet. We've got a contract, you owe me." So it'd be quite difficult to, I'm sure, have those conversations around, "Well, you know, I promised"you 3%, 5% equity," whatever it may be, "you haven't delivered, so you're leaving with no equity." Yeah, whenever people are thinking of contracts, you know, everyone generally, and this is my experience as an adviser to startups, thinks of the upside. Yes. They never contract in the downside. So as an adviser for me, it's very important when I'm having these discussions with founders as, "What do we do if this doesn't work out?" Yes. It's very important to understand that we're going to hope for the best, but plan for the worst. Yeah, yeah. Absolutely. And so, and that if your adviser isn't contracting that into any agreement that you're coming to, that would be a red flag for me. Right. Yeah, absolutely. And there's some value you're already adding when in the early stage of the conversation. So, you got to talk about the downside. What advice would you give to a first- time founder about putting together an advisory group. That's a key one as a starting point when you, you know, have a contract in place, and make sure you're looking at the downside as well as the upside. Yes. Step one is the gap analysis. So what, there's probably a lot of things that people aren't even aware of that are gaps within their experience. No. But you start with the things that you know you're probably pretty bad at, and it's likely fundraising, it's likely go-to-market, it's likely, you know, all the commercial stuff, because often times a lot of these founders are coming in from an experience within the market, an identification of the opportunity, and then an idea of the product of how to solve that, but not of the commercial acumen that's required to scale a business rather than launch it. Yes. Yeah. Right. So identify your gaps. Yep, yep. So often times that's commercial, or it's also operational. Like right now, you know, the experience is we don't, you know, where I'm coming in and being more involved is"We want to build the product, we're having a hard time running the business,"we need help running the business." And running a business, I call it the long tail of bullshit. Am I allowed to swear on this podcast? Sure? You did. It's, I call it the long tail of bullshit. Is all of these things that you have to do to run a business are actually often times distracting from the mission at hand. Yes. And so identifying those, understanding what those are and managing them is a very important thing to do as a founder, which is where advisers come in. Right. And you know, how can those be taken away from their plate so they can focus on the mission? Yes. Which is building the product, getting the commercials right, launching that product into a market rather than dealing with, you know, what insurance premiums I have to pay as a business and how my bank account works. Employing staff. Yeah. And building out processes for your business, your HR [human resources] manual, like all of those things are necessary but a distraction from the mission. Yes, right. Jon, thank you very much. That's been a really cool conversation. I really enjoyed it. Thank you. Let's catch up again soon. Yeah, thanks for your time. I appreciate it. See you next episode. Thank you for watching this episode of Governance Bites. We have more episodes on YouTube and your favourite podcast channel where I interview directors and experts on various topics relating to boards of directors and governance. We'd love to see you back and please like, subscribe and share the videos and podcasts.