Research by Christine Beckman
Entrepreneurial boards typically stay actively involved in the growth of a new venture and can be critical to the company’s success. So it is important for startups to know which types of people they should offer board seats to.
Christine Beckman, associate professor of management and organization at the Robert H. Smith School of Business, looked at the influence of entrepreneurial boards and the makeup that helps startups grow quickly in a paper she co-coauthored for Academy of Management Journal. The authors followed 105 semiconductor firms founded in the United States from 1977 through 1990 to see how well the companies did and how the inaugural board members impacted success.
Typically in a startup, a small group of founders brings in a few outside advisers to form a board. Often venture capitalists or other early investors sit on the board. Sometimes startups might ask a large client to participate. Other times, spinoff startups might recruit someone from the parent company.
The researchers found that individual board members’ backgrounds and the makeup of the board as a whole both influence a startup’s success — in particular through the formation of alliances. For example, having a venture capitalist on a board can be a good thing for developing an alliance portfolio, but having all venture capitalists creates problems.
“We looked at how board members influence the different types of alliances that startups create,” Beckman says. “We looked at alliances because our research shows that having a broad set of alliances is really useful for reaching all sorts of milestones for startups, such as raising money and scaling up.”
Alliances encompass licensing, manufacturing and marketing deals — or anything that can help a new venture grow faster. Forging multiple alliances usually bodes well for success.
“Different kinds of people are going to bring different ideas and opportunities, so that should help startups create different kinds of alliances,” she says.
The ideal scenario is to assemble a board that is diverse in terms of the kinds of organizations that members represent (parent companies, clients, investors), the mix of industries they come from, and the regions they hail from.
The researchers also found that board members are more likely to deliver value when they have deep ties to the organization. This might be because board members who are also investors or clients do not lose interest over time.
The researchers also looked at individual board members to see how centrally involved they were in other boards and in the industry. Specifically, the researchers wanted to know whether it was better to have board members who sit on several semiconductor boards and how that might impact a startup.
They found the best scenario for a startup is to have multiple central board members also involved in other boards in the industry. “It make sense — having a lot of people who are well-connected is useful,” Beckman says.
However, if a startup can attract just one industry heavy-hitter to be a central board member, that person should not also be an investor in the firm. The researchers found that scenario can consolidate too much influence in a single person and restrict a firm’s growth.
“When you have an investor who is also a board member, and they are more central than everybody else on the board, they have too much influence,” Beckman says. “That one person only has one way of thinking about things and only one set of connections and tends to dominate, and all the other ideas and other connections just don’t get brought to the table.”
Beckman says entrepreneurs who fall into this trap eventually discover that their interests are not always as aligned with their board members as they initially think.
“Even though the investor has money in and they clearly want the firm to be successful, the ways that they think that can be accomplished might be different,” she says. “Even having the same big overarching goal is not enough if you have different pathways to get there.”
“Relational Puralism in De Novo Organizations: Board of Directors as Bridges or Barriers to Diverse Alliance Portfolios?” is forthcoming in the Academy of Management Journal.