8 steps to building a strong board of directorsWith nearly 30 years of experience in both operations and investing, I may have developed a few gray hairs, but I’ve also learned a thing or two about...
Key takeaways from the NGP CEO Summit in Berlin
On May 18, we welcomed NGP portfolio companies, as well as friends and advisors, to our CEO Summit in Berlin. We gathered to help entrepreneurs and management teams learn from each other, get inspired, build new partnerships and friendships, and, most importantly, discover concrete ways to build successful businesses.
Running a business can be lonely at times so this forum was deliberately kept small-scale to facilitate open conversations in a private environment. We tackled some of the thorniest issues facing entrepreneurs including internationalization strategies, managing investors, managing rapid growth, hiring, developing a motivating culture, building partnerships, and a variety of other topics related to building a successful business. Each session was carefully designed based on what we have learned over the years in our work with management teams around the globe.
So, if you are an entrepreneur pondering some of these issues, here are some of the key learnings shared during at the event.
Building a successful culture, mission and purpose is crucial for long-term success
Creating and fostering a successful culture is crucial for success. Not only do the values of the company describe the desired culture, they serve as a behavioral compass for everyone in the company. As one of the attendees put it:
“A good culture is conscious and helps people work towards a common goal and to achieve that, you need to think long-term”
It’s essential to remember to adjust your culture and foster peer feedback as your company grows to encourage straight and honest communication at all levels. This can help to ensure that the exceptional leadership drive and commitment that enabled initial success doesn’t lead to overdrive, burnout and self-defeating behaviors among your employees during a high growth phase. Building anonymous feedback channels can be a way to ensure that the rumor-mill reaches top management before minor issues metastasize into larger problems. A formal 360-degree feedback mechanism, which periodically solicits information from multiple sources at all levels of the organization, is another helpful tool for taking the pulse on your company culture.
Organizational design – building effective teams and enabling decision-making
A good organizational design enables decision-making at all levels. The single most important prerequisite for good decision-making is the development of effective teams.
As a company grows it’s common to be hesitant about radically changing team dynamics. The fear is that making such changes might slow down the growth momentum. However, it’s actually the opposite; continuous re-assessment of the team dynamics, determining who wants to stay and who should leave, and making sure to take care of the employees who do stay is important to ensure healthy growth of the company. Having a clear mission and vision, as well as a conscious culture that nurtures people through difficult times makes it easier on the entire organization both during high growth and slowdown.
In most organizations, highly motivated employees will be high-performance employees which is why performance management should always also include motivational management. We came away from this discussion with two important pieces of advice:
– Make performance management an integral part of your management culture from the start. The key to making performance management work is to set clear targets and to include motivational management in the mix. Effective team collaboration tends to outperform “individual stars” in the long run.
– Nurture your top talent. Don’t attempt to control these individuals or keep them locked in because you’re afraid they might leave. Instead, trust them and give them more responsibility. You will be amazed at what highly motivated people can accomplish.
Managing growth –finding ways to overcome barriers
All of our companies are thinking about the fastest and most effective ways to scale their businesses, whether it’s through organic growth by expanding into new markets, or inorganic growth via M&A or partnerships. In either case, there is a range of language, cultural, regulatory and other barriers to overcome.
Organic expansion into new markets, especially very large markets such as the US or China, can be challenging, but we came to consensus on three main things to be mindful of:
– Develop a playbook for market expansion and test it in two or three smaller markets first. Be prepared to learn from these test markets and change the playbook as you go.
– If you are a European entrepreneur looking to break through or fundraise in the US, the best way to go about it involves relocating either a founder or the CEO to the US. From our experience, most other ways of tackling the US market have a high failure rate.
– Taking on the Chinese market can be done through joint ventures, but building a joint venture in China is not easy, and a high percentage of these ventures fail. The key is finding the right partner, learning what your partner truly wants, and aligning objectives with that partner. In addition, most companies start with tier-one cities such as Shanghai, Beijing and Shenzhen but remember that there are many lower-tier cities with large populations that can provide a good alternative to the tier-one cities as first places of expansion.
Inorganic growth through M&A or partnerships can be an effective route for scaling your business across barriers, but it has its own set of challenges. The discussion on this topic raised three key points:
– Most successful business contracts are based on relationships. It is, therefore, important to spent time with potential partners, M&A targets and even potential acquirers both to gather market insights and to understand, outside the confines of a formal business agreement, the foundations for a cultural match. Most mergers and acquisitions happen between companies or founders who have come to know each other well before entering into a contract.
– There are many divergent views on the use of bankers but when handled in the right way, bankers can help with both market insights and relationship building prior to a partnership, merger or acquisition. Strong relationships with individual bankers who can provide quality insights are key to fruitful use of this type of advisor.
– When partnering with a strategic partner navigating a large multinational can be difficult and confusing. Business development people can be useful for initial introductions, but you need to move quickly beyond business development to find and build relationships with the people managing budgets and responsible for partnership creation. It is helpful to keep in mind that signing a partnership agreement is only the end of the beginning of a long journey.
Building the right investor syndicate and board of directors – for a profitable exit
Building an effective investor syndicate and board of directors is easier said than done. As you may be working with this group for five to ten years prior to an exit, planning for the long haul is critical.
The most important factors to consider when building a board of directors are: aligned interest (this one often goes wrong), balance (think carefully about who you have on your board since you can’t fire your investors), complementary strengths (the real work happens in between the board meetings), experience, and trust. Keep your board small – between five to seven members maximum, the smaller the better. Have conversations on an ongoing basis about how you want to strengthen and develop the board and remember that replacing more tenured directors with newer ones should be part of the company’s growth. A seasoned, trusted chairman can help facilitate these conversations. At the end of the day you don’t want a parliament, but rather an effective, supportive decision-making group.
For the board to be successful, not only does it need to be compact, but the CEO or the CFO needs to manage the meeting dialogue and set the expectations for each meeting. Demand participation from your board at meetings, but also make sure to deliver materials well in advance so your board members can arrive prepared. Fewer well-run board meetings are better for everyone.
A discussion about exit strategy should be part of the ongoing dialogue from the start. There is no right time to exit, but management must be fully behind it, or it won’t work. It is complex and time consuming, so there should be frequent analysis and debate with management, investors and board members about timing and aspirations. One thing to keep in mind is that an IPO can be five to ten times more difficult than a merger or acquisition. Among other things, if you are going the route of an IPO, you need to make sure that you can meet your quarterly goals for at least 4-6 consecutive quarters prior to the planned IPO date. One memorable quote during this discussion was, “I can’t see rational reasons why anybody would want to go IPO!” Remember also, an IPO is really just another financing round with some liquidity for some investors; it is rarely a full exit for all investors and management. Mergers and acquisitions are typically cleaner, but it is absolutely critical that you get the cultural fit right for longer-term success of the resulting entity. If there are doubts about fit, it might be better to step away, even though it can be very hard. Sometimes an acquirer might look more attractive just before a merger or an acquisition so try to keep that perspective and follow your gut feeling. If something about the fit feels wrong, it probably is.
Thoughtful discussions and new connections
Everyone in the room made thoughtful contributions on some of the most pressing topics for any growing business. We were pleased to see that everyone made new connections, learned something new and got feedback on key issues from their peer group, and from a range of experienced executives and entrepreneurs, both in a supportive forum as well as over dinner and drinks. We also learned a lot that we can apply when we assess investment opportunities and we look forward to the next CEO Summit in Palo Alto on November 14th.