Tap retired talent for board to help grow startups

Charleston Business Journal > May 15, 2006 > News

By Dan McCue
Staff Writer

With corporate executives retiring or semi-retiring to affluent parts of the Lowcountry, a group of civic entrepreneurs in Charleston believes it’s time for area startups to begin viewing the influx of intellectual capital as a resource.

The idea, put forward at a recent informal gathering of business leaders and venture capitalists at the College of Charleston, is to draw on the expertise and good name of those individuals to improve the competitive advantage of early-stage companies.

“What I’ve found over the years is that an awful lot of people starting companies believe that if they only had venture capital, it would solve all of their problems,” said Ted Dintersmith, an active and early investor in several successful startups, including 10 that have gone on to public company status.

“The problem is they fail to understand the psychology of the typical venture capitalists,” he said. “We love high-potential companies that don’t demand that we work very hard to protect our investment. Why do so many startups driven by the desire to secure venture capital fail? Because as interesting as their companies might sound, they haven’t paid attention to developing a quality board of directors—in most cases our only assurance that the business will have a solid foundation.”

Fearing boards of directors

Prior to the gathering, which grew out of an effort started by the South Carolina Council on Competitiveness and led by Edward Sellers of Blue Cross of South Carolina, members of the collaborative group—a group steeped in corporate, legal and venture-capital experience—interviewed 30 small business owners to gather their views on their businesses, corporate governance and financing issues.

“That’s an admittedly tiny sample, but we found that an overwhelming number, more than 80 percent, said they couldn’t find money in the state,’ said Rick Throckmorton, a management consultant who divides his time between Charleston and Sante Fe, N.M.

They also identified a significant dilemma: While there’s much to be gained by reaching out to individuals with significant expertise in a particular industry and business in general, most CEOs of startup companies have an inherent fear of boards of directors because they fear a loss of control of their businesses.

One area upon which there was early consensus among the participants was that geographical advantage is something that is made, not found.

“People believe Boston has an advantage to drawing venture capital because of the proximity of its startups to the Massachusetts Institute of Technology,” Dintersmith said. “Likewise, they believe that Silicon Valley has an advantage because it’s close to Stanford.

“In both cases, I think the perception is more myth than reality. The reality is those places succeeded the way that they did because clear clusters of expertise developed there. Austin, Texas, for instance, had no such connection to universities turning out engineers and software specialists, but the city aggressively recruited software manufacturers and created its own cluster of expertise,” he said.

Eric Friberg agreed.

Friberg spent 30 years with and is a former director of McKinsey & Co., a firm that specializes in advising companies on strategy, organization, technology and operations. Over the years, he was also active in the growth of Atlanta, Ga., as a business center.

“Atlanta’s experience raises the question of where advantages really come from,” he said. “I think the advantage was a direct result of the clusters that developed there. In Silicon Valley, Boston and other places, people tend to do one startup, build the company, sell it and then move on.

“In Atlanta, the dynamic was a little different. People would do one startup, sell it, but then stayed put and started another. That’s where the competitive advantage was.”

Capitalizing on the advantage

The question, then, is how to fuel that environment.

“The first thing I would recommend every entrepreneur do is ask themselves, ‘Who are the key people in this area that I would align myself with if I could? Who are four people who are living in this community that I can get behind my company, based on their expertise, interests and experience?’” Friberg said. “Do that and then all sorts of amazing things happen.”

Dintersmith and others, notably Steve Swanson, president and CEO of Mount Pleasant-based Automated Trading Desk LLC, observed that while Charleston has a large number of executives retiring to the area, it often seems as if they live in an entirely different country.

“That’s really surprising to me,” said Swanson, who started his company in his garage with two employees, formed a board of directors and now has 85 employees trading roughly 6% of NASDAQ’s total volume every day.

“Retired executives are always being asked to serve on some kind of charitable board, but when it comes to startups, they invariably say they haven’t heard from any,” Dintersmith said. “The tragedy is that when you ask most of them if they’d be interested in serving on the board of a startup, they invariably say ‘yes.’”

Swanson said he has found that a good board member is one who brings business insight to the table and is willing, even in good times, to push for more achievement.

“My board consists of people I can draw upon for insight into management issues and possible ways of handling them,” he said. “Also, in my industry, regulation is a big issue. So it’s important to look for people who know the trials and tribulations you’re going through (in that regard).”

Swanson suggested another way a board can be helpful.

“As a startup, the prestige of your board members is part of the sales process,” he said. “I’ve had customers say, ‘The names on your board are the only reason I returned your call.’”

That’s true of venture capitalists, too, Dintersmith said.

“If you’ve got good people tied up with your company, your e-mail goes from an easy delete to something a venture capitalist should seriously consider,” he said.

Dan McCue is a staff writer for the Business Journal. E-mail him at dmccue@charlestonbusiness.com.

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Advisors bring knowledge, networking to startups

By Dan McCue

Staff Writer

As a partner of Nelson Mullins Riley & Scarborough LLP, attorney Robert W. Pearce Jr.’s practice focuses on corporate law, shareholder representation, venture capital, mergers and acquisitions, and myriad other aspects of business law.

As a civic entrepreneur, his goal has been to foster Charleston’s business community, and that’s why he has become so involved in the effort to form collaborative partnerships between local businessmen and businesswomen and the potential advisors to be found among the region’s retired executives.

“Thanks to our quality of life, we believe that there’s a great intellectual capital pool here in Charleston. The question has been figuring out the demand,” he said during a College of Charleston gathering of startup business owners and venture capitalists.

One of Pearce’s primary roles at the meeting was to remind participants that boards of directors are creatures of statute with clearly delineated powers, rights and liabilities.

“By statute, members of a board of directors owe their loyalty to the company and its shareholders, not the management,” Pearce said. “At the same time, in terms of their potential liability, it should be recognized that by law, board members don’t have to make the correct decision; they have to make the decision correctly.

“A board of advisors, on the other hand, has far fewer liability issues to worry about. They’re not running the company on any level. They’re simply a group bringing unique knowledge to the table that compliments the knowledge of the company’s management,” he said.

Pearce said that nearly 99% of the Charleston region’s small businesses have one or two individual owners and don’t have a board of directors.

“Of course, in some cases, that can be an asset because as the old adage says, ‘When two or more shall gather, there will be nothing but an argument,’” he quipped.

Pearce’s advice to startups considering forming a board is that they start with a board of advisors and think about forming a formal board of directors later.

“In a sense, you’re crawling before you can walk, but it is a much less threatening situation for both parties,” he said.

Pearce recommends startup entrepreneurs approach a potential advisor on an informal basis and pose a current business question to them.

“Your approach should be as straightforward as possible, and at the end of the conversation, you might ask whether they can recommend someone else that you can talk to,” he said. “Start small, and by the time you get to two or three people you can talk to, it’s time to ask if they’d be members of your board of advisors.”

While Pearce and others at the College of Charleston meeting recommended that boards of directors should include individuals with diverse business talents and experience, boards of advisors can be somewhat narrower in construction.

“The critical thing about a board of advisors is that their respective expertise be deep within the industry you’re working in,” Pearce said. “Not only will they provide you with pertinent strategic input, but they’ll also provide industry prestige and contacts—the networking that’s so important in a competitive marketplace.”

Dan McCue is a staff writer for the Business Journal. E-mail him at dmccue@charlestonbusiness.com.

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