Many of the companies born in the digital age are private, which makes it hard to gain insights into how their boards of directors operate and learn of their boardroom best practices. Our research examines what really happens behind closed doors at born-digital businesses. The secrets we uncovered point to four common pitfalls that boards at those companies are particularly vulnerable to.
The more that born-digital management teams and company boards understand the pitfalls, the better they can work together to avoid them—and the better both parties can serve stakeholders.
This article is part of our Born-Digital study, where AlixPartners set out to research born-digital companies' unique blend of strengths and challenges and identify the most pressing needs and areas of focus needed to sustain their success. See all the articles in our series here.
"We’ve always been big fans of having a diverse, independent, robust set of board members: people who are from the industry—but are willing to engage in real substance—and have the specific domain and occupational acumen to help make a company better. I think the evidence is extraordinarily compelling that when you do that, it has a ton of value.”
—Founder and partner, private equity firm
Secret #1: Unicorn IPOs are informing private valuations
What could be higher priority for boards than increasing company value? Because the board members of born-digital companies are typically private equity or venture capital investors, developing the right exit strategy is also an important consideration for those stakeholders. Although taking a company public is not the predominant exit strategy for investors, recent highly visible IPO misses are influencing not only public offerings but also private valuations. Complex tech unicorns are notoriously hard to value, so the business world is starved for examples to follow.
Of course, there are always exceptions, but a couple of the notable tech unicorn IPOs from 2019 and 2020 show that a trendy buzz and a coolness factor are not enough to outweigh business fundamentals. A higher gross margin is not a guarantee of success following a top valuation (i.e.: Slack), but a lower gross margin (i.e.: Peloton) can be a major sign of trouble, causing born-digital boards to rethink valuations. Those companies need to be evaluated and valued based on the industry in which they reside versus valuing them compared with other tech or software companies.
"The market is now bringing private valuations around to reality, as skittish Wall Street investors have been punishing billion-dollar-plus initial public offerings (IPOs) with questionable balance sheets or paths to profitability.”
—Dan Primack, Business Editor, Axios
Secret #2: Whether they know it or not, the management team needs help
We heard from born-digital boards that they spend a large portion of their time seeking to build the right management team—even well after the launch of the company. Understandable, and given the start-up nature of born-digital companies, it’s not surprising to find gaps in the top team’s expertise. But boards must close those gaps early on—not keep fiddling with the issue when they should be focused on growth and scaling. Otherwise, shortfalls in the team’s expertise can haunt—and hurt—the company long after it has ramped up operations.
Boards of born-digital companies should also tread lightly when it comes to making management changes, because every management change raises the risk of disrupting the company’s culture and its growth trajectory. Inserting leaders with extensive management experience in traditional corporate operations into a start-up is a tricky balancing act—one that usually triggers resistance from both founders and employees. Indeed, boards may have such strong fears of disruption that they’re willing to live with deficits in the management team in order to stay in good favor with the founders.
Moreover, the current members of a born-digital company’s management team may bristle at the notion that "corporate types" brought in by the board from outside will destroy the entrepreneurial culture that they value so much.
“Sometimes it’s their first rodeo and they’re working through all the issues that young entrepreneurs work through in building the management team.”
—Founder, private equity firm
Secret #3: Too much focus on operations, not enough oversight
Findings from our study show that the boards of born-digital companies get much too involved in the day-to-day running of the business—for example, financial planning and analysis processes, marketing approaches, or helping negotiate supplier relationships. What’s more, the younger the company is, the more pronounced the problem.
operations and strategy execution
However, born-digital companies of any age still have boards that are heavily involved in operations, suggesting that they don’t have much time left over for assessing the company’s overall direction.
Born-digital boards’ desire to involve themselves in their companies’ operations is perhaps understandable. After all, many born-digital companies do have real gaps in their management teams’ levels of expertise. But that over involvement sometimes occurs even though the directors themselves may not have the right operations expertise. Instead, the directors tend to know much more about the area of investment—which calls for a decidedly different skill set.
"We had a board of investment specialists... I had six people with exactly the same skill sets and exactly the same backgrounds. For venture capital boards, you need real operators; and private equity boards need the same thing.”
—Born-digital chief executive officer
When directors who lack expertise in operations nevertheless consistently have their hands in their companies’ everyday goings-on, it can exacerbate the problem rather than solve it. If born-digital boards are spending too much time involving themselves in their companies’ daily operations and in installing a winning management team, what responsibilities are they shirking? The answer is risk oversight. Today’s digital waters are fraught with complex threats that can destroy unwary companies overnight—from cyberbreaches to artificial-intelligence ethical gray areas, to data privacy scandals. Born-digital companies need more help from their boards when it comes to risk management than born-traditional companies do because born-digital companies operate in a space characterized by immature or even nonexistent laws and regulations. But there’s cause for hope. Even though born-digital boards spend less time on risk oversight than their born-traditional counterparts do, our study shows that born-digital boards see the value of actively managing risks to their company’s reputation.
Such a long-term perspective is important, but born-digital boards have to follow that up with action—specifically, by allocating sufficient time to oversight, governance, and the development of policies that will enable the company to thrive in the face of daunting and diverse risks. Boards that set up for their companies—early on—the right management teams that include members with operational expertise can free up the time needed to devote to risk management.
Secret #4: Digitally savvy boards rule
Just because a company is born digital and has a highly technical management team doesn’t mean it automatically has a digitally savvy board. In fact, born-digital boards can be at a distinct disadvantage when there’s a deep divide between the executive team’s understanding of technology and the board’s. According to MIT, being digitally savvy means knowing what the impact of emerging technologies on the business will be during the next 10 years—a tall order unless one has gained such knowledge through a career’s worth of education and experience. The recruitment of board members with extensive knowledge and expertise in the use of digital strategies and tools in business can be difficult. But tackling that challenge pays big dividends. Despite the compelling benefits of having a digitally savvy board, only 24% of companies actually do today.1
As a result, those companies are missing out on important advantages because adding digitally savvy board members is one of the most proactive and measurable actions a board can take to improve its impact.
Digitally savvy board members bring a lot to the table, but they can’t go it alone.
In addition to adding technologist board members, it’s critical to educate the entire board and executive committee in the area of digital in a nonthreatening, inclusive way so that everyone has at least a foundational level of knowledge about how to best apply emerging technologies to the business.