When it comes to startups, having a diverse and experienced board of directors can be a key success factor.
As we head into the new year, the general consensus in the venture capital world is that funding will be harder to come by and times will be tougher in terms of business management. Having a strong board with a big name is likely to help both in terms of expertise and perspective.
But what happens when one of these administrators is also a member of a dozen others?
Overboarding, as the practice of hoarding board members is called, has been on a lot of mind lately, especially with publicly traded companies, who are taking a stand against it. According to PwC’s 2022 Annual Survey of Corporate Directors, nearly half of respondents said an independent director should hold no more than three seats on the board.
Taking on directorships is not unusual in the venture capital world. About 15% of venture capitalists who sit on boards hold more than four, according to data from PitchBook. Examples include Khosla Ventures co-founder Samir Kaul, who has 19 board positions according to his LinkedIn profile, and Index Ventures partner Mike Volpi, who sits on 16 boards.
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Companies that invest heavily, especially those leading deals, will want to have more control over the direction of a startup – after all, they have a duty of care over their investors’ money. A seat on the board of directors provides this in addition to offering a startup a level of expertise outside of the organization.
And there are benefits to having a board member with multiple other board commitments. They’ve likely gained valuable information and knowledge through their different roles, and may have a rolodex full of connections that could benefit the startup.
Additionally, a big name can provide a vote of confidence to future investors and also increase a company’s attractiveness to world-class talent.
But instead of proactively trying to grow the startup, someone on a dozen or 20 boards may end up opting out due to lack of focus or simply lack of time. It may not be the end of the world when times are good, but when crisis hits and all hands are needed to steer the ship, a distracted or overly engaged board can hurt company performance. a company.
A key element of venture capital funding is the added value of experienced and knowledgeable investors, but if over-committed board members are unable to commit the necessary time, they may not be able to leverage their skills effectively to add that value. By spreading too thin, they can miss red flags with potentially disastrous results. For examples of what can happen when boards fail to pay close attention to growing startup problems, see Theranos, Uber, or WeWork.
Overboarding isn’t just bad for startups. It’s bad for the board members themselves. Let’s not forget that performing this role can be exhausting, increasing the risk of burnout. Of course, some companies will have dedicated portfolio teams that can do the work for board members in terms of gathering the necessary information about a company. But even so, with a mountain of startups to help govern in addition to other tasks as an investor, the difficulties of staying informed and uncovering each startup’s needs are obvious.
There is also evidence that a high number of board seats for startups is not always a good thing. A Correlation Ventures study analyzing exits in the United States from 1998 to 2017 found that startups with four or more VCs on the board underperformed even when vetted for investment stages, industry groups and periods. Companies without a board of directors have had the worst results, however, so this should not be used as an excuse to get rid of external governance altogether.
So how many board seats should an investor hold? Well, that depends.
Whether you are a member of the board of directors of a start-up or early-stage company, this will be taken into account. The more the startup grows and becomes established, the less support you will need to provide. If the startup is doing well and doesn’t need to pivot or restructure, then again, the services of a board member won’t be needed as much.
But the times ahead will test many businesses. Already last year, waves of layoffs swept through the tech sector and startups focused on nothing but growth had to change not only their practices but also their mentalities. Having a board member with experience and expertise – and the time to deploy them – is a big help in getting through tougher times.
So, when considering board composition, a few tips for startups: Treat a board seat like any other job. Allocation of a seat is neither a gift nor a reward, but should be approached in the same way as hiring for a leadership position. Choose people who have the skills and resources to serve your business and be clear about what you expect of them.
Having a big name on the board is great when it comes to future funding, but if that’s the only reason they’re in the job, then it’s a missed opportunity to bring in someone who could be more useful and more committed to the future of your business. . And do not hesitate to replace them if possible when they are not enough.