More than Money: Venture Capitalists on Boards by Natee Amornsiripanitch, Paul A. Gompers, & Yuhai Xuan

There are a series of factors (geographical proximity, prior relationship with founders, network size, etc.) that make it more likely for an investor to get a board seat during a fundraising round. When VCs do serve on the board the companies are more likely to hire managers and other Directors from the VCs’ network, especially if the VCs have strong track records. Relationship-based exits are also more likely.

  • How helpful? Scale of 1 to 5

5.

  • Topic Tags

Human capital value added, VC-backed boards, VC presence on boards, VC value added

  • Relevant questions addressed

Do VCs receive board seats? When they do, do they take actions that help the company grow?

  • Summary bullet points
  • Boards of public companies and boards of private startups differ in terms of structure and role
  • VC backed Boards tend to be smaller, mostly made up of VCs and independents.
  • The board size tends to increase with financing rounds as more VCs and independents are given seats. The number of insiders seat remains steady
  • There are several factors that are positively correlated with VC board representation
    • Lead investor status. The lead investor is typically the one with the strongest relationship with the company.
    • How early a round is. In later rounds, there are already more VC seats and VC investors that compete for board seats.
    • Prior VC-founder relationship, which helps reduce information asymmetry
    • Geographical proximity. As physical distance increases, strict monitoring becomes more costly
    • Lack of founders’ previous success. A more experienced founder has more leverage (because of a higher likelihood of success) and less need for investors’ guidance.
    • Lack of competition from other VC firms. The more competition the less leverage each VC will have.
    • VC track record. More successful VCs are seen as more desirable board members
    • VC fund’s network size. The more connected a VC firm is the more choice in outside hires they have.
    • Independence of fund from companies or other institutions. Corporate and institutional VCs are more passive.
  • Some of these factors relate to the non-capital value added VCs bring
  • VC funds create syndicates with firms that have similar skill levels
  • VC funds with high status and past performance tend to have better outcomes in terms of returns
  • Succesful and connected VCs who join boards
    • Tend to hire more managers and directors from their network.
    • Their portfolio companies are more likely to be acquired by companies the VC had invested in previously
    • These activities might be valuable to portfolio companies
  • VCs are active investors
    • The most successful are able to find the right investments
    • And to make key contributions as management or board hires and relationship-based acquisitions
  • Follow-up links

Venture Capital Contracts - https://www.nber.org/papers/w26115

How do Venture Capitalists make decisions? - https://www.hbs.edu/faculty/Pages/item.aspx?num=51659

The Determinants of Corporate Venture Capital Success: Organizational Structure, Incentives, and Complementarities - https://www.hbs.edu/faculty/Pages/item.aspx?num=8253

Venture Capital and the professionalization of Start-Up firms: Empirical evidence - https://papers.ssrn.com/sol3/papers.cfm?abstract_id=243149