When it comes to startups, a diverse and experienced board of directors can be a key factor for success.
As we head into this new year, the general consensus in the VC world is that funding will be harder to come by and times will be more frugal in terms of running a business. Having a strong board with a big name on it is likely to be beneficial both in terms of expertise and optics.
But what happens when one of those board members is also a member of a dozen others?
Over-the-top, such as the well-known practice of stockpiling board memberships, has been on the minds of many recently, especially with listed companies taking a stand against it. According to PvC’s 2022 annual survey of corporate directors, nearly half of respondents said an independent director should hold no more than three board seats.
The burden of directorships is not unusual in the venture world. According to PitchBook, about 15% of VC investors with board seats have more than four. 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 is on 16 boards.
This article appeared as part of The Weekend Pitch newsletter. Subscribe to the newsletter here.
Firms that invest large sums, especially those that run businesses, will want to have more control over the direction of the startup – after all, they have a duty to look after their investors’ money. A board seat ensures this, as well as offering the startup a level of expertise outside the organization.
And there are advantages to having a board member with multiple other responsibilities on the board. They’ve likely gained valuable insights and knowledge from their various roles and may have a rolodex full of connections that could benefit the startup.
Further, a big name can give a vote of confidence to prospective investors and also increase the company’s appeal to world-class talent.
But instead of proactively trying to grow a startup, someone on a dozen or 20 boards may end up breaking away from a lack of focus or simply not having enough time. This may not be the end of the world when times are good, but when a crisis hits and every hand is needed to steer the ship, distracted or overwhelmed management can hurt company performance.
A key part of VC funding is adding value from experienced and savvy investors, but if over-committed board members are unable to commit the necessary time, they may not be able to effectively use their skills to add that value. If they get too spread out, they can miss red flags with potentially disastrous results. For examples of what can happen when boards don’t pay close attention to growing problems in startups, look at Theranos, Uber, or WeWork.
Overshoot isn’t just bad for startups. It’s bad for the board members themselves. Let’s not forget that this role can be exhausting, increasing the risk of burnout. Of course, some firms will have dedicated portfolio teams who can do the work for board members in terms of gathering the necessary information about the company. But still, with a mountain of startups to help manage in addition to other responsibilities as an investor, the difficulties in informing and discovering the needs of each startup are obvious.
There is also evidence that a large number of board seats for startups is not always positive. A study by Correlation Ventures that analyzed US exits from 1998 to 2017 found that startups with four or more VCs on the board underperformed even when controlled for investment stages, industry groups and time periods. Boardless companies were the worst, though, so that can’t be used as an excuse to get rid of outside management altogether.
So what is the right number of board seats for an investor? Well, that depends.
Whether you’re on the board of an early- or late-stage company, it will make an impact. The bigger and more established the startup, the less likely you will be needed to provide support. 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 as necessary.
But the times ahead will test many companies. Already last year, waves of layoffs swept through the tech sector and startups that focused on nothing but growth suddenly had to change not only their practices but also their mentality. Having a board member with experience and expertise — as well as the time to deploy them — is very helpful when navigating more complex times.
So when considering board composition, some tips for beginners: Treat the board seat like any other business. The appointment is not a gift or reward, but should be approached in the same way as hiring for any senior position. Choose people who have the skills and resources to serve your company, and be specific about what you expect from them.
Getting a big name on the board is great when it comes to future funding, but if that’s the only reason they have the position, then it’s a missed opportunity to bring in someone who could be more useful and engaged in the future of your business. And don’t hesitate to replace them if possible when they don’t meet your needs.
