When it comes to startups, having a diverse and experienced board of directors can be a key factor for success.
As we head into the new year, the general consensus in the venture capital world is that it will be harder to get funding and time will be tighter in terms of running a business. Having a solid board with a big name is probably helpful both in terms of experience and optics.
But what happens when one of those board members is also a member of a dozen others?
Overboarding, as the practice of accumulating board members is known, has been on the minds of many recently, particularly with publicly traded companies 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 board seats.
Taking on directors is not unusual in the corporate world. About 15% of VC investors who hold board seats hold more than four, according to PitchBook data. Examples include khosla enterprises co-founder Samir Kaul, who holds 19 board seats according to his LinkedIn profile, and company index partner Mike Volpi, who is on 16 boards.
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Companies that invest a lot, particularly those that are leading businesses, will want more control over the direction of a startup; after all, they have a duty to take care of their investors’ money. A board seat provides that, as well as offering a startup a level of experience from outside the organization.
And there are advantages to having one board member with many other board commitments. They have likely gained valuable information and insights from their various roles, and may have a rolodex full of connections that could benefit the startup.
Additionally, a big name can provide a vote of confidence for 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 pulling the plug due to lack of focus or simply not having enough time. This may not be the end of the world when the good times are rolling, but when crisis hits and every hand is needed to steer the ship, a distracted or overly engaged board of directors can hurt a company’s performance.
A key part of VC funding is the added value of savvy and experienced investors, but if overly committed board members can’t dedicate the necessary time, they may not be able to effectively leverage their skills to add that value. By spreading themselves too thin, they can miss red flags with potentially disastrous results. For examples of what can happen when boards don’t pay close attention to the growing problems at startups, check out Theranos, uber either We work.
Excess is not just bad for start-ups. It’s bad for the board members themselves. Let’s not forget that having this role can be exhausting, increasing the risk of burnout. Of course, some companies will have dedicated portfolio teams that can do the legwork for board members in terms of gathering the necessary information about a company. But still, with a mountain of startups to help govern in addition to other roles as an investor, the difficulties in staying informed 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 a positive thing. A Correlation Ventures study looking at exits in the US from 1998 to 2017 found that startups with four or more VCs on the board underperformed even when investment stages were controlled for, industry groups and the time periods. However, companies without a board performed the worst, so this should not be used as an excuse to get rid of external governance altogether.
So what is the correct number of board seats for an investor to have? Well, that depends.
Consideration will be given if you are on the board of an early or late stage company. The bigger and more established the startup grows, the less likely it 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 the tech sector, and startups focused on nothing but growth suddenly had to change not only their practices but also their mindsets. Having a board member with experience and knowledge, and the time to implement it, is a huge help when navigating difficult times.
So when considering board composition, some advice for startups: Treat a board position like any other job. Giving a seat is not a gift or reward, but it should be approached in the same way as hiring for any high-level position. Choose people who have the skills and resources to serve your company, and be explicit about what you expect of 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 helpful and committed to the future. of your business. . And don’t hesitate to replace them if possible when they don’t measure up to what is required.