VCs And Multiple Board Seats — A Good Idea, Or Not?
What's not okay is when you ignore the importance of relationships with your venture capitalists while you're getting your company off the ground. Don’t assume in blind faith that the VCs who sit on your board are totally devoted to the success of your enterprise, especially if they have multiple board seats.
Generally speaking, they are. But success generally breeds more success, too, and that's a truism on steroids in the VC business, right? Board membership, and the number of seats a board member holds, has come under scrutiny since the debacles of unicorn darlings Uber and Sofi. When a VC sits on a dozen boards, do they really have your company's best interest top of mind, all the time? Let's discuss.
The ABCs of a Start-Up Board
Let's review board basics. In the beginning, you've pitched your deck, spun your spiel, and wonder of wonders, gotten a VC to literally buy into your idea. In return for their seed money, the fund wants not only a piece of your company, but a seat on your Board of Directors.
This is good — you've probably found a VC who is immersed in your particular industry. The individual investor who's chosen to actually sit on your board will have a depth of business expertise that you need to move forward. The VC pitches that deal as a win-win. You get free (sort of) advice from an industry pro who wants to see you succeed as much as your mother does. Probably more, since your mom or dad (mine did BTW) hasn't invested several million into your company.
What exactly does your board do? For start-ups, it determines the company’s mission — building and selling a given product or service. It also develops the strategies to execute the vision. As your company grows, so does the board. You go from a close group of family, friends, and co-workers where you have all the decision-making authority to turning over some ownership and decision-making to your investors. Strong corporate governance at the outset sets the tone for the future. At that point, "outside" board members should bring both experience and time to the table.
Board Structure — A Primer
Corporate boards are not a one-size-fits-all concept. Most start-up boards have a mix of voting members and non-voting observers. Voting members are likely the individual VC or CVC partner you dealt with during your negotiations. They're overlooking the nuts and bolts. Are you hitting your targets, making your numbers, all that corporate-speak for Are You Making Money Yet? Observers are typically more junior members of the firm. They're there in a support role — doing the research and providing the data for the voting member.
As a founder, your job is to understand — down to the tiniest detail — how the firm looks at board positions. Are they advisory, will they second-guess every decision, will they rubber-stamp even your dumbest ideas? Ideally, the firm's board rep acts as a mentor more than anything else.
What Do Observers Do?
Observers not only don't vote — they're not fiduciaries, either. The legal responsibilities of an observer are somewhat murky. An August 2019 decision by a federal appellate court found that "legal status, rights, and obligations" of board observers should be determined before the observer takes a seat.
Any comments they may have are typically in camera (that means privately) with the founder or leadership team after the general board meeting.
Why does it even matter that you have two kinds of board members? I'm going to tell you, but context is important. You can't exactly catch all the nuance of VC in a two-minute blurb.
Board Seat Bingo
When your company is in either the angel or seed stage, you need a lot of hands-on advice to bring things to the next level. That advice comes in the form of a board member or two. There are usually two or three solid choices within the VC firm for your board. You should vet that proposed choice as closely as the VC vetted you.
Suppose your new board member has tons of experience in your niche. Also, he or she appears to be just the right person (more on that later) to steer you towards success. They're a voting member, and they are tasked helping you to market with multitudes of other investors following you to the promised land of the IPO. Their track record with other start-ups is impeccable. So, you consider yourself lucky to have such a pro by your side.
Not so fast.
Who Pays the Opportunity Cost?
If your hotshot board member has all these other seats at other tables, do they really have the bandwidth to nurture you through the fairly harrowing early stages of your company? Will they be really hands-on and driven to keep up with all the minutiae that matter, or simply be a figurehead that drives further funding rounds (which ain't all bad). If you've got a Peter Levine (Andreeson Horowitz) or a John Doerr (Alphabet, and recently Zynga) on your board, you're in Archangel firmament. You'll probably be okay — they sit on tons of boards, as many as 15-20 at any given time.
But it's more likely that you'll have Joe Normal on your board, who's overwhelmed and overworked and doesn't have billion-dollar coattails.
If you're lucky enough to get a master of the universe on your board, congrats! While there simply aren't enough hours in the day to focus on everything they've got in their portfolios, their advice is invaluable.
The practice of a VC having multiple board seats than they have fingers is referred to in the business as overboarding. Whether this is a good thing or not is a hot topic for debate.
One of my go-to’s for VC advice, Foundry Group's Brad Feld, sits on 20 corporate boards according to his LinkedIn profile. FirstMark's Amish Jani sits on a whopping 18 boards, with between 70 and 100 board meetings per year. Jani manages this workload a couple of ways. One, he has a team of staff and investors to keep up with the mundane details of his commitments and curate the data. Also, in the pre-COVID environment, he was in close proximity to the 18 companies in his portfolio.
Some VCs firms have portfolio services teams who do all the research and legwork for the board members. They also do business and talent development. These synchronies allow the VCs to "deliver value to the entrepreneurs of the companies they are involved with, and be available to them," according to Navin Chadda, a nine-board pro at Mayfield.
Kate Mitchell, past chair of the National Venture Capital Association, is not a fan of overboarding. Speaking for her own firm, Scale Venture Partners, she says that some VCs with multiple board seats just sit on too many boards to be any good to the company, beyond a master of the universe name. "You see it in the lack of preparedness, lack of access to the CEO and not adding value."
Start-Ups Gone Wrong
Even with a crackerjack portfolio team, an overextended director can't pay close attention to start-up management. Enter the crash and burn example of WeWorks. A star-studded board, a founder with an astonishing sense of entitlement equaled only by his ability to BS everyone in his orbit, and a billion-dollar IPO — what could go wrong? About $37 billion (with a B) in perceived value, evidently.
Uber's fall from grace wasn't quite so meteoric. It was only a drop in share price from $45 to $30 per share after the IPO and resignation of founder Travis Kalanik. It turns out Kalanik ran a horrifically biased organization that caught the attention of Attorney General Eric Holder. However, the board didn't seem to notice that — or that Uber lied about vetting drivers after women were murdered. What do you think?
What's the Magic Number of Multiple Board Seats for a VC?
There isn't one. Most VCs sit on 4.4 boards, which is either four or five. Every VC and entrepreneur are different, and every start-up has unique needs. Tech start-ups need boards with both technical and marketing expertise. A couple of members need both to meld the two. Your seed VC board members should balance between having the time to devote to your company and the experience to navigate the transition from garage idea to IPO.
So maybe the question isn't about how many boards does a VC sit on. It's, "What are the levels of their other commitments?"
If your member sits on nine boards and seven are in the latter stages of funding, chances are pretty good that they have the time to devote to your company. On the other hand, if they're sitting on five boards in roughly the same early stage, that's more problematic. The law of time dictates that there are only so many hours in the day. Even the most dedicated VC has to sleep occasionally. So it's just not possible for them to manage several tech start-ups simultaneously.
Get Involved in the Process
When you and your VC partners are discussing board seats, feel free to insert yourself in the selection process. It's their money, but it's your company. Everyone has a vested interest in seating a director with time for the job.
The reality is that you're not likely to score a Marc Andreeson on your start-up board. But you do deserve solid, focused talent. Demand board members who can deliver what you need, regardless of the size of their portfolios.
It really doesn't matter how many plates they juggle if they can provide the advice and support you need. And if you’re not sure what the various members of your board should be doing, read up on the major VC players and roles here.