When it comes to startups, having a diverse and experienced board of directors can be a major factor for success.
As we head into this new year, the general consensus in the venture capital world is that financing will be more difficult to obtain and times will be less costly in terms of running a business. Having a strong board with a big name will likely come in handy in terms of experience and optics.
But what happens when one of those board members is also a member of twelve others?
Oversharing, as the practice of accumulating board memberships is known, has been on the minds of many lately, particularly with publicly listed companies, taking a stand against it. According to PwC’s 2022 Annual Corporate Directors Survey, nearly half of respondents stated that an independent director should hold no more than three board seats.
Loading up on board members isn’t unusual in the adventure world. About 15% of VC investors with board seats hold more than four, according to PitchBook data. Examples include Khosla projects Co-founder Samir Kaul, who holds 19 board positions according to his LinkedIn profile, and Index Ventures Partner Mike Volpe, who serves on 16 boards.
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Companies that invest a large amount, especially those that lead deals, will want to have more control over the direction of the startup—after all, they have a duty to take care of investors’ money. A board seat provides that in addition to offering a level of expertise to the startup from outside the organization.
There are positives to having a board member who has many other obligations to the board. They will likely have gained valuable insights and knowledge from their various roles, and may have a rolodex full of connections that can benefit the startup.
Moreover, a big name can provide a vote of confidence for future investors and also increase the 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 walking away from a lack of focus or simply not having enough time. It may not be the end of the world when the good times have passed, but when crisis strikes and every hand is needed to steer the ship, a distracted or overly committed board can hurt a company’s performance.
An essential part of VC financing is the added value from experienced and astute investors, but if committed board members cannot dedicate the necessary time, they may not be able to effectively utilize their skills to add that value. By spreading themselves too thin, they may miss red flags with potentially disastrous results. For examples of what can happen when boards don’t pay close attention to the growing problems in startups, see Theranos, Uber or WeWork.
Over-accomodation is not only bad for startups. It’s bad for the board members themselves. Let’s not forget that taking on this role can be stressful, and increases the risk of burnout. Of course, some companies will have dedicated task forces that can do the legal work for board members in terms of gathering necessary information about the company. But still, with a mountain of startups to help govern in addition to other duties as an investor, the difficulties in staying informed and uncovering each startup’s needs are obvious.
There is also evidence that a large number of startup board seats is not always positive. A study from Correlation Ventures analyzing exits in the US from 1998 to 2017 found that startups with four or more venture capitalists on the board performed poorly even when controlling for investment stages, industry groups, and time periods. However, companies without a board of directors performed the worst, so they shouldn’t be used as an excuse to get rid of external governance altogether.
So how many board seats is appropriate for an investor? Well it depends.
Whether you are on the board of an early-stage or late-stage company will take into account. The larger and more established the startup, the less likely you are to need to provide support. If the startup is doing well and does not need to pivot or restructure, the services of a board member will not be needed as much.
But the times ahead will test many companies. Already in the past year, waves of layoffs have swept through the tech sector and startups focused on nothing but explosive growth have had to change not only their practices but their mindsets as well. Having a board member with experience and expertise — and the time to deploy it — is a huge help as you navigate difficult times.
So when considering board composition, some advice for startups: Treat a board seat like any other job. The giving of a seat is not a gift or reward but should be treated in the same manner as recruitment for any senior position. Choose people who have the skills and resources to serve your company and be upfront 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 got the position, it’s a missed opportunity to bring in someone who could be more helpful and more involved in the future of your business. And do not hesitate to replace it if possible when it does not achieve the desired.