Startups beware: Juggling board members may drop the ball

When it comes to startups, having a diverse and experienced board of directors can be a key factor to 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 leaner in terms of running a business. Having a strong board with a big name on it is likely to come in handy both in terms of expertise 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 memberships is known, has been on many minds recently, particularly with publicly listed companies, which are taking a stance against it. According to PwC’s 2022 Annual Corporate Directors survey, nearly half of respondents stated that an independent director shouldn’t hold more than three board seats.

Loading up on directorships isn’t unusual in the venture world. Around 15% of VC investors who have board seats hold more than four, according to PitchBook data. Examples include Khosla Ventures co-founder Samir Kaul, who holds 19 board positions according to his LinkedIn profile, and Index Ventures partner Mike Volpi, who is on 16 boards.
 

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Firms that invest a large amount, particularly those who lead deals, will want to have more control over the direction of a startup—after all, they have a duty of care over their investors’ money. A board seat provides that as well as offering a startup a level of expertise from outside the organization.

And there are pros to having a board member with multiple other board commitments. They have 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 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 disengaging from lack of focus or just 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 overcommitted board can hurt a company’s performance.

A key part of VC funding is the value-add from experienced and savvy investors, but if overcommitted board members aren’t able to devote the necessary time, they may not be able to effectively leverage 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 growing problems at startups, see Theranos, Uber or WeWork.

Overboarding is not only damaging to startups. 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 firms will have dedicated portfolio teams that can do the legwork for board members in terms of gathering the necessary information on a company. But still, with a mountain of startups to help govern on top of other duties as an investor, the difficulties in staying informed and uncovering each startup’s needs are obvious.

There’s also evidence that a high number of board seats for startups isn’t always a positive. A study from Correlation Ventures analyzing exits in the US 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. Companies without a board performed the worst though, so it’s not to be used as an excuse to get rid of external governance altogether.

So what is the right number of board seats for an investor to hold? Well, that depends.

Whether you’re on the board of an early-stage or late-stage company will factor in. The larger and more established the startup grows, the less likely you’ll be needed to provide support. If the startup is performing well and doesn’t need to pivot or restructure, then, again, a board member’s services won’t be needed as much.

But the times ahead will test many companies. Already last year, waves of layoffs ripped through the tech sector and startups focused on nothing but growth all of a sudden had to change not only their practices but their mentalities too. Having a member of the board with experience and expertise—and the time to deploy it—is a huge help when navigating trickier times.

So when considering the composition of a board, some tips for startups: Treat a board seat like any other job. Giving out a seat isn’t a gift or a reward but should be approached in the same way as hiring for any senior position. Pick people who have the skills and the resources to serve your company and be explicit in 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 more engaged in the future of your business. And don’t hesitate to replace them if possible when they fall short of what’s required.