David Coats shares the results of a very interesting analysis that Correlation Ventures has produced based on its own data.
The company analyzed more than 31,000 exits over a period from 1998 to 2017 to determine the correlations between the number of investors on the board of companies and the results. The comparison was made on the number of VCs present at the time of the financing and realized multiples for investors in that round.
The results show a clear (and quick) degradation of the multiples when there are more than two VCs present on the board of the company.
It is useful to specify that the analysis also did what was necessary to avoid seeing the results biased by the investment phase between early stage and late stage. The same is true for differences in industries or time periods.
Seth Levine also comments on these results in his blog by explaining that having more VCs on the board will increase the chances for the CEO to receive contradictory advice. Similarly, the CEO spends more time managing his board, to the detriment of his business. Levine points out that too many VCs on the board is a disadvantage even if they all are excellent professionals.
Of course we have to be very careful that correlation does not mean causality. Each company must be taken in its global context before pointing to the number of VCs as the cause of a valuation problem.
An interesting analysis I invite you to read so you can have this data in mind if the question arises of adding new investors to your board.
My co-founder Trevor Kienzle and I have each served on both functional and dysfunctional boards during 20+ years as VCs and before that as entrepreneurs. We’ve also discussed this topic with many other experienced VCs and management teams. The consensus appears to be that boards with too many VCs can create too much distraction for CEOs and senior management teams. They must devote valuable time to managing boards rather than focusing that time on other mission-critical tasks, such as acquiring their next customers, making progress on the product, or hiring key additions to the team. Also, the larger the number of VCs, the higher the likelihood of conflicting agendas. Finally, it may be the case that at some point incremental board positions would often be better filled by independent directors with highly targeted relevant expertise versus another VC.