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Venture-backed boards more active and better aligned, study finds

US venture capitalists and the chief executive officers of venture-backed companies are spending more time on board activities and do not expect the pressure to lessen in the foreseeable future, according to the second study on venture capital-backed boards from the National Venture Capital Association and Dow Jones VentureSource.

The “A Seat at the Table” study also found a strong agreement between VCs and chief executives regarding the key challenges and strategies for venture-backed boards, but highlighted continued disparity regarding the number of boards on which VCs should sit. 
First conducted in 2006, this survey was completed in late October 2009 and includes responses from more than 300 VCs and 200 CEOs in the US.
“Board members today are under more pressure than they were a few years ago,” says Jessica Canning, global research director for Dow Jones VentureSource. “The lag in liquidity has them locked into their positions longer and hunting for later stage financing to keep companies alive. But the difficult environment has brought some unity as VCs and chief executives now agree on their top three strategic issues.”
Given the lackluster exit market of the last two years, it is not surprising that VC respondents sat on an average of 4.4 boards, an increase from the 2006 study when VCs sat on an average of 4.0 boards. West Coast VCs on average sat on more boards (4.7) than East Coast VCs (4.5), and those VCs in mid-America (3.8). VCs at smaller firms (less than USD500m under management) sat on fewer boards than those at larger firms (more than USD1bn), averaging 4.2 and 5.0 seats respectively.
As it was in 2006, this year’s study found that VCs were comfortable sitting on more boards than chief executives would prefer. According to the 2009 survey, VCs believed that the ideal number of board seats on which a VC should sit averaged 4.6 for early stage companies and 5.4 for later stage companies. Chief executives felt the ideal number of boards on which VCs should sit averaged 3.8 for early stage and 4.2 for later stage companies. Both VCs and chief executives preferred a lower average number of seats overall than they did in 2006. 
“The numbers of boards VCs sit on, the amount of time dedicated to those companies, and how much control VCs should take are three key areas of disagreement between VCs and chief executives,” says Canning. “While these issues are not easily resolved, open communication – the hallmark of an effective board – can ease the tensions.”
Two-thirds (67 per cent) of the VCs and 60 per cent of chief executive respondents have spent more time on board related activities over the last three years than in years past. Over the next two years, 52 per cent of VCs expected their number of board seats to increase. Eighty-two percent of the VCs surveyed required a board seat held by their firm or a trusted co-investor as a pre-requisite for investment.  

VCs typically leave a company board within 18 months of an IPO or acquisition. However, the speed at which they leave varies with the exit. Eighty-four per cent of VCs leave a company board within six months after an acquisition while only 54 per cent leave the company board within six months after an IPO.

According to respondents, the top three concerns of venture-backed boards were financing strategies, exit strategies related to acquisitions and sales and marketing concerns. The poor exit environment for IPOs was also cited by 17 per cent of the VCs and 15 per cent of the chief executives as one of the top five concerns for venture-backed boards.
VCs and chief executives also concur on the biggest value-add that VCs bring to the board, with 63 per cent of VCs and 64 per cent of chief executives citing “network of contacts” as being most important. VCs subsequently listed “mentoring the chief executive” (54 per cent) and “raising follow-on financing” (48 per cent) to round out their top three value-adds. Chief executives cited “raising follow-on financing” (64 per cent) and “exit market knowledge” (34 per cent) as their second and third highest value-adds from VCs.
The majority of chief executives were satisfied with the VCs on their board.  Yet there are some who believed there could be improvements. Eighteen per cent of chief executives were not satisfied with the amount of time VCs spent on their company’s board activities, 19 per cent were not satisfied with the level of feedback given by VCs, and 27 per cent were not satisfied with the quality of feedback.

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