Question: What is the optimal number of board seats a single partner takes on at one time?
In order to increase the odds of having a successful portfolio of investments, venture capitalists try to strike a balance between investing in a broad range of companies and spending time with each company in helping them build their business (see Peter’s post on active vs. passive approaches to VC investing). Active investing typically involves taking a board seat, so venture capitalists must strike a balance with the number of board seats they hold at any given time in order to dedicate enough time to each company.
While it depends on a number of factors, as a rule of thumb most venture capitalists typically try to target around 5-6 board seats in order to balance the number of investments with the time they can spend with each company. This varies based on the time commitment required by each of the companies, which is a function of:
Duration of investment – New investments often take a considerable amount of time as the partner dives deeper into the business (the pre-investment due diligence process is just a starting point), works their network to provide connections to the company, and builds relationships with the management team and other board members. Over time as the partner moves up the learning curve, they become more effective and efficient with their time.
Stage of company – Early stage companies often require a large time commitment from board members as the management team has not been fully built out and needs to lean on the experience of the board. As companies mature and add depth to their management team the time commitment of individual board members may reduce somewhat. Board meeting frequency may also drop from monthly to quarterly.
Changes in the business – Key events such as a financing, sale of the company or change in the management team can require board members to dedicate more time to the portfolio company.
Board composition – A cohesive and engaged board can help to reduce the time commitment on any one individual. It is important to choose board members that will not only lend credibility and name recognition to the company, but that will carry their weight in the board dialogue.
Location of companies – If a partner’s board seats are geographically dispersed, they will have to spend more time traveling to board meetings, which can add up if the partner has to fly (especially if they fly through O’Hare in the winter).
All that said, there are many venture capitalists that hold more than 6 board seats and many of them are effective board members. In any case, do your homework when choosing a new investor or board member by talking to the CEOs of the other boards they’re on. Make sure that they’re able to dedicate the time needed to be a great addition to the board and can add more than just money to the business.
Each week the team at Pritzker Group Venture Capital answers your questions about startups, raising capital, technology, and entrepreneurship. Submit your own question and see more answers here.