VC Cliché of the Week
Bliss McCrum, the inspiration behind this weekly column, was fond of saying, "the success of a company is in inverse proportion to the number of venture capitalists on the board".
That’s a mouthful and hardly classifies as a cliche, but he used to say it all the time and I find myself muttering it from time to time as well.
Because there is some truth to it.
VCs always want board seats. And for good reason. They want to be able to monitor the progress of the investments they have made. It’s really a critical aspect of the venture deal. We insist on it at Union Square Ventures unless there is some really good reason why we don’t need a board seat (like a very trusted colleague already on the board). But I’d guess that we take board seats in at least 80-90% of the investments we make.
But imagine that you do a two handed deal for your first round and get two VCs on the board. And then you do a second round and get another VC on your board. And then you do a third round and get a fourth VC. All of a sudden, you’ve got four hard charging type A personalities who demand your attention and respect staring you down once a month. It’s enough to give even the most battle hardened entrpreneur migraines.
And what if they don’t get along? What if they are pulling you in different directions. One of them wants profitabiity now. Another wants you to invest for growth. A third wants to sell the company. And a fourth wants to go public. Managing your board becomes harder than managing your company.
These are, of course, nightmare scenarios and don’t happen nearly as much as people think they do. But they do happen and situations like this can and do hurt small companies.
Another reason that the success of a company is in inverse proportion to the number of VCs on the board is that its simply a proxy for the amount of money that has been raised (and the number of rounds that have been done). By definition if an entrepreneur can build a business on less money and less financing rounds, there is a higher liklihood of success. How many companies that have done "J rounds" have turned into big winners? Not many.
Venture capitalists can and do add value. Some add enormous value. But don’t think that if one is good, four are better. It doesn’t work like that. Because the success of a company is often in inverse proportion to the number of VCs on the board.