More than Money: Venture Capitalists on Boards

Abstract

We explore what factors influence whether venture capitalists receive a board seat and whether they add value to portfolio companies in which they invest. In a comprehensive sample of US-based and non-US-based companies, we find that a prior relationship with the founder, lead investor status, size of a venture capital firm’s network of managers and outside board members, and geographic proximity are positively correlated with taking a board seat in an investment round. The enactment of Sarbanes-Oxley (SOX), which increased the demand for independent and sophisticated directors, increased the probability of a venture capitalist receiving a board seat for US-based companies. We also find that successful and well-connected venture capitalists recruit more managers and outside board members for portfolio companies on whose boards they serve than their less successful and less connected counterparts do. We control for potential endogeneity by using the enactment of SOX as an instrument, which exogenously increased the demand for sophisticated venture capital directors. This study provides evidence to support the notion that venture capital investors are active investors who take actions to enhance portfolio firm value.