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News and Information Article
Study Reveals Exit Strategies, Financing Rounds and Management Issues Are
Top of Mind Among 700 Venture Capitalists and Company CEOs
WASHINGTON and SAN FRANCISCO, April 10 /-FirstCall/ -- U.S.
venture capitalists and the CEOs of the companies they fund often have
different perspectives on board-related issues yet still share common
concerns, according to the first ever study on venture capital-backed board
activity from the National Venture Capital Association (NVCA) and Dow Jones
VentureOne. "A Seat at the Table," a study of venture-backed company
boards, reflects more than 700 responses to surveys sent in early 2006 to
venture capitalists and CEOs of venture-backed companies in the U.S.
"The synergy between the venture capitalists and CEO is critical to an
effective VC-backed company board," said Stephen Harmston, director of
global research at VentureOne. "This study for the first time examines how
these two players look at board participation, value contribution,
conflict, challenges, and effectiveness. The results confirm that the
venture capitalist / CEO relationship goes far beyond a pure financial
transaction."
"Are venture capitalists from Saturn and CEOs from Neptune? According
to the survey, these individuals are thinking about the same issues but
their perspectives and priorities often differ," said Mark Heesen,
president of the National Venture Capital Association. "Still, the system
works because the VC and CEO interaction brings out the collaborative
nature of the entrepreneurial process. The premise that one group is more
concerned about money and the other about management demonstrates how
different perspectives bring added life to the enterprise."
Venture Capitalist Board Activity Levels
Overall, venture capitalists are comfortable sitting on more boards
than CEOs would prefer. According to the survey, venture capitalists
believe the ideal number of board seats is an average of 4.6 for early
stage companies and 5.5 for later stage companies. CEOs would prefer their
venture capitalists limit their early stage board seats to an average of
4.0 and their later stage board seats to 4.6. However, in actuality,
venture capitalists sat on fewer boards this past year than they identified
as ideal -- or an average of four board seats in 2005, down from the bubble
period of 2000 when the average was five board seats.
Attitudes Toward VC Board Participation -- Early Stage Companies
Early Stage Later Stage All
Companies Companies Companies
Respondent Maximum # of Ideal # of Maximum # Ideal # Actual #
Boards for Boards for of Boards of Boards of Board
VC to Sit VC to Sit Seats 2005
Venture
Capitalist 6.9 4.6 8.2 5.5
4
CEO 6.3 4.0 7.0 4.6
VCs at smaller firms (under $250 million under management) sat on fewer
boards than those at larger firms (more than $1 billion under management)
averaging three and five seats respectively in 2005. Geographically, San
Francisco Bay area VCs averaged the highest number of board seats at five
per VC whereas regions such as Research Triangle, Southern California and
Washington state averaged only three seats per VC.
"The survey confirms that an active relationship is valued by both the
CEO and the venture capitalist," said Allan Ferguson, senior partner of
global venture capital and private equity firm 3i. "In early stage
investing where it is all about business building, we recommend limiting
the board seats in order to be effective. In a late stage fund, partners
may take on more seats because mature companies tend to have established
boards, a complete team, and a proven business model; therefore, the nature
of support provided by VCs is different. Overall, large funds, including
ourselves, are able to take on more board seats because they tend to have
resources that can be leveraged across the portfolio which may not be
available within the smaller funds."
Almost two-thirds of the venture capitalists surveyed expect to
increase their board participation in the next two years. A board seat held
by the venture capitalist or a co-investor was a pre-requisite for
investment for 81% of the VC respondents.
VC-Backed Board Concerns
The survey asked the respondents to rank strategic issues that are of
most concern for VC-backed boards. Overall for the full board, the issues
of greatest strategic concern (ranked as #1 or #2) are management
transitions (64%) and exit strategies (58%), according to the venture
capitalists surveyed and financing strategies (48%) and exit strategies
(47%) according to the CEOs.
Both VCs and CEOs cited Sarbanes Oxley compliance and stock option
valuation as the top two concerns of audit committees although more venture
capitalists than CEOs were concerned about Sarbanes Oxley than CEOs. In
fact, while 65% of VCs stated that Sarbanes Oxley has impact the Boards
ability to find outside directors, only 21% of CEOs agreed.
"We believe that most private companies are concerned about being SOX
compliant -- even though they dont HAVE to be," said Chad Waite, general
partner of OVP Venture Partners. "Unlike many start-up CEOs however, most
brethren of mine in the VC community have the added perspective of having
served on private and public company boards. This experience is helpful to
private boards when addressing issues like SOX. Our CEOs rely on that
expertise to guide them so they can focus on building market leading
enterprises."
When it comes to the most common drivers of conflict between the board
and CEO, the two groups diverged. Venture capitalists cited personality
conflicts, exit strategies, and management changes as the top three issues
while CEOs named valuation, burn rates, and exit strategies as being the
most common causes for conflict. The most common reasons for changing
leadership according to the venture capitalists are to find someone with
more sales and marketing expertise (83%) and operational leadership (63%).
Interestingly, 88% of CEOs and 73% of VCs say they do not have specific
metrics for measuring board effectiveness. And while 60% of VCs have a
policy in place for handling conflict of interest between their fiduciary
responsibility to the company and financial obligation to limited partners,
only 25% of company CEOs have a similar policy.
The Value of the VC Board Member
Venture capitalists spend an average of 12 hours per month per board
while CEOs average 15 hours per month according to the survey. CEOs and VCs
both cite the audit and compensation committees as the most common
committees on which they sit. While 73% of the CEOs surveyed were
comfortable with the amount of time their VCs are spending on board
activities, 24% wanted more time. When queried about additional experience
the ideal VC board member would bring to the table, 45% of CEOs cited more
sales strategy and industry sector experience.
As for the primary benefits venture capitalists provide to a company
board, both parties agree that VC expertise in raising new rounds of
financing is most important followed by the ability to help recruit top
talent to the company. Both parties also cited VC counsel on governance
issues as beneficial.
"Venture capitalists add value to boards through the rich experience
they gain by working with multiple companies and the pattern recognition
that comes from this experience," observes Pascal Levensohn, founder and
managing director of Levensohn Venture Partners. "VCs can normally see the
strategic opportunities and obstacles more readily because they go to
numerous board meetings monthly and see hundreds of situations first-hand
every year through their partnerships portfolios. This depth of exposure
makes the context of what is happening more obvious to the VC than to the
CEO in many cases. Strong communication between the VC and the CEO can
maximize the positive contribution from this complementary relationship,"
Levensohn added.
Three quarters of VC Board members were not compensated as individuals
for Board activities. For those VCs who did receive compensation, nearly
all received it in the form of stock.
Venture capitalists 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 five percent of VCs are off a company board within six
months after an acquisition while only 60% of VCs are off the company board
within six months after an IPO.
The survey also explored additional areas of conflict, the use of
advisory boards and outside directors, observers and other board practices.
For a copy of the complete survey highlights, please contact Emily Mendell
(emendell@nvca.org) or Michelle Jeffers (michelle.jeffers@dowjones.com)
About VentureOne
Dow Jones VentureOne (http://www.ventureone.com and
http://www.venturecapital.dowjones.com ), a unit of Dow Jones Financial
Information Services, has been the leading provider of finance and
investment data to the venture capital industry for almost 20 years. Dow
Jones VentureSource, a sophisticated electronic database on the venture
capital industry, is published by VentureOne.
About Dow Jones Financial Information Services
Through its Financial Information Services group, Dow Jones produces
focused, sector-specific online databases, newsletters and industry events
for the private equity, venture capital and diversified markets.
Newsletters published include Private Equity Analyst, VentureWire
Professional and Daily Bankruptcy Review. In addition, Dow Jones & Company
(NYSE: DJ) (http://www.dowjones.com ) publishes the global Wall Street
Journal with its international and online editions; Barrons; the Far
Eastern Economic Review; Dow Jones Newswires and Indexes; MarketWatch; and
Ottaway newspapers. Dow Jones co-owns Factiva with Reuters and SmartMoney
with Hearst. Dow Jones also provides news content to CNBC and U.S. radio
stations.
About NVCA
The National Venture Capital Association (NVCA) represents
approximately 480 venture capital and private equity firms. NVCAs mission
is to foster a greater understanding of the importance of venture capital
to the U.S. economy, and support entrepreneurial activity and innovation.
According to a 2004 Global Insight study, venture-backed companies
accounted for 10.1 million jobs and $1.8 trillion in revenue in the U.S. in
2003. The NVCA represents the public policy interests of the venture
capital community, strives to maintain high professional standards,
provides reliable industry data, sponsors professional development, and
facilitates interaction among its members. For more information about the
NVCA, please visit http://www.nvca.org .
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