rlucas.net: The Next Generation

[Update: the conversation referenced below was with Scott Austin of the Wall Street Journal; he has written an article about the subject. In it, he quotes some VCs that have well over ten board seats, including Forest Baskett of NEA. I know Forest only through his and his firm’s reputations (both stellar), and I emphatically do not mean to impugn his board service, commitment, or professionalism. That said, I can’t back down from the math below and I must suggest that overloaded VCs necessarily give some of their boards short shrift.]

I had an interesting conversation today about VCs and board seats. The essential question is: how many board seats is too many?

Happily, the math involved here is pretty low-key (algebra, the highest level of mathematical reasoning to which VCs are required to aspire).

One of the best VCs I know always aspires to be the lead investor. Being the lead investor means you’re the de facto coach, quarterback, and ringleader for that round’s investor syndicate (and likely the entire board). He also tries, both as lead investor and as board member in general, to be a coach, if not confidant and mentor, to the CEO. This is all in addition to the normal duties of a good board member: meetings themselves, prep for meetings, often board dinners the night before, regular if less frequent contact with non-CEO executives (diligence and prudence), recruiting etc., and of course, any audit/comp committee work.

What kind of time does this take, on a monthly basis (4.3 weeks/month)?

• Weekly CEO calls: 4.3 * 30 min = 2.15 hrs
• Board meetings q 6 weeks, plus prep: (3 hrs + 1 hr) * (4.3 / 6) = 2.87 hrs
• Massaging the egos of other board members before/after: 30 min * (4.3 / 6) = 0.36 hrs
• Monthly CFO or other exec calls: 1 * 30 min = 1 hr
• Executive recruiting (2 major searches a year, taking 10 hours min. each): 2 * 10 hrs / 12 = 1.67 hrs
• Committee work (2 meetings a year, taking 3 hours min. each): 2 * 3 hrs / 12 = 0.5 hrs
• Go to one industry conference a year: 8 hrs / 12 = 0.67 hrs

This is the bare minimum theoretical lower bound that you can consider as the time requirement to be a good, lead investor VC board member: 9.1 hours per board, per month, or just about 2.1 hours a week.

That is for the perfect, steady-state, frictionless world: board meetings are in your town at your firm’s offices (no travel), you do not raise a round, and there are no crises. A more realistic assumption would be to add:

• Meeting travel q 6 weeks (MINIMUM, even driving up the 280 from Menlo Park to the city takes some time): 1.5 hr * (4.3 / 6) = 1.1 hrs
• One crisis OR new round per year: 20 hrs / 12 = 1.7 hrs
• Actually “adding value” like you said you would (soliciting customers, buyers, investors, etc.): 2 hrs /month = 2 hrs

So the real-world minimum adds another 4.8 hrs / month, bringing us to 13.9 hrs /month or 3.2 hrs / week.

How much do VCs really work? I think it’s fair to suggest that VCs work at least as much as other ambitious but affluent, socially-encumbered, and non-hourly-billable professionals: probably on the order of 50-60 hours a week. Let’s call it 55, which would reflect the combination of 10 hour days, 5+ hours each weekend, and a long and/or exotic-enough vacation each year to brag about with the other nouveau-affluent in your social circle.

The real-world catch here is that VCs have to spend a minimum of 5 (and as high as 12) hours at weekly partnership meetings. Let’s call it 6 hours/week to be charitable.

55 hours total – 6 hour partner meeting overhead = 49 workable hours.

49 workable hours / 3.2 hours per board (real world minimum) = 15.3 boards.

So there we have it: 15 boards is the upper bound of what a VC can probably sit on. HOWEVER, this assumes 100% of his working capacity is devoted to board work — nothing here for new deals or fundraising (or for other exotic and occasional pursuits, like strategic planning, learning and research, or leadership and mentoring of junior personnel). That estimate of 15 boards also has what I call the “conceit of optimality,” or inverse-Murphy: it assumes that the crises, new rounds, etc. do not overlap and create impossible time-crunches.

Given that fundraising is THE existential requirement of VC firms, and given that new deal work does have to happen somehow (after all: how did those 15 investments get made??), you’ve got to make significant provision for the working time of a VC to those other, non-board priorities. I personally think that non-board work is at least HALF of the workable hours, but I could be convinced that a board-seat-heavy partner might spend 2/3 of his time on board work.

Therefore, I think that 10 is the maximum realistic board seat capacity of a VC partner who wants to do a reasonably diligent and good job on boards, while also doing the minimum to stay in business as a VC. In practice, I think many boards will take more-than-average time, and I think most VCs will need to spend more time on non-board work, so 7 or 8 is probably a better number to set as a prescriptive maximum.

One could exceed ten board seats without f***ing up in exceptional cases:

• Independent angel investor (no “firm” overhead)
• Exceptional geographic and/or industry concentration
• Evergreen fund, wind-down of a fund, or other nontraditional partner role

Otherwise, you are going to be dropping packets on the floor like a Cogent router in a SQL Slammer epidemic.

One probably needs to hold significantly FEWER than ten (or even fewer than 7) if the following hold:

• Geographic diversity (have to fly to board meetings)
• Industry diversity (trying to stay up to date and mine contacts in diverse fields)
• Series A/B/C rather than later stage weighting (hypergrowth, “chasm,” hiring, and fundraising challenges).

Tags: board, vc

This entry was posted on Thursday, July 22nd, 2010 at 6:22 pm and is filed under vc. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.