More than Money: Venture Capitalists on Boards

41 Pages Posted: 30 Mar 2015 Last revised: 20 Sep 2017

See all articles by Natee Amornsiripanitch

Natee Amornsiripanitch

Yale University, School of Management, Students

Paul A. Gompers

Harvard Business School - Finance Unit; Harvard University - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Yuhai Xuan

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: August 2017

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 venture capital firm’s prior relationship with the founder, lead investor status, track record, network size, and geographical proximity to the portfolio company are positively correlated with its likelihood of taking a board seat in an investment round. When venture capital firms serve on the board, they use their network to recruit managers and board members for the portfolio company and to help the portfolio company exit via relationship-based acquisitions. Furthermore, most of these activities are performed by successful and well-connected venture capitalists on the board. We control for potential endogeneity by using local venture capital market competitiveness as an instrument, which exogenously increases a venture capital firm’s willingness to serve as a board member. This study provides evidence to support the notion that venture capital investors are active investors who take actions to enhance portfolio firm value.

Keywords: Corporate Finance, Corporate Governance, Venture Capital, Private Equity, Econometrics

JEL Classification: G30

Suggested Citation

Amornsiripanitch, Natee and Gompers, Paul A. and Xuan, Yuhai, More than Money: Venture Capitalists on Boards (August 2017). Available at SSRN: https://ssrn.com/abstract=2586592 or http://dx.doi.org/10.2139/ssrn.2586592

Natee Amornsiripanitch

Yale University, School of Management, Students ( email )

New Haven, CT
United States

Paul A. Gompers (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6297 (Phone)
617-496-8443 (Fax)

Harvard University - Entrepreneurial Management Unit ( email )

Cambridge, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Yuhai Xuan

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://www.business.illinois.edu/yhxuan/

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