Venture Boards - Empirical Evidence from Venture Capital-backed Start-Ups in the U.S.

Project Start: 01/2015
Status: Completed
Researchers: Douglas Cumming, Uwe Walz, Jochen Christian Werth, Sijia Zhang
Category: Corporate Finance
Funded by: LOEWE

Topic & Objectives

While startup financing via angel financing and venture capital has received considerable attention in the academic literature, organizational issues such as the creation of boards at the early stage and their structure are not well-understood. Our main research question thereby is: Why do venture boards matter and what is their role in the context of corporate governance?

In order to provide a description of the venture capital industry’s best practice with respect to the implementation of venture boards, we specifically look at

  • the timing of the creation of these boards (e.g. in the context of the funding history and the life-cycle of the start-up),
  • the composition of both boards of directors and advisory boards according to their functions (start-up managers and founders, venture capital investors, industry experts, etc.),
  • the skills and experiences of the board members and the complementarities with the skills of the founding tea,
  • the evolution of boards over time (i.e. who leaves and/or joins the board, at which stage).

We use a hand-collected dataset of venture capital-backed technology ventures in the U.S. Thereby, we merge firm data with detailed biographical information about the founders, key executives and board members.

Key Findings

  • VC-backing does not lead entrepreneurs to become repeated founders, unless they i) had prior experience either founding or working for a startup, or ii) unless they have a general management background (a so-called “jack-of-all-trades” entrepreneur).
  • VC-backing by itself gives rise to future entrepreneurial activities (repeated founding or creating business angels) only where the VC-backed venture generates a substantial financial return to the entrepreneur.
  • Comparing different entrepreneurial firms’ governance structures of advice and networks (i.e. technology parks) versus control (i.e. VC), following findings can be observes: i) VC-backed firms are more likely to experience replacement of the founding entrepreneur as CEO (normally after 1.5 years), ii) VC-backed firms are more likely to exit by acquisition (normally after 6.5 years), iii) technology park affiliated firms are more likely to achieve an acquisition exit without experiencing CEO replacement.
  • Thus, iv) the probability of and time to acquisition are significantly mitigated once VCs are involved in firms together with technology parks.

Related Published Papers

Author/s Title Year Research Area Keywords
Douglas Cumming, Uwe Walz, Jochen Christian Werth Entrepreneurial Spawning: Experience, Education, and Exit
Financial Review
2016 Corporate Finance Venture governance, entrepreneurship, entrepreneurial spawning, angel finance, venture capital, exit

Related Working Papers

No. Author/s Title Year Research Area Keywords
135 Douglas Cumming, Jochen Christian Werth, Yelin Zhang Governance in Entrepreneurial Ecosystems: Venture Capitalists vs. Technology Parks 2016 Corporate Finance Entrepreneurship, Entrepreneurial Finance, Governance, Technology Park, Incubator, Board of Directors, Venture Capital, Angel
122 Douglas Cumming, Uwe Walz, Jochen Christian Werth Entrepreneurial Spawning: Experience, Education, and Exit 2016 Corporate Finance Venture governance, entrepreneurship, entrepreneurial spawning, angel finance, venture capital, exit

 

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