Every great idea starts with an observation, and the most creative people I know have this wonderful ability to look around and see things that could be improved upon everywhere. We aren’t inventing cold-fusion over here at Greycroft, but we started the firm in 2006 because we saw a disturbing trend in the venture capital business.  Every major VC firm had evolved to the point where they had an identical approach for funding start-up companies.  If you went to Silicon Valley or Boston in 2006 you would have heard a familiar refrain in every meeting, “We invest $5mm to $10mm in an initial check.  We are lead investors.  We need 20% ownership.  We need a board seat.”  I am going to debunk all of these in a series of blog posts.  In this first post I tackle the myth of the board seat.

Greycroft has a unique strategy of not requiring board seats in every investment.  In fact we generally prefer a board observer seat to a board seat.  This defies logic in VC circles, where I have literally seen VCs fight about who gets to be on the board, so when I bring it up I generally get a lot of peculiar stares and raised eyebrows.  When we were fundraising last year the LP community had a hard time with this too because it goes against conventional wisdom that “board membership = active investor”.  The reality, of course, is that there is a mile-wide gap between “helping entrepreneurs” and “attaching my name to every company that I invest in by being on the board” – and VCs have done a good job confusing the two.  But before I attack the establishment let me first explain the principle behind not taking board seats.

First and foremost, there is an opportunity cost of adding VCs to a board.  In my opinion, a board seat is an opportunity to attract talent that would otherwise not be involved with a company.  As a VC, I am already a major investor, so my companies get my help no matter what my role is (and for those portfolio CEOs reading this blog you can chime in about what that experience is like).  On the other hand, there are a lot of valuable people who didn’t invest in the company, and those people need a reason to get involved.  A board seat can be that catalyst.

Second, this strategy allows us be a better syndicate partner.  The last thing a lead investor wants is a co-investor who is going to fight him or her over a board seat.

Third, this strategy gives us a little operating leverage.  We go to every meeting regardless of our position as an observer or board member, but observers are not on the compensation committee or the audit committee.  These board committees aren’t a big time sink, but it is one less thing to worry about.

Final point – being on the board of a start-up really isn’t any different from being a board observer.  I am willing to bet that an outsider looking in couldn’t even tell the difference between the two roles.  In spite of what you see in Hollywood movies, board votes never come down to a 2-3 split decision.  Everything is decided before the meeting in a series of phone calls and email conversations, and then it is ratified during board meetings.

The inevitable question that people ask is, “What about control?” The easy response is that preferred shareholders have a lot of rights that are independent of the board.  However, the real answer is that if you need to use a board seat in order to “control” an entrepreneur than you have already lost.  Influence with entrepreneurs has nothing to do with board membership – it is based on how much they value your advice (and you would be surprised at how many blank stares I get on this point).

So that is our thesis in a nutshell.  I do think that having one VC on your board is fine, and possibly two if you have raised multiple rounds of capital and have a larger board.  We even take board seats at Greycroft when the entrepreneur insists on having us as a condition of the deal.  But I think it is bad for entrepreneurs and bad for the company to have a board that is loaded up with investor seats.  That structure just doesn’t create shareholder value.