[Updates below.] In recent weeks, there’s been talk that venture investor Peter Thiel, who recently cashed out the majority of his stake in Facebook, should step down from the company’s board, given that his financial interests are no longer as closely aligned with the success of the company as they once were.
But Merih Sevilir, an associate professor finance at of Indiana University,
politely calls B.S. on such logic.[See update.]
Sevilir is the co-author of a comprehensive 2010 paper about impact of venture capitalists on public company boards, and her research – based on 1,830 S&P 1,500 companies and their 16,911 directors – suggests that there’s no correlation whatsoever between the long-term success of a public company and how much equity its directors hold. More, the research suggests that if newly public companies like Facebook hope to evolve into healthy mature public companies, they need VCs on their boards.
I talked briefly this morning with Sevilir about some of her past and current findings (update: she’s soon publishing new financial studies); our conversation has been edited for length.
Yours is the only research I’ve seen on what role, if any, VCs perform in established, public companies.
Everyone is very focused on VCs’ importance to small entrepreneurial companies. But we find that even more mature pubic companies benefit from having VCs on the board, including [because they can help] make a company more R&D intensive, increase its [use] of patents, and increase its chances of making deals with VC-backed startups — deals, by the way, that add value to the acquiring company on the announcement date.
Does what happens on the day of an announcement matter, when, longer term, companies wind up writing off so many of their acquisitions as a loss?
We think so. We looked at stock market reaction on the day of an acquisition. Typically, if you’re an acquiring company, you lose value. But we found that a VC on the board is positively related to [positive stock market reactions], as long as the target is VC backed. [We think it’s] because VC directors understand – more than other insiders – how to make better deals and how to better integrate those acquisitions.
We actually follow these companies’ operating performance and return on assets and find that after a VC director joins the board, [both improve]. If good companies that attract VCs didn’t show any improvement, [it’d be one thing]. But [over time], we see big improvements in operating performance after a VC director joins the board.
Did your research show a correlation between how much of a company an investor owns and his or her performance on the board of that company?
That was an important question for us. We thought that maybe these VCs were working hard on boards because they own a significant equity stake, but we find that they don’t. They’re mostly like regular board directors. Of course, they get may get more visibility, or exit channels for their own VC companies, or prestige or status. But we found no correlation with strong company performance and the equity ownership of its VC directors. [In fact] lots of VCs sell or liquidate their [stakes] soon after the IPO.
What about conflicts of interest? Did your research account for VCs who might influence a public company to buy a portfolio company, even while a better alternative might exist?
We wondered if maybe VC directors were trying to generate opportunities for their portfolio companies, but we checked the companies acquired against the [holdings of the acquirer's VC directors] and we didn’t see any evidence of that kind of conflict of interest.
Most surprising to me, in your research, were findings that a.) so many mature, public companies have directors with a background in VC — 30.5 percent of them — and b.) that so many in your sample set had nothing to do with the company before it went public. In fact, your research suggests that roughly 35 percent of VC directors join companies well after their IPO and that these individuals often have nothing to do with the companies earliest venture backers.
Yes, which suggests the role that VCs play in mature companies isn’t a direct outcome of their pre-IPO involvement with them, which was interesting to us, too.
Do you know if VCs who remain on the board of a company that goes public are any better as directors than VCs who have no ties to a public company before joining its board?
We don’t find a meaningful difference.
Update: In talking with Professor Sevilir, I was specific about the context of my questions, including mention of Peter Thiel and the controversy around the sale of his Facebook shares two weeks ago. But after seeing this published piece, she contacted me, saying we’d had a misunderstanding and asking me to clarify that while the “VC directors we analyze on the boards of mature firms do not have a significant equity ownership,” there is “research showing that there is positive relation between equity stakes of directors and company performance.”
Update 2: Sevilir would also like me to make it clear — in case any readers are confused — that I “never said I call anything politely BS.” She also said told me “very clearly this was a recently accepted paper” that she and I were discussing, though I wasn’t aware of that paper, have never seen it or know if it’s publicly available. More, I repeatedly referred to her older research in our conversation (link above), and in emails leading up to our conversation.
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