Venture Boards: Past Insights, Future Directions, and Transition to Public Firm Boards

• DOI: http://doi.org/10.1002/sej.1258
• Author: Sam Garg,Nathan Furr
• Date: 01 September 2017
• Published date: 01 September 2017

Venture Boards: Past Insights, Future Directions, and

Transition to Public Firm Boards

Sam Garg

1

*and Nathan Furr

2

1

Department of Management, HKUST, Kowloon, Hong Kong

2

Strategy Area, INSEAD, Fontainebleau, France

Research summary: Venture boards are theoretically important and economically rel-

evant. They are at the apex of a venture’s organizational hierarchy and have signifi-

cant influence on the most important decisions related to venture strategy and

personnel. This article reviews the organizational and strategy research on venture

boards, clarifying how venture boards differ from venture investors and from public

firm boards. It lays out a systematic research agenda to stimulate more research on

venture governance, including venture board composition and structure, venture board

processes, and venture board transitions to public firm boards. This agenda attempts

to illuminate the research opportunities related to the distinctive nature of venture

boards and enable theoretical engagement with the broader corporate governance

scholarship on public firms.

Managerial summary: A venture’s board of directors is highly consequential for its

most important strategic and personnel outcomes. Uber and Theranos are just two

recent ventures whose boards have come under public spotlight. This article reviews

organizational and strategy research on venture boards, mapping the evolution of the

academic literature, summarizing key findings, and identifying the most important lim-

itations. It explains how venture boards are different from venture investors and from

public firm boards. Importantly, it lays out a systematic research agenda that draws

upon the distinctive nature of venture boards and also creates a bridge to the broader

literature on public firm boards. New insights on venture board composition, structure,

process, and transition to public firm boards will be relevant to venture executives,

investors, and directors. Copyright © 2017 Strategic Management Society.

In research on entrepreneurship, there is a growing

recognition of the importance of the board of direc-

tors within ventures. Boards are at the apex of the

venture’s organizational hierarchy and have signifi-

cant influence on major decisions (Daily, McDou-

gall, Covin, & Dalton, 2002; Garg & Eisenhardt, in

press). Board members are closely involved in and

ultimately responsible for many of the most impor-

tant venture decisions, including the selection and

dismissal of key executives (Boeker & Karichalil,

2002; Wasserman, 2003) and the evaluation of

potential investors (Bagley & Dauchy, 2008). They

also help shape the venture’s strategy and innova-

tion trajectories (Garg & Eisenhardt, in press), key

operating procedures (Hellmann & Puri, 2002), alli-

ance portfolios (Beckman, Schoonhoven, Rottner, &

Kim, 2014), and exits (Graebner & Eisenhardt,

2004; Higgins & Gulati, 2006; Pollock, Chen,

Jackson, & Hambrick, 2010).

Moreover, the importance of venture boards

appears to have increased with many “unicorn”ven-

tures such as Airbnb, Spotify, and Uber choosing to

continue to raise money as ventures rather than go

public through an initial public offering (IPO).

Keywords: new ventures; board of directors; innovation;

CEO-board relationship; resource dependence theory; agency

theory

*Correspondence to: Sam Garg, Department of Management,

HKUST Business School, HKUST, Clearwater Bay, Kow-

loon, Hong Kong. E-mail: samgarg@ust.hk

Copyright © 2017 Strategic Management Society

Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 11: 326–343 (2017)

Published online 5 September 2017 in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1258

Thus, venture boards can be in place for a number

of years and have fiduciary responsibility for major

ventures that are often at the cutting edge of the dis-

ruption of existing industries. A leading U.-

S. regulator noted this trend and its implications:

“As the latest batch of start-ups mature, generate

revenue, achieve significant valuations, but stay pri-

vate, it is important to assess whether they are like-

wise maturing their governance structures and

internal control environments to match their size

and market impact”(White, 2016). Although the

exact role of the board may vary across ventures

and institutional contexts, venture boards are typi-

cally central to the most significant actions within

ventures.

Our purpose is to review the organizational and

strategy literatures on venture boards within entre-

preneurship research and, more importantly, to stim-

ulate future research. We begin by examining the

composition of venture boards, their critical role vis-

à-vis other governance control mechanisms, and

their distinctiveness relative to the boards of public

firms. We then take a retrospective look at the litera-

tures within our review scope and clarify their con-

tributions and shortcomings. Finally, we describe a

systematic future research agenda on venture boards,

including venture board composition, structure, and

process. In order to encourage more research at the

fertile intersection of entrepreneurship and corporate

governance, we also call for greater attention to the

essential changes that accompany venture boards’

transitions to public firm boards.

Venture Boards: Composition and

Distinctiveness

By ventures, we refer to privately owned and pro-

fessionally funded entrepreneurial firms.

1

Often at

the behest of their professional investors, these

ventures typically form a formal board of directors

(Bagley & Dauchy, 2008), particularly in the well-

studied U.S. context.

2

A venture’s board of direc-

tors frequently consists of both inside and outside

directors (Garg, 2013). Inside directors include the

CEO (who may also be a founder) and possibly one

or two other firm executives. Outside directors

include nonexecutives, primarily investor-directors

who are direct representatives of professional inves-

tors in the venture such as venture capital (VC) and

corporate venture capital (CVC) firms. Other out-

side directors may also include founders who are no

longer working at the venture and independent

directors who are usually senior executives from

relevant industries (Bagley & Dauchy, 2008).

3

Rights to board seats are one of various potential

rights given to investors in venture investment con-

tracts. These contracts may also provide cash flow

rights, liquidation rights, and other control rights,

and they may specify contingencies based on mea-

sures of financial and nonfinancial performance

(Cumming & Johan, 2013; Kaplan & Stromberg,

2003). Analysis of real-world contractual arrange-

ments finds that the various rights and contingencies

in venture investment contracts are often highly cor-

related and provide complementary approaches to

controlling ventures (Cumming et al., 2010). As

Kaplan and Stromberg (2003, p. 282) observe,

“Cash flow incentives, control rights and contin-

gencies in these contracts are used more as comple-

ments than as substitutes.”

Yet, there are important differences between

investors’rights to a board seat and their cash flow

rights. Rights to a board seat (and taking that board

seat) enable investors to engage actively in moni-

toring, advising, and strategic decision making,

both during and outside board meetings. By con-

trast, investors’cash flow rights are monetary

claims to the venture’s cash residuals as specified

in the relevant investment agreement. These latter

rights provide limited access to information and

limited voice in strategic decision making in most

investment agreements. Although the various other

rights and contingencies in investment contracts

create some control opportunities for investors and

can potentially even substitute for board monitoring

in some ventures, the rights to a board seat

uniquely provide an avenue to influence a wide

1

Following other scholars (Gompers et al., 2016), we

exclude private equity backed firms for which board composi-

tion and board involvement are different.

2

We thank an anonymous reviewer for the insight that

national institutions can affect whether investors obtain board

seats (Cumming, Schmidt, & Walz, 2010) and whether there

is a board at all.

3

Venture boards of directors (or “venture boards”), as

defined here, should not be confused with advisory boards

that, if present in a venture, function mainly as an informal

advisory body with no governance rights and responsibilities.

Neither should “venture boards”be confused with the boards

of venture capital firms, which do not govern the investee

ventures.

Venture boards 327

Copyright © 2017 Strategic Management Society Strat. Entrepreneurship J., 11: 326–343 (2017)

DOI: 10.1002/sej.1258