VCs Take CEO and Board Relationships to the Next Level

When it comes to finding the right match, recruiting a senior leader for a VC-backed company is a lot like online dating. Both have evolved over the past decade in a surprisingly similar way, with the emphasis shifting from relatively short-term commitments to long-term compatibility. At the same time, the value of a rigorous approach to finding the right partner has grown.

That’s what a recent study conducted by executive search consulting firm Spencer Stuart and the National Venture Capital Association suggests. Researchers interviewed VC firm leaders across a variety of sectors and surveyed more than 200 NVCA members to measure how changes in the economic environment in the past 10 years (following up on a similar study from 2001) have affected the characteristics and skill sets required for successful portfolio company CEOs and board members. (The complete study can be found at

In the process, they uncovered some clear opportunities for venture capital firms to take a more structured approach to building strong, independent and diverse boards of directors for their companies, as well as hone how they recruit and how they assess the performance of their management teams.

Seeking Long-Term Relationship

It’s no secret that over the past decade, the pathway to exit has grown considerably longer and less certain. This longer haul has prompted VCs to take a more strategic approach to building their boards—both in terms of numbers and experience. In particular, 75% of the survey respondents said they are recruiting more independent (outside) board members now that they face a longer path to liquidity. In fact, given that venture-backed companies that go public do so at much later stages in their lives than a decade ago, many of these private companies today have board compositions that increasingly resemble those of public boards.

The venture capitalists interviewed for the study agreed that companies that want to be regarded as professional and well-managed need outside board members. Furthermore, a company should put two or three independents on the board before even thinking about an IPO.

Thanks to the longer haul, broader experience and operational expertise are becoming greater priorities for board members. More than 90% of the survey respondents said that one reason for the increase in board members is to provide the company with advisers who have a wider spectrum of experiences and contacts. Fifty-one percent said that another reason is to add directors who have experience with more mature companies.

In sectors without an established base of CEO talent, the board also provides an opportunity to bolster the management team with much-needed sector knowledge. In the clean tech sector, for example, the dearth of executives with proven VC experience in the fast-growing field led one respondent’s firm to recruit board members from the energy industry to help bolster this sector expertise.

As they assemble boards more strategically, firms also expect more from their board members than in previous years. Board members must thoroughly understand the financial arrangements of their companies and grasp the intricacies of their technologies to be effective directors.

Naturally, board members are commanding greater compensation in return. Liability issues have increased and the time commitment has increased significantly. In addition, the pool of talent meeting the expanded criteria of the role today is smaller than before, increasing both their value and their bargaining power. In particular, directors of venture-backed company boards are showing less willingness to work for only equity compensation.

Three-quarters of the survey respondents said they are recruiting more independent board members now that they face a longer path to liquidity.”

Wanted: Mature CEO Who Enjoys Long Walks

Over the past 10 years, the value that VCs place on having the right people in place and the characteristics they look for in those people remained fairly consistent, as have the methods for recruiting and evaluating those people.

As they did in 2001, VCs identified “strength of the management team” as the most important factor in making their investment decision in this year’s survey. For CEOs, integrity, leadership skills and the ability to attract talent remain paramount.

That said, some subtle changes in emphasis have accompanied the new venture landscape.

As it did for board members, experience rated highly on the priority list for CEOs. When seeking talent for emerging sectors with a limited CEO pool, for example, respondents clearly favored proven venture-backed CEOs from unrelated sectors over sector entrepreneurs with no CEO experience or industry leaders from large companies who lack experience in an entrepreneurial environment.

While venture capitalists seem willing to consider talented leaders from different sectors, they are less willing to do so in sectors such as biotech, where a lack of understanding of regulatory issues can be a considerable hurdle to overcome.

Given the difficult environment for raising capital, respondents also valued fund-raising skills more highly than they did a decade ago. Fund-raising ranked fifth in importance in this year’s survey, up from eighth place in 2001.

However, the research suggests that reducing funding acted as a double-edged sword: Some firms reported being less likely to embrace leaders whose primary strength is salesmanship over those who not only have a proven track record for raising private capital, but also understand the value of capital efficiency.

Overall, the recruiting picture for top CEO talent was mixed. In some sectors, such as biotech and medical devices, increased regulatory hurdles have significantly increased the degree of difficulty for VC-backed CEOs to reach an exit. This factor has made it harder to attract talent. But this trend has been balanced by the struggles of big pharma, which are making a greater pool of talent available.

In terms of compensation, VC-backed CEOs are being paid more than they were 10 years ago, with 47% of respondents saying they are paying CEOs both greater cash compensation and greater equity.

VC-backed CEOs are being paid more than they were 10 years ago, with 47% of respondents saying they are paying CEOs both greater cash compensation and greater equity.”

In addition, VCs note that employment contracts, including negotiated severance packages, have also become more common for CEOs and other senior managers than they were a decade ago.

While venture capital firms are increasingly funding portfolio companies in international markets, many venture capitalists don’t value international experience more than they did a decade ago. Just 19% of this year’s survey respondents agreed and 47% somewhat agreed that global or international experience has become more important over the past 10 years. The primary mission for most early stage investments today remains the development of their product or service.

Is this Really Working?

VCs feel much more confident in their assessment practices today than they did a decade ago. In 2001, only four in 10 venture professionals predominantly agreed that their firms recruit the best talent, consistently and thoroughly assess management teams, and remove underperformers quickly. This year, 84% agreed that their firms recruit the best talent, 63% agreed that they consistently and thoroughly assess management teams, and 67% agreed that they quickly remove low-performing CEOs.

But firms remain less systematic about conducting formal assessments of their CEOs and top managers after they are hired. Only 25% of respondents said they conduct formal, ongoing management assessments after an investment has been made.

In part, this may be because enthusiasm for formal processes is not consistent with the DNA of the venture capitalist. But the biggest factor is that VC firms feel that they are already linking the CEO’s goals and accomplishments with the needs of the company through their compensation structure.

In many firms, however, a greater attention to ongoing assessment—not only for performance, but also for fit and development opportunities after the hire—could represent the greatest potential area of improvement for talent management in the industry.

Though borne of adverse market conditions, the new trends identified by the 2010 research—a more strategic approach to building boards, the emphasis on CEO experience and a greater incentive for assessing chief executives’ performance—may deliver significant value for venture capital firms. They provide opportunities to increase the science and the rigor in selecting and managing innovative, entrepreneurial leaders with the necessary skills to guide their portfolio companies to profitable exits.

While that may not sound very romantic, few VCs can afford to settle for less than a perfect match.

Jeanne Metzger is Director of Marketing for the NVCA and can be reached at Ben Holzemer is the global communications sector leader for the TCM Practice at Spencer Stuart and can be reached at