Governance Academy
22 maart 2023

The real risk of board members turnover in the VC and startup landscape

Jesse Grift

Key takeaways:

We’ve all been there: a board member calls in sick or has a family emergency a couple of hours before presenting at a board meeting, and you’ve got to step in and pick up their slack.

No matter what role or industry you’re in, you’ll know how inconvenient that staff absence can be for you and your team.

But turnover can be much more than an inconvenience at the board level. We’ve previously explored the collective responsibility — and management liability — that every board member and director has for the performance of a company.

Executive turnover — especially when one of your partners holds board positions across your portfolio — can pose not just a headache but a legal and organisational hazard with real implications for your firm as a whole.

Risks and challenges of executive turnover at the board level

Investing in a startup or scaleup can give venture capital firms a powerful seat at the table — not to mention voting power and a say in the direction of portfolio companies. So when a partner leaves a VC firm, it can have a hugely negative impact on not only the fund’s performance, but that of its portfolio companies.

Research conducted by Pitchbook last year found that 27% of VC and private equity firms lost a partner or key staff member — with a further 40% of these personnel moving onto a competitor firm. This is a huge increase from 2017 when just 19% of investment firms said they lost a partner or key recruit in the same period of time.

What’s more, this turnover for VCs is largely cyclical, with partners typically leaving a firm when new funds are closed.

This is compounded by the impacts of executive turnover for all businesses, not just VCs. One survey found that high board turnover can “cause frustration and decreased motivation” on both internal and external stakeholders, with knock-on effects for the whole business.

Part of the reason for this is that when you lose a board member, you don’t just lose their voice or decision-making power — but the knowledge they hold.

Impact of VC partner turnover on portfolio companies

The loss of a VC partner is often keenly felt by the startups and scaleups a fund represents. On one level, founders stand to lose the expertise and knowledge an investor has of their business and potentially a key advocate for their venture at the board level.

Board members who have been with a firm for years or even decades will know the organisation inside out and are capable of making snap decisions with impressive accuracy and control.

Losing them could therefore be a major governance challenge and hamper a founder’s efforts to scale effectively.

On a more practical level, it could even mean the loss of access to key mission-critical documentation, including legal papers, cap tables, prior resolutions, and verbal agreements.

On top of that, there’s the cost of getting a new board member up to speed with all the information and knowledge your organisation lost along with the previous stakeholder.

If it’s crunch time at the firm, these issues can be devastating for meeting deadlines and keeping shareholders happy — ultimately undermining accountability and credibility at the board level.

Board member turnover: key challenges for VCs

While VC partner turnover can lead to significant consequences for portfolio startups and scaleups, it’s undoubtedly an even bigger challenge for VC firms themselves.

VC partner turnover is very much cyclical and often falls in line with fund transitions, which results in the loss of talent and energy. According to Deloitte, turnover is higher among junior investment professionals, who made up 24% of turnover at VC firms in 2020. Meanwhile, those in senior investment positions tend to stick around longer, representing 4% of turnover.

So although many VC firms typically don’t tend to lose their veteran partners very often, they do lose younger partners who typically work more closely with portfolio companies and have their finger on the pulse when it comes to a fund’s investments.

In many cases, these partners may have had direct, regular contact with founders and even various board positions. Losing them means losing not just their knowledge but their working relationships — including with other investors and those with voting power at the board level.

In some ways, it means that a VC firm loses visibility and ‘soft power’ within its startups and scaleups — not to mention key documentation and lines of communication.

Avoiding disruption through a corporate governance SaaS platform

Fortunately, there are ways to mitigate the impact of a board member suddenly leaving a firm. Centralising organisational knowledge, documentation, and decision-making on a single governance platform enables you and your board to continue work without interruption.

Instead of relying on manual processes or one or two individuals, Govin’s corporate governance platform helps ensure that all decisions are made in accordance with your articles of association, shareholders’ agreements, and all other relevant documents.

Govin acts as a secure repository for all key legal documents as well as accurate, up-to-date capitalisation tables and comprehensive records of shareholder clauses. This greatly reduces the risk of any governance issues in the event of a board member leaving. It’s also a way to manage the whole resolution cycle, from a portfolio company drafting it to board members signing it, ensuring continuity.

Ultimately, utilising a secure corporate governance platform ensures your board has a single source of truth — rather than relying on individuals to get the work done.