Investors on company boards without operating experience?

Curious what everyone's thoughts are on investors who sit on company boards without having operating experience. Yes, these investors usually have 10+ years of buyside experience but does that really make up for lack of understanding how a company works from the inside? How much does this matter in VC vs. growth vs. buyout

 

In most of these cases they invested in the company. They want representation, or even control, on the board as part of that. That way they can influence the direction of the company, which is what comes with their investment. You’re assuming that all of the board members are chosen based on their ability to contribute - while that does happen, it’s not what determines board seats usually.

 

On of our ex MDs went to work in a biotech incubator, investment group and is also board member. He is not a scientist and never worked in biotech before.
However, he acquired a lot of knowledge through his life in this field as an interest and can contribute to an extent.

 

Obviously this is a biased response since I’m an investor and not an operator, but at least in the MM and LMM a lot of management teams have no idea how to build a business to maximize value. It becomes pretty clear if you ask them to explain how they track and manage the business, how they strategize, how they prioritize, etc. They know 1000x more than I do about managing the business from the trenches, but they also benefit a lot from guidance and strategic direction from the investment team, which is a big part of what the board exists for

 
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I completely agree with the 10:51pm "VP in PE - LBOs" comment.

Private company boards are very different than public. The function is primarily one of control. Regardless of buyout, growth, or venture, people are writing board seats into their term sheets because they want the right to deny or compel actions within the company. The primary qualifications for these seats then are tenure within the investment firm and scale of assets at the firm (because if multiple funds are investing simultaneously, the largest check almost invariably gets the seat(s)).

For your follow-up question about their usefulness, it gets murky. Some people are genuine, self-aware, and humble -- so they open their mouth more to ask questions than opine randomly, and the contributions they make are based on their knowledge on how a company can be positioned more wisely, or a strategy (bolt-on acquisitions, product expansion, geographical expansion, cost reduction initiative, headcount reduction initiative, and so forth) be implemented most frictionlessly -- but unfortunately that's often an exception rather than the norm.

Good boards are one where management and investors respect each other and pull together. This can be an advantage of the upper middle market, where management teams have worked with sponsors before, either in their own careers or at the current company with the immediately preceding owner. In the middle market or lower, you'll find a higher frequency of family-owned businesses selling to private equity for the first time or just generally less sophisticated management. And obviously, regardless of the scale of the business, bad personalities exist on both sides of the table and make things strained.

In venture, this is where the appreciation for investors with founding experience comes from. You can always tell when someone knows how it is for a founder, not just from what they're saying but from the tenor of the entire dynamic.

I am permanently behind on PMs, it's not personal.
 

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