Blue Bag Lunch Talk with Nadya Malenko

January 13, 2022 0:50:01
Kaltura Video

Using qualitative interviews with workers and retirees from unionized jobs, this project investigates the ways that these adults provide help (both financial and practical) to their adult children, extended kin, and others. January 13, 2022.

The project also investigates how providing this help affects family relationships; and how serving as a private safety net is perceived to affect their economic well-being, particularly planning for and in retirement.

Helping Across Generations and Impacts on Retirement and Retirement Planning

Union jobs were once the backbone of the middle class in the United States, providing livable wages and good benefits, including pensions, for those without four-year college degrees. When fewer workers have access to good-paying jobs and benefits, and when public benefits are difficult to access, those with union ties may find themselves serving as a private safety net, sharing their resources across households and generations. While this help may be crucial to struggling family members, how do workers balance help with their own economic needs? How do union retirees navigate retirement and provide help on a fixed income?



0:00:00.0 Kristie Bear: Oh, good Jess Kaplan is...


0:00:22.0 KB: Greetings folks, sorry about the short delay. I think we've resolved our tech issues now. Jessica Kaplan, I'm so happy to see you.

0:00:38.4 Jessica Kaplan: Great to see you all, thanks.

0:00:41.1 KB: Ladies and gentleman, Jess Kaplan, superstar former research assistant with the CFLP.

0:00:51.2 Speaker 3: Nice to meet you Jessica.

0:00:53.4 JK: Nice to meet you.

0:01:00.8 KB: We're gonna just wait one more minute because we had the little early tech stuff.


0:01:34.5 KB: Okay, why don't I start since I am the least important speaker talking today. Greetings everyone. Thanks for coming. My name is Kristie Bear, I'm the assistant director of the Center on Finance Law and Policy. Welcome to our monthly Blue Bag Lunch Talk. These talks were started six years ago, they are an opportunity for some of the superstar faculty around the University of Michigan to connect with other superstar faculty around U of M to share the research or ideas and gain feedback from an interdisciplinary audience to improve their work and then go out into the wide world with an even better idea.

0:02:15.7 KB: So before I introduce our speaker today, I want to plug a couple of upcoming events because you know that's just what I do. Next Monday, January 17th at noon, we are co-sponsoring a talk that the Ford School is hosting for MLK Day with deputy secretary of Commerce, Don Graves, and Kelly or Liz will drop that link in so that you can see it to register for that if you'd like. And then also, this whole month is about a month of economic opportunity events. We're also co-sponsoring a talk on Monday, January 24th, at 6 o'clock in the evening that will feature four of the CFLP's faculty affiliates, that would be Katherine Dominguez, Josh Haussman, John Lekhi, Betsy Stevenson. These people are brilliant and they are also hilarious, and so I hope that you all register for that event as well.

0:03:19.3 KB: But enough about future events, let's talk about Nadya. So everyone, please meet Professor Nadya Malenko. She is at Michigan Ross and she joined during the pandemic, so if you haven't met her yet in person or you've only met her as a disembodied head, I hope you'll get a chance to meet the rest of her body. Professor Malenko's research interests are focused in the areas of corporate finance, corporate governments, private equity. And in her work she has examined shareholder voting, the design of corporate boards and public firms, and also VC backed startups, shareholder activism, and then the allocation of authority in organizations.

0:04:06.0 KB: She is an associate editor at the Journal of Finance and the Journal of Financial Economics, and she serves on the board of directors of the Financial Intermediation Research Society, Midwest Finance Association and Financial Management Association. In the past, she's taught corporate financing decisions but if you wanna take a class with her this semester, too bad, it's too late. You'll have to wait until the fall when she will be teaching investment banking.

0:04:35.5 KB: So today, she's gonna talk to us about board dynamics and how they change over the startup life cycle. And Professor Malenko specifically wants you to interrupt, so don't be polite, don't do the thing where you all like wait until you wanna ask questions about something 20 minutes ago. She wants you to raise your hand, she wants you to put stuff into the chat. And she probably won't be able to see, so I'm gonna interrupt and you'll get a chance to ask your question. Or if you wanna wait until the end that's also fine, we'll have time at the end. You can put things into the chat and I can ask for you or you'll get a chance to unmute and ask. Before we get started, final thing, I wanted to say a special thank you to Kelly Loughlin and Liz Smith. This is our first Blue Bag Lunch Talk without our former admin coordinator, Tracy Fenderson, and they have done a stellar job of getting us up and running, so thanks very much to them. And with that, Professor Malenko, tell us what we need to know.

0:05:43.3 Nadya Malenko: Okay, thank you very much for the opportunity to present here and to all of you for joining today, and yes please interrupt me with any questions. It's much more fun to present this way. So this is joint work with Michael Evans from Caltech. And in the space of our study the dynamic evolution of [0:06:00.3] ____ of venture capital backed startups. So let me start with some motivation for what we do, starting with why we are interested in the governance of VC backed startups. Overall, over the last decades we have seen several important trends. We've seen a decline in the number of public funds, an increase in the amount of capital going into private funds and the strengths coincide and are partly caused by the deregulation of private equity markets, which ultimately allows private firms to raise more money more easily from a variety of investors.

0:06:32.4 NM: So all of this suggests an increasing role of private firms including venture capital-backed firms. We see that firms are an important part of the private firm universe, for example, half of initial public offerings are firms that are venture capital-backed. Among the existing publicly traded US firms, those that in the past were VC-backed, account for 20% of market capitalization and 44% of R&D spending. And these are just some names that you know of, they are all... Were backed by venture capitalists in the past. All of this makes it important to understand how these VC-backed firms make decisions and how they are governed. And the board of directors has the ultimate decision-making authority over corporate decisions. If we want to understand how corporations and start-ups in particular make decisions, it's very important to understand what composition and who has control over the board. I would say probably the allocation of control over the board is especially important in VC backed start-ups for a couple of reasons.

0:07:36.3 NM: First, their major shareholders, entrepreneurs and venture capitalists, often have different payoffs from the decisions that are facing the board. And I will give some examples when... During my talk. Second, unlike in many other situations, investors in this case, venture capitalists play a very active role in the management and operations in the business alongside with the founders themselves. And finally the roles of these two major sets of players, founders and investors evolve substantially over the life cycle as the start-up matures. So we believe that understanding the dynamics of what composition and the dynamics of the allocation of control in these firms is important. In particular, to understand these dynamics we need to understand what are the roles of the three types of directors on these boards. And the three types of directors are, venture capitalists or generally investor representatives, executives or founders of the firm, and so called independent directors. These are directors who are not affiliated either with investors or with entrepreneurs, they are jointly elected, mutually accepted to both of these parties.

0:08:53.8 NM: Based on the literature we know about the role of venture capital directors on these boards, but the roles of executives and independent directors are yet to be started and these are the focus... This is the focus of our paper. In particular, independent directors and their presence on the startup was... It's interesting for a couple of reasons. First, unlike in public firms, their presence is completely voluntary and not required by any regulations. Second, in the context of public firms, usually independent directors are attributed the monitoring role, monitoring managers on behalf of dispersed public shareholders. In the context of start-ups, there are no dispersed shareholders, there are large active block holders, venture capitalists who have incentives, ability, time to monitor the managers of portfolio companies or what they're doing. So the monitoring role is likely to be relatively less important. What we'll try to understand are the roles of these independent directors on these boards.

0:10:00.6 NM: And in particular while prior literature hasn't studied these questions about the dynamics of allocation of control and the roles of these other types of directors is because the existing databases have important gaps and don't essentially allow us to observe the full board composition and it's dynamics. First of all what we do is we build a data set of... On a 7800 start-up boards over a 16-year period, which documents the full composition, all director types and hence the allocation of control and the dynamics of start-up boards that were financed by venture capitalists. And I will start by just presenting you some facts, we show about the composition, the allocation of control over these boards and how those evolve over the life cycle from the first VC financing and to X. And then we'll look at these assets and try to answer the following questions. What factors do we think determines this board composition and allocation of control both over time over the life cycle and in the cross-section of firms? And what are the roles of independent directors and how they evolve? So just as a preview incase I don't have time to finish all the slides, these are the three takeaways. First of all, over the life cycle of the start-up, we show a shift of control from entrepreneurs in earlier stages of the life cycle to venture capitalists in later stages of the life cycle.

0:11:35.1 NM: But importantly, there is a very important role that independent directors are playing these transitions, so they will be playing a very important role in between these two stages. And if we look at the older patterns of board composition and control over time across firms, they seem consistent with what we call the mediation role of independent directors. I will be more clear about what we mean by that. Very roughly, it means mediating, resolving potential disagreements and conflicts that can arise between these two major shareholders, entrepreneurs and venture capitalists. And to be more precise, what we see in those patterns is that, likely the roles of independent directors evolved from mediation in the earlier stages of the life cycle to more of an advisory professionalization role in later stages. Finally, the last fact that we document is a shift of board control over the decades. If we compare the allocation of board control now verses two decades ago, we'll generally see a shift of control from investors in earlier years to founders. Nowadays founders control boards to a much larger extent than they used to 20 years ago.

0:13:00.1 NM: Let me see. Okay, yeah. So let me start just by briefly telling you what startup boards do. And I will start with a quote from the paper by [0:13:10.6] ____, which suggests that startup boards are very intimately involved in strategic decision-making, personnel issues, which distinguishes them from their roles in public boards. And of course, the control over the board gives whoever has control the right to initiate major transactions, such as mergers, IPO, or the liquidation of the firm. So the board will make decisions over next rounds of financing. Who to raise financing from at what terms? At what price? Any decisions about exits, both IPO or acquisitions, turnover of executives, and large investment decision. Let me now describe our key sources of data. The key source of data that we get information about these boards from is form D filings which are available on SEC EDGAR. So essentially, a regulation D suggests that if a startup wants to be exempt from registering its securities with the SEC, it needs to file Form D within the first 15 days of the first sale of securities.

0:14:28.2 NM: And here is how the relevant exit of form D looks like. You can see that form D filings list all of the directors of the firm. And moreover, they have checkboxes on those directors who are also executives. So these are founders, co-founders or any other top executives of the startup. And essentially, this information, especially which directors are executives is not available. We don't know other datasets that have information on executive directors. To classify all types of directors, we merge these form D filings with venture source, which is a standard commercial database, and then do a lot of manual categorization. So all in all, that allows us to classify all of the directors into three types: Entrepreneurs, venture capitalists and independent directors. And that gives us the dynamics of almost 7800 startup boards over 2002 to 2017.

0:15:33.4 NM: Okay, so let me first just give you some broad overview of the total sample without yet looking at dynamics. And then I will go and show you the dynamics. Across all firm years, the typical size... The median size of the board is four, four directors. We see that independent directors are very common, even though their presence is not required by regulation, we see them in almost half of our firms. And moreover, what we see is that they are actually given important power, some important power on this board. So they have voting power because, in an average board, neither VCs nor executives control the majority of board seats. They have strictly less than 50%. Which means that when these two parties disagree, essentially independent directors have a tie-breaking vote. Jeremy? 

0:16:32.4 Jeremy: Yeah, Nadya, I'm interested in your definition. I get why you've defined independent as non-founder and non-VC. Couldn't that hide dynamics, though? An independent director could be a founder's high school or college roommate or could be a VC partners brother-in-law, which would suggest that although they're nominally independent, they're gonna vote in a block with either the founder or the VC. Can you suss out any of those dynamics about whether the... To what extent the independent directors really are independent? 

0:17:05.3 NM: Yeah, that's a great question. We have devoted lots and lots of time and effort thinking about this and trying to do something about it. So yes of... First of all, let me say just in terms of the data, we try to account for all of these. So this particular date, this particular sample, it only looks at very less conservative definitions. So whether an independent director is a representative of any of the investors, right? Or a representative of the founders. On top of that, we looked at prior professional connections between these independent directors and either of the directors or investors. So that about... Professional connections to entrepreneurs are sufficiently rare, connections to VCs do exist in the data, so we see about 20% of independent directors who have some overlap with VCs in the past. And what we do not in the test but in the robustness in the people, we reclassify those as being VC affiliate and we reclassify the allocation of control, and pretty much everything holds without any changes.

0:18:16.8 NM: But more importantly, I think more fundamentally, is we try to understand what are the fundamental reasons for startups to have independent directors versus maybe some affiliated. And we try to analyze case law and talk to a lot of practitioners, legal scholars, and our conversations reveal that for the court when the court considers controversial cases, it's very important that... The presence of truly independent, truly disinterested directors is very important for how the court use those decisions from the perspective of the business judgment rule or this entire fairness standard. So that really matters. And that's why even an investor's interest, it makes sense to have truly disinterested directors if they want to have... To not be subject to liability. So this is all across all board financing years. Now, let me show you the dynamics over the life cycle.

0:19:13.0 NM: This is just the number of directors of each type. And you'll see that the board's size grows over the life cycle, primarily due to the addition of VC directors, and partly due to the addition of independent directors. So in a medium-firm, the number increases to... Is one and typically, an independent director is added around year three which corresponds to the second financing round. If we take those numbers and look at percentage of both seats held by each director type, we see the following. The fraction of VC directors on the board grows, they start with about 30% of seats and come close to controlling a majority of the seats in an average board by the second year. While the fraction of entrepreneur-controlled seats goes from a majority of the seats early on to less than a third later on. Jeremy? 

0:20:14.6 Jeremy: Is that because of follow-on rounds of financing? Are they bringing in different VCs later in the life cycle? 

0:20:22.4 NM: Yeah. So that's how we... Right now we follow some [0:20:26.3] ____ and what we do is just classify all of those VC directors together, so we don't track them. We believe some of this indeed comes from follow on VC financings and our argument for doing this is that, there are good potential... What you probably have in mind, there might be some potential conflicts between different investors from different rounds of financing. That said, we think probably the first order of conflicts would be still between entrepreneurs and investors, that's why we align those investors as just one block. But I think one question we want to explore further, exactly your question is, are these different investors and potential conflicts between them given the different terms they can get. Yeah. Thank you.

0:21:10.2 NM: So roughly, what this shows is that the allocation of control switches from entrepreneurs to VCs over the life cycle. And to be more precise about it, we define three types of allocation of control. So VC or entrepreneur control would correspond to those directors just having strictly greater than 50% of the seats. And then the remaining type of allocation of control is what we call "Shared Control." And most of these cases correspond to the situation that I showed you in that average from when neither entrepreneurs nor VCs have a majority of the seats and independent director is essentially a tiebreaker. So a typical scenario would be one one one, or two VCs, two entrepreneurs, one independent director. So that's how a typical board with shared control would look like.

0:22:01.6 NM: And this is the dynamics of the allocation of control over the life cycle, which shows what I showed you before in terms of percentages. Entrepreneur control is the most common form of the allocation of control earlier on, but becomes much less common over financing rounds. VCs increasingly control the board over financing round and then the shared control with independent directors as tiebreakers emerges in between. It's essentially, the transition from entrepreneur to VC Control and overall, it's pretty common, it's observed in about a third of observations across all financing rounds.

0:22:41.8 NM: So, taking this all together, what we see is board control changes. Entrepreneurs are losing control, VCs gain control over the life cycle and independent directors are playing an important role in this transition with shared control emerging in between in the second financing round. So what we'll do next is try to understand this dynamics and in particular, answer the following questions. What factors would determine the allocation of control between these three types of directors? And why would they give this tie breaking vote to this independent directors? More generally, what are the independent directors roles on the board? In the paper, to answer this questions, we present a toy model which builds on the work by Brian Brownman, which is how he builds on Adeonan Bolton, in which helps us answer these questions and generate our main prediction.

0:23:39.4 NM: And in this model, independent directors emerge as mediators between entrepreneurs and VCs in the sense that they are resolving potential conflicts that can arise between these two parties on decisions concerning, say the timing of exit. So VCs generally have a preference for quicker exit, entrepreneurs may prefer a later exit or terms regarding raising in your financing round or the replacement of the CEO or the founder. And before I explain it in more detail, let me just show you this quotes from some industry practitioners. These are well known venture capitalists, so it's a quote from their book. This is the former LinkedIn co founder. "It seems that the way industry practitioners view these independent directors is very much consistent with this idea of mediating bridging potential conflicts and disagreements."

0:24:35.9 NM: More specifically the way we think, the way this toy model gives right to these independent directors is the following. So on the one hand, the presence of independent directors as tiebreakers ensures that the board will make decisions not that favor entrepreneurs or decisions that favor VCs but it will make decisions that maximize the value of the startup, because this is the fiduciary duty of directors and independent directors. They are not beholden to any of those parties, so they have incentives to take decisions that are good for the startup as a whole. In addition, if we think about the exempted perspective at the time when both VCs are thinking, "Should I contribute capital to this startup?" and entrepreneurs are thinking, "Should I devote all my time and effort? Should I contribute my human capital to the startup?"

0:25:29.9 NM: The fact that independent directors have this tie breaking rule, it's essentially a promise, a commitment by both of those parties to not expropriate the other party. The VC, when thinking about contributing capital, they know that entrepreneurs will not be running the show, there will be an independent director to control those decisions and likewise from the perspective of the entrepreneur. So, both of them are more willing to make this exempt to investments, capital or human capital. And what emerges is that, which allocation of control will be observed ultimately depends on the relative importance of these investments by entrepreneurs and VCs. So when the both of them are equally important, then independent directors emerge as tiebreakers. When VC investments are particularly important then VCs should get control, when entrepreneurs are particularly important human capital, investment is particularly important, entrepreneurs should get control.

0:26:34.8 NM: So this is very clear. And now, let me talk about the predictions that come out of this idea and how we test those predictions and the date. So the test prediction is over the life cycle. And in particular, what we see over the life cycle... What we know about the transition right of this... Their alleged importance of entrepreneur and VC human capital over the life cycle. We know that the entrepreneur's human capital and its irreplacability, its importance generally decline. As the firm establishes a product, the entrepreneur becomes much more replaceable. This has been shown in prior work. On the other hand, the amount of capital contributed by VCs increases over the life cycle. So what this dynamics suggests, given this prediction that I just showed you on the previous page, is that over the life cycle, we should see entrepreneur controlling all the stages. That's when the human capital is especially important, relative to VC capital, then to shared control and then to VC control in a later stage.

0:27:44.6 NM: So I presented some evidence for you earlier, right? That was essentially the dynamics of control over time, so let me... We do more direct tap, so in the interest of time, I will skip this one. This basically shows you the transition within the firm. So, within the firm, it pretty much shows this transition through the stages. Let me show you this graph, which is... Shows you what is the percent of firms with a given allocation of control, over financing balance but where we already control for important factors, so what important factors we control for. Most importantly we control for ownership, because one concern is maybe this increased VC control over board just reflects increasing VC ownership stakes over time, what we see now, so this is already controlling for ownership stakes. We see exactly the same dynamics. VC control is becoming increasingly more likely.

0:28:35.9 NM: Entrepreneur control is become increasingly less likely. We also can control for industry location here, so this dynamics is pretty robust. So this is over the life cycle. Second prediction is more across firms, and it concerns the relative bargaining power of investors relative to the founders. So very, very similar prediction that as the relative bargaining power or venture capitalist across firms increases, relative to entrepreneurs in the same sense, in the sense that the VC capital is really, really important, it's very hard to find it while entrepreneurs human capital is abundant. So in that sense, as the degree of VC bargaining power increases, we should essentially, as we switch right in this... Along this dimension of VC relative bargaining power, we should see the switch in the allocation of control in a similar direction. To test this prediction, what we developed two different measures of bargaining power in the paper and maybe let me just talk about the second one, it's more intuitive.

0:29:50.2 NM: It's based on dry powder in the region. So this essentially measures how much available VC capital there is for start-ups in this region, so it's all capital that was raised by VCs from located in this region, minus the capital that has been invested by this time into start ups located in this region. So the highest dry powder, the more available is the VC capital to be invested, the lower is VC's bargaining power because there are lots of VCs, there are lots of capital available for relatively few founder. And then we just divide all region here into quintiles based on this measure. So what this table shows you is the likelihood of each type of allocation of control across this quintiles of VC bargaining power relative to the middle of the distribution. This is the excluded category. And as you can see, just looking at this co-efficients, we can see that they are monotonically declining. So entrepreneur control is becoming increasingly less likely as VC bargaining power increases, while VC control is becoming increasingly more likely.

0:31:09.2 NM: So it seems consistent with this bargaining power. And then, the third prediction, which also follows from a similar argument is that if we can find some kind of negative exogenous shock to the relative importance of VC capital, keeping the importance of entrepreneur's human capital fixed, we should gain in the sense of this changing bargaining power, we should see entrepreneur control to become more likely and VC control to become less likely. And in the paper, what we, the negative shock that we exploit is the introduction of Amazon Web Services in 2006. So in 2006, Amazon introduced cloud computing, and what this technological shock allowed is a lot of startups could now start developing their ideas without large upfront investments in hardware, 'cause now, all of these applications could be developed on the cloud. And there is an early paper by my co-author which showed that essentially that led to a lower, much lower early stage capital needs by startups.

0:32:24.3 NM: So that's essentially the shock to the relative importance of VC capital in earlier stages, and we do a difference in difference specification where the treated firms are those that were particularly affected by the introduction of cloud computing. So you can think of tech firms relative to other industries, but it's more detailed than that. Yes, I was also... Yes, I see the comment about 2006. Yes. [chuckle]

0:32:54.6 NM: So this is the results of this difference in difference specification. What we see is that for firms that were treated, so those where cloud computing had a particularly strong effect, we see that post cloud computing entrepreneur control is significantly more likely compared to control from after the introduction of Amazon Web Services. While VC control is significantly less likely. So this last finding goes to this idea that over time, if we look... So now we are looking over years, over decades, we see that in the past, at least partly due to this shock, but not only, we see that VCs are controlling boards to a lower extent. And interestingly, this is not just due to this shock, because what we... This shift of control over decades from VCs to entrepreneurs is observed across different industries as well. So we see it in biotech where cloud computing didn't really have an effect. It is more pronounced in these Amazon-treated companies, but it's more pronounced than that.

0:34:05.7 NM: So you just... So these pictures show you the likelihood of VC-controlled boards in each round. In Round One, in Round Two, in Round Three for different cohorts. The reason it ends in 2013 is that we track cohorts. So 2013 is the first year when certain start-ups raised VC financing. We want to track them over years. So that's why we stop in 2013 so that we still observe the third financing round of those firms. This is this point in our sample. And what we see is, across the board, venture capital-controlled boards are becoming less likely. So they are essentially twice less likely in 2013 relative to 2002, while entrepreneur controlled are essentially twice more likely. And we don't do much... The formal analysis is this Amazon Web Services job, but that only accounts for the IT industry. What we think is happening on top of that, in other industries, is generally this trend that I mentioned early on in the presentation. Higher supply of private equity capital due to the deregulation of private equity markets, due to increased movements of non-traditional investors, such as sovereign well funds, hedge funds, pension funds into financing these start-ups.

0:35:21.8 NM: So all of these increases the amount of capital available for the startups and increases the relative bargaining power of entrepreneurs, and leads to these dynamics. At the same time, shared control is becoming... Stayed prevalent, so we think that this mediation role continues to be important. I have a couple of minutes so maybe I'll just talk briefly about two other pieces of evidence, and then I will stop for questions. So to provide some direct evidence for the mediation role, we try to think of the following questions. If and when the directors are invited as mediators, then we should see them to be more prevalent in those firms where the exempted potential for conflicts to arise is high. So we try to get some variation across firms in the extent to which disagreements between entrepreneurs and VCs are likely. And let me talk about one of those. So one obvious decision where such disagreements can arise is the decision whether to replace the CEO. And the likelihood that these disagreements will arise is probably higher if the VC has a reputation for aggressively replacing the CEOs in the past.

0:36:41.8 NM: So we essentially look at CEOs prior... Sorry, VC's prior history in terms of their tendency to replace the CEOs of their portfolio companies and then identify so-called top CEO replacements. So they are in the top of the distribution. And what we see is, if there is this top CEO replacing among the investors, independent directors are significantly more likely to be on those boards and they are more likely to be given the tie-breaking role. So shared control with independent directors as tiebreakers is significantly more likely. Let me skip the second. There is another... We also look at some prior connections between VCs and entrepreneurs to get also this variation. And I'll conclude with one last thing about the other role of independent directors. So we don't want to say that the only role of independent directors is mediation. We think that another important role of these directors could be advisory. So they could be complementing venture capitalists in setting the strategy, investment, hiring, and they could be helping professionalize the start-up towards being a public firm.

0:37:54.1 NM: So if this is true, we might also expect the dynamics of these roles to change. So early on, before VCs have control on the board, mediation is relatively more important. In later stages, once the start-up already needs this professionalization, being prepared to be a public firm, their board is VC-controlled, the advisory role is probably becoming relatively more important. So we do several pieces of analysis. And let me... To see whether indeed we have these dynamics. And let me just show you one. It concerns the characteristics of independent directors. So if these roles indeed change over the life cycle, then we should see the independent directors who join the firm early on to somehow look differently, to match the mediation role early on. Then those independent directors would join the firm later on. And this is what we see and this is the summary. So we look at where the independent directors joined later on, just in either in terms of age or in terms of whether they joined during VC control, as opposed to entrepreneur shared control. And what we see is that those who join early on are...

0:39:08.0 NM: They are substantially more likely to be unconnected. So this goes to Jeremy's earlier question, so if we look at this prior connections to VCs and entrepreneurs they are substantially less likely to have any prior professional connections specifically to VCs which is consistent because we want them to be truly unbiased, truly impartial to both parties. They are also... So in this specification, less significant based on age, it's much more significant, more likely to be former founders, which we also think serves in the same direction, being former founders, they are more likely to withstand the general pressure to be VC-friendly, so they can be more effective in this mediating role.

0:39:48.8 NM: On the other hand, those who join in later stages, they have much more managerial level experience, C-level, VP-level as well as experience on being on a public firm board, which is very much consistent with this idea of professionalization of the start-up towards being a public firm. So let me skip this and just conclude in the interest of time. So what we do in this paper is we document the dynamics composition of the startup boards from first VC financing to exit and how the allocation of control emerges. We see that control switches from entrepreneurs to VCs but in the middle there is this important role played by independent directors, which we believe is consistent with the idea of mediation. While in later stages this role seems to be transitioning to more of an advisory role. And finally, this interesting trend over time about the switch of control from VCs to entrepreneurs, which would be interesting to explore further what are the implications of this trend. So far we haven't yet explored those. Thank you and I very much hope to answer any questions that you may have.

0:41:01.7 KB: Awesome. I'm gonna ask the first question. Professor Malenko, earlier you... In the section about dry powder, you said that you're measuring based on the amount of available VC capital. How do you know that? Do you count up the number of VCs or do you look at how much has been invested historically, like how do you figure that out? 

0:41:24.9 NM: Yeah, it's somewhat a noisy measure, what we do is we take all capital that has been raised by venture VC firms in a given... Headquartered in a given region. So that's how much was contributed by investors and then we subtract the amount of capital that was invested into startups located in this region. So it's how much invest limited partners give minus how much was invested. It is noisy and that's probably what you're getting at, right? It is noisy because, for example, the fact that a VC firm is headquartered in a given region doesn't mean it can't invest in other regions. So it's noisy to that extent, that's why we use this other measure based on belations but that's what we do.

0:42:09.2 NM: Yu.


0:42:17.1 KB: Go ahead Yu.

0:42:24.2 NM: I think Yu, did you raise your hand? 

0:42:31.8 KB: We might have a mic issue.

0:42:33.9 NM: Maybe.

0:42:39.3 JK: Professor Malenko, while we're waiting for the other person to chime in, thank you so much for this presentation. My question was with regard to... You talked about independent directors coming in and having this mediator-type role, and my question is around venture capital being such a relationship-driven business, I'd wonder in your studies if you collected any more anecdotal or qualitative evidence at all in addition to quantitative evidence in terms of you know, if a venture capital firm had a reputation for replacing the CEO, which was one of the measures that you showed us. Potentially that would be an adversarial type of relationship at the outset, and so an entrepreneur may be more reluctant to partner with that venture capitalist at the outset. How, if at all, did you account for that in that measure of kind of the independence mediation role? 

0:43:32.0 NM: Yeah, no, that's a great question. So definitely this right, there is this... It affects... So I think this variable, whether someone is pretty aggressive, it would affect which start-ups they would merge on as well as it could also be correlated with the characteristics of the venture capitalists as well. So maybe just better right VCs, they are more aggressive at doing that, so we just... So far, we just included controls for VC experience and prior founder experience, but yes, I agree that we should probably take this issue and take it more seriously, right? How this endogenous matching, how we can reach over this result given this endogenous matching. Thank you.

0:44:17.9 KB: Okay, professor, you wanna try again? 

0:44:20.5 Speaker 6: Yes thank you. My name is Yujo, I'm from Eastern Michigan University, I have a quick question. So for those start up companies, are these all successful to go to the public or what stage are they... Second round, one round, something? What are they there? 

0:44:39.3 NM: I'm sorry, could you just clarify a bit? So you're asking for those startups that went public, right? 

0:44:45.1 Speaker 6: Yeah, all these startups, what are the stages, like these companies finished the first round financing, second round, third round or they actually went to public. What are they? I mean...

0:44:58.8 NM: Okay, okay. Yeah. So we track all VC backed startups, so the dynamics... About I would say... We have 7800, so about 270 of startups out of those ultimately did an IPO. For those, we see actually more interesting dynamics so closer to the IPO or the percent of independent directors increases much more, so they're probably adding these independent directors in preparation to being public. But generally we track all of them so one thing you might be concerned about, maybe that's why you're asking, right? Is whether how much life cycle dynamic is potentially affected by survival, right? Those firms that survive. So basically, it's not a factor. So in the paper, we have figures that condition on say surviving to four years, six years, it's pretty much the same dynamics but ultimately we track all of them.

0:45:52.2 S6: Okay, thank you.

0:45:54.4 KB: Jeremy? 

0:45:57.5 Jeremy: Yeah, so this may be another way of asking Jess's question, but I wonder about... To what extent that initial independent director, to what extent is that an affirmative choice to put somebody in place to play a mediating role in anticipation that power will shift from the founder to the VC at some point early in the start-up's life cycle? Or is the independent director put on there for some other reason at the outset, and then just by a function of the economics, you've shown that power will happen to switch and at some point the independent director will just happen to fall into a mediation role? So I guess the question is, is the mediation role driving the independent director's presence or could there be alternative explanations for having an independent director early in the life cycle? 

0:47:00.8 NM: So I think, definitely, I think the advisory role could be another right reason to have them early on, and I think that founder experience that decided that former founders are more likely to be present early on is consistent with advisory role because they are entrepreneurs, experience could contribute their advising needs. I think that definitely that could be happening as well. That said, the only role where advisory... Why... As you mentioned, right? They fall into this mediating role. But I think there are also ways to avoid it, right, so if the goal is not for them to play a tie-breaking vote, to be a mediator, there is a way to avoid them. So we could invite them on the board, if you... There are advisory boards for these private firms. Or we could invite them as board observers without giving them any voting right, or we could just say have two VCs. So there are different ways to arrange the board in a way that these directors still contribute advice but don't actually have this voting power. So I think there are other reasons, but at the same time, it's a little bit puzzling for me if it's only other reasons and not mediation at all, why they are giving them this role, this vote, this tie-breaking vote.

0:48:10.8 Jeremy: I just, going back to my previous comment, I think it'd be really interesting to see, to breaking down the VC directors based on whether they represent one VC or multiple VCs that may have adversarial interests, 'cause that could change how we think about the independent...

0:48:27.9 NM: That's interesting. Yeah, that could mean actually that later on... Because multiple VCs with conflicting interests are more important to later stages. And we are saying later stages with advising, but this could suggest as maybe, in later stages they are also playing these conflict, right. That's interesting, yes, thank you.

0:48:50.1 KB: Alright, well, let's pause there if we will. Can we have a moment and either use your reactions or show your video real quick and acknowledge Professor Malenko for teaching us some new things today.


0:49:01.8 KB: Yay! Thank you. This is her first time with us, and so... Thank you, and I hope that you will come back in the future. I want to do a final promo, if you don't mind, or I'm gonna do it even if you do mind, which is come back next month. Our talk next month will be by Professor Kristin Seefeldt. She is with the Ford School of Public Policy and the School of Social Work. She is one of the co-directors of Poverty Solutions, and her talk is titled Helping Across Generations and Impacts on Retirement and Retirement Planning. So thanks to all of you for being here today, thanks for your support and hope to see you at a future event.

0:49:50.9 Jeremy: Thank you Nadya.

0:49:52.5 NM: Thank you. Thank you for coming and all the questions. Thank you for inviting me Kristie.

0:49:57.7 S?: Thank you.

0:50:00.0 KB: Thank you.

0:50:00.5 JK: Thank you.