Is there value in good governance at the early-stage of a company’s life? It turns out that the answer depends on with whom you speak and on what you mean by “good governance.” We spent two months speaking widely to investors, accelerators, and founders in the startup investment ecosystem in different parts of the world. This was part of an exercise commissioned by the Center for Financial Inclusion to wrap up its multi-year Board Leadership for Impact program by considering governance needs of early-stage companies – ranging from startup to a Series B funding round or equivalent.

Our interviews showed a disconnect in understanding between funders and founders, caused in part because the word “governance” is vague with different connotations. Funders differed in their degree of activism on the issue of governance, but tended to agree on the value of good governance and had a general desire to see certain practices in place over time. This was true whether or not the funder’s strategy or available resources allowed them to be actively involved in investee governance.

However, founders tended to have less positive views of the value of governance at the early-stage. Some founders experienced a low return on their investment of scarce time and money in formalizing their board. The co-founder of African fintech Zoona, Mike Quinn, writes in his recent autobiographical reflection, Failing to Win, that while he spent a lot of time preparing for board meetings, the outcomes of meetings were not focused on the pressing issues he faced as an early-stage CEO. For other founders, governance connoted adding formality and bureaucracy in ways that fettered their discretion and ability to move fast at a stage when there was little time to waste.

This is one of the reasons why the accelerators with which we spoke tend to avoid putting structured emphasis on the issue of governance, and instead, focus on product-market fit and go-to-market strategies. This Silicon Valley “proverb” expresses the prevailing view of many founders that boards bring more risk than they bring value: “Good boards don’t create good companies, but a bad board will kill a company every time.”

While we heard evidence of this disconnect between funders and founders in our interviews, we don’t want to exaggerate its extent: it turns out that founders who are working on their second or later startup are much more likely to recognize the value of paying attention to governance early on, in part because of ‘scars’ from difficulties they experienced in earlier ventures. And there is value in good governance: funders generally supported the view that investors are willing to pay a premium for good governance – certainly by the time of a Series B round. Even at the time of a seed or Series A round, the lack of governance processes is a negative screen for many investors. Founders can capture more investment value by building a governance roadmap that anticipates how their governance structures and practices will evolve as they mature.

Part of the disconnect is generated by different understandings of the term governance. Some definitions emphasize the structure and practices, usually focused on the role played by the board of directors. This tends to be the emphasis of ESG standards designed for and applied primarily to large public companies where the board plays a central role. For startup companies, the board typically becomes the main governing body after an inflection point, usually a seed or Series A funding round in which external investors have at least one board seat. But prior to that point, the locus of governance may well sit outside a formal board and be vested rather in less formal decision-making structures among founders, perhaps assisted by mentors or an advisory board.

It is important to note that an overemphasis on governance structures misses a key point of what happens to a company during a startup journey: not only is a company emerging out of an idea, but it is also accumulating stakeholders other than the founders – including investors, employees, suppliers, government officials, and the society in which it operates – who have legitimate but often competing expectations that their needs and claims on the company will be considered and met.

Good early-stage governance amounts to effective and ethical decision-making processes in the transition from founder-centric to a multi-stakeholder environment. Governance is a progressive process along the startup journey: governance practices evolve as the startup evolves. Smart, agile governance recognizes not only that an evolution towards multi-party decision-making is inevitable but also that it can and should be value adding. The interviews shed light on the importance of reframing early-stage governance more along these lines. And the rationale for doing so is clear: for founders, good governance pays off through better access to capital on better terms; for funders, good governance helps to de-risk a fundamentally risky early-stage investment proposition. This forms the basis of reconnecting the interests of founders and funders.

Reframing early-stage governance is important. Without it, the disconnect between founders and funders may widen. ESG pressures are rising for fund managers, even in alternative asset classes like venture. Without a clear reframing, this pressure may have the unintended consequence of rigidifying early-stage governance so that it is less, not more, effective. That deadweight loss is something society can ill afford at a time when risk capital may become scarcer and when innovation is required as never before to reach the Sustainable Development Goals.

Reframing is also timely because of recent events in the emerging world, which has experienced a flood of VC investments in the past few years. In April 2022, former employees and an investigative journalist surfaced allegations of abuse and misconduct at one of Africa’s fintech unicorns, Flutterwave. If found to be true, these may be attributed in large part to lack of good governance. This one case may be the tip of an iceberg: also in April 2022, Sequoia India published a blog post reporting that some founders in their portfolio were under investigation for potential fraudulent practices or governance lapses. Their lament expresses the reality that some VCs, in their chase to win deals and be “founder-friendly,” have neglected, or at least underemphasized, their governance responsibilities. Sequoia India has committed to double down on improving governance at its early-stage portfolio companies.

We hope that other VCs and impact investors will follow suit. We also hope that the outcome will not just be more procedures or controls, though some of that may well be needed, but rather a smart, agile approach to good governance at the early stage.

David Porteous

Founder and CEO, Integral

David is a seasoned executive and entrepreneur who has founded and led four successful organizations on two different continents. Each one serves a wider purpose of promoting a path to human flourishing in its own niche. In addition to the organizations he has started up, David has been involved in the design, setup, and management of numerous public and private organizations across multiple countries.

Originally trained as an economist with a PhD from Yale University, David has particular domain knowledge in the areas of fintech and development finance, having consulted to financial regulators and providers of digital financial services in many countries in Africa, Asia, and Latin America for twenty-five years. He also has experience in education technology (edtech) through his involvement in online professional education as co-founder and chair of the board of the professional capacity building platform Digital Frontiers. He has completed Certified Professional Coach training approved by the International Coaching Federation.

Sam Parker

Co-Founder, Global Innovation Platform

Sam Parker has held a number of senior management, CEO, and board roles both for companies and non-profits. This includes international companies in the agrochemical and commodity industries and early-stage, impact-focused enterprises in the emerging markets of Africa and South Asia, with a particular focus on water and sanitation, energy, SME finance, and agriculture. In 2014, Sam won a Skoll Foundation Award for Social Entrepreneurship, which recognized his work in building local enterprises serving low-income urban consumers lacking access to water and sanitation. Sam has worked with the boards and senior management of over 150 enterprises and experienced many of the challenges that are commonly faced by high-growth, innovative companies. He has deep experience in coaching entrepreneurs and boards in developing governance that empowers while building clear and compelling business strategies. Sam studied agriculture and forestry at Oxford University.

Marc Herson

Head, Endeavor Harvest Fund

Marc is a Venture Capital (VC) investor, coach, and operator with 20-plus years of experience at startups and organizations like Softbank, Sony, and Hasso Plattner Ventures (VC of SAP founder). He currently heads Endeavor Harvest’s VC Fund and actively invests in startups in Africa and the US. Marc has experience in VC across the globe, having recently set up and managed VC funds for Investec Bank in South Africa and Israel, and anchoring a NY-based fund. Marc was previously COO at 2go Interactive, a mobile messenger, that he helped build to profitability and more than 50 million users, an EIR at Softbank, and SVP at SONY BMG, where he helped orchestrate the global merger of Sony Music and BMG and grew the international digital business to more than $100 million in revenue. He began his career as an attorney and holds an MBA from INSEAD, a graduate certificate in evidence-based coaching, and a certificate in mediation from Harvard Law School. Marc has been a certified executive coach since 2006 and has coached at organizations such as Harvard Business School, Red Bull, Metropolitan Insurance, and numerous startups.

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