Why corporate governance matters now more than ever for startups

In a startup, the lines between ownership and management of a business are often blurred, with the only stakeholders being the founders themselves at the beginning. It’s only when companies start to raise funding from outside investors do they begin operating with broader governance. 

However, in the current climate, it is more important than ever for corporate governance to be part of a startup’s company culture as early on as possible. Corporate governance can be a dry topic, but with more and more cautionary tales emerging from around the world, startups in Latin America will benefit from implementing basic guidelines of governance. Good corporate governance not only helps founders achieve their goals and build trust with investors, but  can also help point founders in the right direction during uncertain times. 

From my experience as a startup investor and advisor, I’ve noticed many startups in Latin America already have good corporate governance practices in place. One reason is that many investors in Latin America require a formal board to be established when they make an investment, regardless of the stage. But many founders in Latin America think about corporate governance early on in their startup’s life cycle, even before raising outside funding. This is a key difference between how startups in Latin America and the US implement corporate governance. 

In the US, early discussions about establishing formal boards are rare – even throughout the seed stages. Rapid growth often dominates founders’ focus, while proper decision-making processes take a back seat. Both Facebook and Google went public with serious governance red flags, while many claimed these issues come with the territory of founder-led entities. Now we are witnessing the results of murky corporate governance play out more frequently among even the most high-profile startups. Just take a look at the recent WeWork situation

In Latin America, it’s common for startups to face scarcity of capital and economic uncertainty, therefore, many founders are accustomed to devising plans to face economic hurdles long before they happen. I believe good corporate governance has many advantages for startups, especially in Latin America, at both the outset of their ventures and during challenging moments like the one we are currently facing now.

Helps startups during difficult economic times

During a crisis, founders need to make decisions quickly. If there needs to be a pivot or a difficult decision needs to be made, it can be challenging to align investor expectations without reliable governance processes in place. This is why having an advisory board is so key. A strong board can provide startups with an outside perspective and help them make hard decisions. The board can provide frameworks for contingency plans (like this example) as well as insights on what else is going on in the world, region, or with other companies. 

An advisory board acts as a space where everyone can get together to think quickly and strategically about the startup’s future. Startups can start small if needed, with a core advisory committee, and should let shareholders know that this group is going to be helping them make strategic decisions. Founders that set up this structure, even if informally, benefit by having access to a broad perspective all while maintaining focus on the day-to-day operations (and keeping customers happy). 

During a crisis, startups are going to be contacted frequently by shareholders, or investors. Having governance processes in place can help standardize responses and reduce the time needed to speak with each investor individually. 

Provides peace of mind to more traditional investors

Having a well thought out approach to the responsibilities and accountability of shareholders, board members, and the founders of a company can help promote investor confidence – especially in a region where investors tend to be more risk-averse. Corruption and lack of institutional trust remain major hurdles in the Latin American business world, and advisory boards can provide peace of mind to startup investors who may come from traditional business backgrounds. 

Having solid governance principles in place helps more traditional investors get a sense of how the startup will make strategic decisions, especially during a crisis when many decisions related to internal control or company financials are being made. While formal board meetings or conference calls with investors may take place on a monthly or quarterly basis when things are normal, startups should consider increasing the frequency of internal updates (for example, to a weekly basis) to maximize efficiency and minimize any concerns. When in doubt, startups should err on the side of over communicating to shareholders.

The current crisis is bringing the importance of startup corporate governance into the spotlight. The good news is that many startups in Latin America have already implemented governance structures at various levels, depending on their stage of maturity and funding. While corporate governance priorities can evolve and change over a startup’s life cycle, startups that put basic policies and structure in place are well-positioned to navigate these difficult times. 

Greg Mitchell is the Regional Director of Angel Ventures, an early stage investor in Latin America, and creator of the blog Ruta Startup. Greg supports the startup ecosystem in Peru through his roles as Director of the Peruvian Association of Seed and Ventures Capital (PECAP) and Mentor at Endeavor.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

You May Also Like