Effective Governance: A Key Success Factor for Start-Ups

This articles includes material drawn from the author’s forthcoming book Founder’s Guide to Governance.

A recent survey of start-ups identified that the most common source of failure was an inability to raise sufficient cash to develop the venture,^[1] which is a signal that investors have significant concerns about the founding team. In reflecting on why entrepreneurs have difficulty attracted financing, Jim Gibson, a Calgary-based serial technology entrepreneur and angel investor noted “The current model of venture and institutional investing is that we get way more demand than we have supply. And we’re looking for a reason to say no. Governance is absolutely the easiest one to say no to, and I've seen it time and time again.” This perspective is reinforced by Brad Pierce, a lawyer with extensive experience working with early-stage corporations and venture capitalists, who reflected “I think the primary reason that many entrepreneurs fail, or their corporation just fizzles out, is that they do not develop the structures or the networks that are key for their success, in terms of the ability to raise further funding and allow them to scale their businesses.”

In my former role as the Site Lead and Academic Director of the Creative Destruction Lab Rockies (CDL-Rockies) program, I observed how founders who had a strong appreciation of governance and its importance to investors were significantly more likely to attract mentor, and potentially investor, support. In a recent empirical study using CDL-Rockies data from the first three years of the program I discovered that founders who focused on resolving product/market fit issues had just over a 70% chance of attracting mentor support, while founders who also focused on developing effective governance and outlining a credible plan for raising financing had an almost 95% chance of receiving that critical support.

In the private equity realm, governance is a broad concept that begins with the manner in which the corporation structures its decision-making processes and how stakeholders gain comfort that there are effective oversight mechanisms being put into place. One key difference from public market governance is that outside investors such as angels and venture capitalists (VCs) have the ability to negotiate directly with the corporate board to mitigate their investment risk through the choice of the security in which they invest and through the development of contracts that provide those investors with additional protections. This is a highly specialized form of governance and gaining an understanding of these issues is very important when founders are seeking financing. Founders who are unwilling to accept these investor-imposed constraints will limit their ability to raise capital, while founders who agree to unreasonable investor demands will find it much more difficult to raise their next round of financing.

Canadian founders are some of the most technically proficient individuals in the world, however, on average, their understanding of what it takes to build a successful world-scale corporation is limited. For the past two years, I have focused on providing private equity governance training to founders from across Canada. In this task, I have been guided by academic principles and have been strongly supported by angel and VC investors who have shared their time and insights to help raise the bar of excellence within Canadian start-ups. The knowledge that these investors have shared is not a secret, but many founders have limited experience and do not know where to seek the required information. Those founders who do take the time to learn and understand how to develop a governance structure that is stage appropriate and that reflects a willingness to seek and consider external perspectives will find their path to success will be much smoother.

If you would like to learn more about private equity governance, as either a founder or a potential director, register for the upcoming Private Equity Governance program. This unique program brings together entrepreneurs and high potential ventures from across a broad spectrum of industries with seasoned advisors who have governance expertise and entrepreneurial experience. This pairing ensures a mutually beneficial learning experience and long-term relationships that can support the ultimate success of start-ups.

^{[1] https://www.cbinsights.com/research/report/startup-failure-reasons-top/}