A common perception associated with how tech startups raise funds is that it is purely done on the back of popular products (insert user acquisition slide here) and teams that can execute (insert slide with background logos). While this is a practical approach for certain ventures that really only have just a team and prototype, this is just a small slice of the pool of investable ventures. And say if this product-and-team-only venture is truly worth a long-term investment, there is another necessary P that is critical to evolving and maturing a five-person team working out of a coworking space into a global organization managing billions of dollars worth of business: processes.
The “P” that brings companies to life
These don’t just refer to processes covering a customer journey (sales to aftersales). More importantly, these include processes that even allow a customer journey to exist (e.g., hiring, accounting, legal, etc.) — the back office operations. Altogether, these processes are ideally designed to keep a company running, regardless of who is within the organization itself. In a way, these processes define the organization as its own living, breathing entity.
And the system that ensures these processes are being done legally, efficiently, and consistently top down from the management and the company board is corporate governance (the system by which companies are directed and controlled, as defined by the ICAEW).
The insidious accumulation of “Governance Debt”
In the early stages of a startup, corporate governance is often a matter of the founder’s or management team’s ability to steer their team (less than 50 people in most cases) towards a certain direction, aligned with the mission, vision, and values of the company. At this point in time, adjustments can be quickly made and feedback loops are small. But as the company grows in size and complexity, steering the team in alignment with its mission, vision, and values becomes increasingly difficult. More stakeholders (and therefore compliance/requirements to each of them) are involved.
Decisions made early on in the life of the company, forsaking process for speed and building up “governance debt”, will oftentimes come back to haunt leadership. Of course, some of these tradeoffs are made consciously, with an awareness of the risks and the need to address them eventually, but more often than not the accumulation of “governance debt” is not that apparent. It could be as simple as overlooking bookkeeping assumptions, inconsistencies in the company’s financial documentation, or even management habits that impede an organization’s decision-making abilities over time.
Greater investor focus on corporate governance, but that shouldn’t be the main motivation
In today’s market where there is greater investor scrutiny on profitability, processes, and protections, especially for companies that are well beyond their first product-market fit, in more than one market, holding licenses, or composed of several levels of management, corporate governance is front-and-center in these considerations.
And while issues with corporate governance have been uncovered in venture-backed startups through fundraising due diligence (as they should be), the importance of corporate governance is not just “because the market climate demands it” or “without it, it’s difficult to fundraise.”
As emphasized just a few paragraphs earlier, the organization can’t run effectively beyond a certain scale without corporate governance. It also serves as a way to build trust with the organization and the rest of the world. For example, for retail investors, knowing there is a reputable and trustworthy independent director on a public company’s board, builds trust in potentially investing in that company. Corporate governance requirements are also typically sought after in applications for licenses and other government certifications.
While corporate governance is executed and handled primarily by the company’s board of directors (the formation of which over time is a topic on its own), the corporate governance issues boards have to deal with often stem from beyond the board of directors itself.
7 ways to develop a company’s corporate governance muscle from day one through growth
In this article are seven key learnings on how to build a company’s corporate governance muscle and reduce “governance debt” early on in the life of the company, perhaps when it may not seem as much of a priority compared to finding product-market fit or raising money to keep things afloat for the next 18 months and beyond. But it is clear that all these things — people, product, fundraising — are all related, and without processes, are ultimately a house of cards waiting to fall.
- A robust finance function starts with the books. Sure, you need a finance function. But it’s important to know first what “being in charge of finance” means to the company and align the finance function development with this evolving definition. Early on, more than focusing on revenue and growth, being in charge of finance is more about having solid bookkeeping foundations. Do you have competent bookkeeping capabilities/bookkeepers? Are you unknowingly making accounting assumptions? Rather than speed, bookkeeping should be optimized for the organization. Then when it comes to growing the finance function over time, it is important to identify how the tasks are evolving vis-a-vis what the organization needs — do they demand investing in world-class talent? Are there audit tasks that can be outsourced? The ideal situation is one where you are able to bring in a finance professional early on to set the standards — a great example in this regard is Alibaba’s Joe Tsai, who was there from the beginning.
- Governance lives and dies on data and reporting. Beyond bookkeeping and cash management owned by the finance function, it is important for the company to also build up a way to organize the ownership and communication of operating data and metrics across the business. For example, Slack used its own product, integrating bots to shoot real-time data into channels as they were needed. Every company will organize that differently but it’s important to figure out how real-time data can be made available to make decisions at all levels — where does each type of data come from? How is it delivered? Tools and processes are one thing here, but it’s also important to have trust in the people tasked with their data ownership.
- Create greater risk visibility through tighter and more nimble feedback loops. When it comes to reporting channels for data communication (typically bottom-up) and decision-making (typically top-down), there’s a tendency for these to naturally become bureaucratic over time. Some organizations may decide to actually break up their business into smaller units to create faster feedback loops. Regardless of the method, the idea is to have more efficient feedback loops. This not only helps with execution but also creates visibility from the management level, to reduce the risk of issues before it is too late to address internally.
- Manage reporting functions not as singular requirements or events, but as a continuous process to reduce the burden on finance teams. The demands of reporting periods (e.g., financial audits, fundraising, budgeting) on finance teams are rigorous, and there is pressure to move quickly while at the same time not dropping the ball on any detail. From a management perspective, it’s important not to forsake accuracy for speed and think about reporting not just as an “event” or “exercise” that needs to be achieved at certain points in the company’s calendar, but as part of a larger, continuous process of data collection and documentation that occurs beyond reporting periods. Doing it fast is great, but the price of mistakes cannot be traded for speed.
- Retain problem-solving “scrappiness” to mature financial discipline. As the company grows, it would naturally have a higher volume of cash flow to manage (the health of this cash flow is another matter entirely), and having more money to manage naturally increases the temptation to just throw money at problems. A way companies have been able to stay disciplined in terms of spending is to “remain scrappy” in terms of their problem-solving mindset. This sounds counterintuitive to maturing a company’s governance, but creativity in problem-solving as it relates to reducing burn ultimately makes an organization more mature in the way it handles money.
- Have “boards” and “watchmen” beyond the board of directors to diversify risk mitigation and governance capabilities. As the company grows, there are more sources of risk, and it can become increasingly challenging for a single group of people (board of directors) to exercise checks and balances. Companies nearing public markets debuts will often introduce sub-boards as working groups to deal with the robustness of internal controls, create enterprise or operational waste management frameworks, serve as advisory boards for a specific market, or even facilitate succession planning. For example, in the case of the Alibaba partnership, a working group outside of the board of directors ensures the health of the organization’s mission, vision, and values through its leadership appointments. Apart from working groups within the organization, companies will also engage with external auditors as they raise growth-stage rounds not just to qualify audited financial statements but also to do health checks on their organization. The ideal scenario is to leverage both internal and external “watchmen” to have more holistic visibility over potential risks. From the board of directors itself, risk mitigation is often done over time by building up the diversity of a board, and engaging with experts across the various needs of the company.
- Governance is shaped by cyclical development and alignment on vision, mission, and values, which are themselves first shaped by the company’s founders. The growth of a company, while often portrayed as linear — e.g., raising seed to Series D, going from one product-market fit to the next, one market to regional to global expansion — is more accurately cyclical. A company will be forced to reckon with itself in the face of existential challenges and milestones (e.g., the arrival of a competitor, debuting on the public markets, new technologies, and market recessions). The ability of a company to navigate these cycles is founded on the alignment of its organization to the company’s vision, mission, and values, much of which is influenced heavily by the way the founders and the initial management team started the company. As an early-stage investor, this makes evaluating the “people” factor much more important with respect to developing processes and therefore governance. There’s the story of the early-stage founders who chose to ride the bus home from their coworking space rather than take a taxi to save on costs. This kind of mindset matters in the long run, say when they have exercised cost-cutting measures for a multinational organization in the hundreds. Then when the company matures, the continued alignment and development of these pillars falls on the shoulders of the CEO. One can only take a snapshot of a publicly traded company that has been around for the past half-century and see how CEO changes have impacted the company’s perceived value, and that is but one indicator of the top-down and cyclical nature of governance.
Related resource: Check out our call with Alibaba Global initiatives founder and longtime Alibaba Group exec Brian Wong who talks about learnings on governance and more from his tenure at the global tech giant
Governance as a cyclical battle against chaos
While not an exhaustive list of practices, this list is built on three ideas about governance. The first is that governance is often shaped by behaviors and decisions from day one — the decision on what assumptions to use when measuring product-market fit, the decision on whether to start spending more on a specific vendor or not and the decision on how data is reported to management.
The second is that governance is centered on de-risking an organization as it grows. It is a battle against natural tendencies toward chaos (entropy as it is called in physics). This means that governance should be optimized to have visibility on these risks (e.g., audits, data collection, and reporting) and the capability to address these risks (e.g., diverse board of directors, solid mission, vision, and values).
The third is that, again, company growth is cyclical. Putting systems in place will not stop the emergence of risks and issues. Having one audited financial statement is not the end. Companies already practice the items we have listed above and more, and yet these do not ensure 100% protection against crises. In governance, the process and its continued practice matter more than any specific ends or results.
Paulo Joquiño is a writer and content producer for tech companies, and co-author of the book Navigating ASEANnovation. He is currently Editor of Insignia Business Review, the official publication of Insignia Ventures Partners, and senior content strategist for the venture capital firm, where he started right after graduation. As a university student, he took up multiple work opportunities in content and marketing for startups in Asia. These included interning as an associate at G3 Partners, a Seoul-based marketing agency for tech startups, running tech community engagements at coworking space and business community, ASPACE Philippines, and interning at workspace marketplace FlySpaces. He graduated with a BS Management Engineering at Ateneo de Manila University in 2019.