A startup governance journey – how to develop a phased governance framework for Venture Capital startups
How can investors assist founders in establishing adequate governance measures based on a startup’s stage and risk profile? This is an important question given that strong governance standards are critical to the success of fast-growing startups. Good governance enhances business performance through better decision-making and alignment, makes startups more attractive to investors and, ultimately, helps to manage risks. These risks can include fraud and regulatory non-compliance that can undermine commercial performance, impact outcomes and reputation, and even result in failure.
Investors, including venture capital fund managers, have a key responsibility to help founders develop a governance framework. The framework should be tailored to the nature of startups and evolve as the company grows in size and complexity. Founders should start building governance early and proactively, but also in a way that is proportionate to the stage and risk profile of their company to maximise value.
This Guidance Note is the second in a series three to share actionable advice – including easy-to-use tools and case studies – on ensuring good governance in startups, particularly in emerging market contexts.
The note focuses on how to identify governance gaps or business milestones that trigger the need for additional controls, and how to proactively address governance red flags and risks through adequate controls (see first note for more context on the latter).
Strong governance framework focus on four key elements: Decision-Making, Finance and Reporting, People and Culture and Risk and Compliance. To address startups’ needs and specifics, it’s important that such frameworks are developed in a way that is:
- Phased: evolving as the company grows over time
- Proportionate: varying in intensity and nature based the on the stage and size of the company and the risks to which it is exposed
- Adaptive: changes based on learnings and feedback about risks and priorities.
This note builds on a first note published in November 2023, on how to identify and proactively manage governance risks. A third note will be published later in 2024, focusing on how investors can continue shaping and monitoring governance when their shareholding and related rights are diluted.
This guidance note series was jointly supported by British International Investment and FMO, the Dutch Development Bank.