Governance needs of start-ups underrated

  • Date:01 Feb 2013
  • Type:Company Director Magazine
Tony Featherstone believes better engagement between entrepreneurs and experienced company directors could help Australia’s start-up ventures grow in scale when they need to.

Surveys show Australian entrepreneurs rank highly in their ability to start ventures. The problem is scaling them into something much larger and growing them sustainably.

The surveys, however, rarely examine how governance and boards can foster high rates of innovation and productivity. A stronger culture of boards in entrepreneurial ventures would fill some missing pieces in our entrepreneurship ecosystem.

That does not mean all start-up ventures need a formal board when they reach sufficient scale. Some can’t afford it and others find little value recruiting directors who, in start-up terms, can’t justify their fees. Nobody wants to bog down nimble start-ups in formal, complex compliance. Debates about entrepreneurship mostly focus on access to capital and tax and government research incentives. They overlook the value of governance and strategic advice from boards and the nexus between capital and governance.

Capital is a critical issue: Australian entrepreneurs find it much harder to raise the same amount of capital as their US peers, and so they scale their venture at a slower pace.

A November 2012 report, Silicon Beach: A Study of the Australian Start-up Ecosystem*, found less than five per cent of Australian start-ups scale up into sustainable global organisations. Led by Deloitte Private, the report compared more than 1000 Australian tech start-ups with 50,000 similar ventures worldwide. It found our start-ups raise far less capital than those in the US when they are ready to grow.

Why? The report listed access to capital, taxing of employment share-option plans, the use of government grants and engagement with the Australian entrepreneurship ecosystem as key issues to address. The report makes an excellent contribution but, like others, it focuses more on the systems than the people.

The human capital part of the entrepreneurship ecosystem is just as important. Building stronger networks and hubs that connect like-minded business builders is vital, as is ensuring there are sufficient mentors for budding entrepreneurs. The next step should be forming stronger links between sophisticated start-up ventures and the Australian governance community.

This already happens to a degree in the listed space. Almost half of all ASX-listed companies are in mining, energy or provide related services. Most are smaller companies. Junior explorers have shown it is possible to have reasonable governance when funds are tight. So have many life-science firms. But this governance mentality is not as pronounced in unlisted ventures. Private equity firms usually form boards around their unlisted investments, although they are typically for larger, established organisations. There is scant local research on how smaller and mid-sized entrepreneurial ventures approach governance and board formation. Much evidence is anecdotal.

I have interviewed many founders of small and mid-cap ventures over the years. A recurring theme is that start-up entrepreneurs use mentors and possibly advisory boards but see formal boards as a step too far, even though many fast-growth unlisted ventures are potentially worth much more than their ASX-listed peers.

That is understandable, but those with big ambitions to scale their venture globally – and use other people’s money to do so – need strong governance systems. They should view boards as an excellent source of strategic advice and networks; not as an inflexible, costly compliance handbrake.

I wonder if part of the success of US start-up entrepreneurship is the nexus between capital and boards. That is, raising much larger amounts of capital in turn necessitates the formation of boards to ensure funds are wisely invested, which in turn helps drive faster growth and sustained success through good governance. Less access to capital could be one reason fewer Australian entrepreneurs form formal boards early in the venture’s journey.

Directors too should think about the merits of adding a fast-growth entrepreneurial venture to their portfolio. These will not suit all directors, such as those with only big-company backgrounds and a career in compliance rather than strategy.

The Federal Government can play a role in connecting start-ups and experienced company directors. Many founders crave high-level advice but cannot afford it. Many directors like the excitement of governing a start-up and the potential equity reward, but understandably want a fair fee for their time. Tax incentives that help start-ups to recruit directors would be a win-win for the venture, directors and Government, through better governance and faster venture growth.

Australia must capitalise on its considerable progress in entrepreneurship. The latest Global Entrepreneurship Monitor report found our entrepreneurship rate is now second only to the US among developed countries. It estimated one in every 10 Australian adults was involved in starting and actively running new businesses in 2011.

A priority must be to help more of these ventures scale into much larger organisations. Strengthening the human capital part of the ecosystem, through better engagement between start-up ventures and experienced company directors, is an overlooked part of the puzzle.

Tony Featherstone is a former managing editor of BRW and Shares magazines