Henri Eliot: Do young companies need a board of directors to grow?
11:19 AM Friday Apr 28, 2017
Problems can rise in scaling start-ups into a larger sustainable company. Photo / 123RF
Surveys show New Zealand entrepreneurs rank highly in their ability to start ventures. Problems arise in scaling them into a larger sustainable company.
These surveys, however, rarely examine how governance and boards can simultaneously foster high rates of innovation and productivity. A stronger culture of boards in entrepreneurial ventures would fill some missing pieces in our entrepreneurship ecosystem.
This does not mean that all start-ups will need a formal board when they reach sufficient scale. For example, a board is simply not affordable for some small companies, while 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: New Zealand 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.
The human capital part of the entrepreneurship ecosystem is 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 New Zealand governance community.
Private equity firms usually form boards around their private company investments, although they are typically for larger, established organisations. There is very little New Zealand research on how smaller and mid-sized entrepreneurial start-ups approach governance and board formation. Much evidence is anecdotal.
Personally, I have worked with many founders of small and medium sized start-ups over the years. A recurring theme is that entrepreneurs use mentors and possibly advisory boards but see formal boards as a step too far.
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 New Zealand entrepreneurs form formal boards early in the venture’s journey.
Strengthening the human capital part of the ecosystem, through better engagement between start-up ventures and experienced company directors, is often overlooked as part of the entrepreneurship ecosystem.
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.
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.
A priority must be to help more of these young companies 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 often overlooked as part of the entrepreneurship ecosystem.