Expert view on start-ups and boards

Friday, 15 March 2019


    Company directors and entrepreneurship experts call for stronger links between emerging ventures and governance community.

    John Barrington AM FAICD, has an unusual mix of board experience. He advises corporates through his strategy consulting practice, chairs the Curtin University School of Management and the Perth International Arts Festival in the not-for-profit sector, and has founded two start-ups and chaired another.

    His latest venture is Artrya, an artificial-intelligence start-up that is launching this year to develop AI in medical imaging and assist radiologists and cardiologists in the diagnosis of coronary heart disease. Barrington, the venture’s Executive Chairman, is already planning the board with Artrya co-founder and CEO John Konstantopoulos.

    “Start-ups should form a board as soon as possible,” Barrington says. “The board must be fit-for-purpose: you don’t want to weigh down a start-up with a large, compliance-focused board. But there are significant benefits in implementing board structures earlier in the journey.”

    Barrington believes start-up founders need to think with the end in mind. “At some point, the organisation will need a Board of Directors as it raises capital and grows. It’s better to get a proper board in place sooner rather than later to help set the organisation’s tone and values from the top and develop strong foundations on which to scale the venture.”

    Like others interviewed on start-ups and boards, Barrington believes directors of emerging ventures need entrepreneurship skills and experience. “The board’s focus must be on performance rather than conformance. Compliance is important, but the start-up board should be focused on strategy, be more hands-on and use its network to open doors.”

    Barrington says start-up founders have much to gain from accessing skills of experienced directors. Equally, directors can benefit professionally and personally from governing high-growth ventures that innovate and disrupt markets with new technology. Some emerging directors view start-ups as a way to gain governance experience.

    “There’s a real opportunity to connect start-ups and the governance community,” says Barrington. “There are a lot of entrepreneurs who want to leverage the skills of experienced directors who suit start-ups, and I suspect many directors who would be interested in joining the board of a disruptive start-up.”

    This is a timely issue for the governance community. Australia’s entrepreneurship ecosystem is growing rapidly as more capital flows into the sector.

    Australia’s level of entrepreneurship activity is the highest of all developed economies, according to the 2016 Global Entrepreneurship Monitor (GEM), an international benchmarking study that compares the rate of total early-stage entrepreneurship activity across countries. Australia had an estimated 2.2 million early-stage entrepreneurs that year.

    Care is needed with GEM’s headline findings for its methodology captures small businesses, many of which are not rapidly trying to scale their operation. But Australia’s entrepreneurship ecosystem is growing rapidly. Sydney, for example, is considered to have the largest technology start-up ecosystem in the Southern Hemisphere.

    “Australia is experiencing very story growth in incubators, accelerators, co-working spaces and university courses for entrepreneurs,” says Dr Alex Maritz, Professor of Entrepreneurship at La Trobe Business School in Melbourne. “We now have one of the fastest-growing entrepreneurship ecosystems in the world, albeit off a lower base compared to the US, the UK, Germany and The Netherlands, which have well-established networks in this area. Much of this start-up growth in Australia has happened in the last five years.”

    Dr Maritz has studied international entrepreneurship ecosystems and believes other advanced economies do a better job of linking start-ups with experienced company directors. “In fairness, Australia’s entrepreneurship ecosystem is in its infancy compared to a market such as the US, which has a long history of linking directors and investors with emerging ventures. But we could do a lot more to build connections between start-ups and the governance community.”

    I’m sceptical about the value of a board flying to Silicon Valley to attend an organised innovation tour. There’s more value to be had forming relationships with local entrepreneurs in the firm’s industry.

    Industry disruption has also made start-up governance a timely issue. Several ASX 200 company boards have visited innovation clusters in Silicon Valley and Israel, for example, to learn from entrepreneurs who are disrupting markets. Other boards have arranged presentations from technology experts and entrepreneurs to keep abreast of latest industry change.

    Maritz believe greater collaboration between Australian start-ups and boards would help directors better understand disruption in their industry. “I’m sceptical about the value of a board flying to Silicon Valley to attend an organised innovation tour. There’s more value to be had forming relationships with local entrepreneurs in the firm’s industry.”

    The need for higher rates of corporate entrepreneurship – large companies thinking and acting like start-ups in parts of their operations – further adds to the case for links between start-ups and boards in Australia. “If corporates want to think more like entrepreneurs, they need greater exposure to people who are challenging current assumptions and practices in their industry,” says Maritz.

    Part of the problem is a lack of awareness among start-up companies of the benefits of boards. “A lot of start-ups don’t understand what stage of growth they are in, or their founders don’t want to share their ideas with a board, or deal with directors,” says Maritz. “They don’t know when it’s time to form a board and gain new knowledge from external sources.”

    Maritz says start-ups should form a Board of Directors when they become a “threshold business” that has an established product or service and market, and is growing quickly. “It’s at this point that the start-up needs to think more about corporate entrepreneurship; that is, how it builds the structures and processes of a larger business, to support its growth. Boards can add great value at this stage, provided their directors have skills suited to start-ups.”

    Successful entrepreneurs know when it is time to gain knowledge from other sources, to exploit new opportunities – a process Maritz describes as “absorptive capacity”.

    “Some entrepreneurs at the start guard their ideas or are not interested in the views of people outside the business. But as the organisation grows, they realise they lack skills in certain areas and need to quickly bring them into the business through an Advisory Board or Board of Directors.”

    Finding directors who can add value to start-ups is not easy, says Maritz. “Start-ups are faced with the ‘Liability of Newness’. They are doing something new and often learning as they go. Many professional company directors are skilled at governing established organisations in established markets; they are not used to governing ventures still discovering their market.”

    Linking directors to the entrepreneurship ecosystem

    Trent Bagnall, founder of Slingshot Accelerator, a leading provider of corporate innovation programs, agrees there is a lack of awareness in the start-up community about boards.

    “Generally, the founding directors of a start-up have limited to no governance experience. And in the early part of the start-up maturity, a professional board is not needed because the biggest risk in the business is not governance but, simply, building something a customer wants. Most start-ups are hovering around the question of insolvency, so it doesn’t make sense for a non-founding director to join when the business is pre-revenue or at a very early revenue stage.”

    Slingshot encourages start-ups in its portfolio to form an Advisory Board consisting of mentors, early investors or people with knowledge of the industry. “Often Advisory Board members have a lower governance skill set and it can be a good opportunity for potential directors to gain some experience while they are building up their own capability. “

    He says start-ups should form a Board of Directors when they have a product or service in their market, are growing quickly and have secured funding at a large seed capital or Series A round. “At that point, a good board is critical to scaling the company, formulating strategy and avoiding common compliance potholes,” says Bagnall.

    Slingshot educates its start-up members on governance. “We cover the basics around director duties, compliance, good governance, board processes and make-up. We also put significant time into (director duties around) trading while insolvent. Most start-up programs don’t cover these topics and there are a lot of recent examples of bad governance in start-ups, including even those that have had Initial Public Offerings. As soon as a start-up receives adequate funding, we also recommend that all the founding directors do the AICD Company Directors course and use the AICD website as a key resource.”

    Forming a Board of Directors early helps the start-up develop structure and consistency, says Bagnall. “The main thing is to get new company boards into a consistent rhythm of meetings and ensuring they have a good reporting process in place early, and then build on that as the business grows, strategy changes and new members join. Start-ups must at least cover the basics and can then incrementally build on their company governance as the business grows.”

    Finding the right governance balance

    Murray Hurps, Director of Entrepreneurship at the University of Technology Sydney, is on the board of several organisations and is a former CEO of Fishburners, a not-for-profit and provider of co-working spaces for start-up ventures. He believes a lack of governance benefits start-ups in the early stage of their development.

    “A start-up’s number one asset is that it is a blank canvas,” says Hurps. “The founders can design a business that makes perfect sense for the problem they are trying to solve. A lack of structure helps the start-up experiment, take risks and discover new markets.”

    Hurps says startup CEOs would often benefit from applying some simple reporting routines “I’ve seen startups prepare board packs with their cashflow forecast, P&L and a quick CEO update, even when they have no board, and the discipline is a very helpful way of keeping themselves aware and prepared for more structure at a later date”

    Hurps says large companies have much to gain by working with start-ups. “Australian corporates, generally, are not doing a good job of engaging with Australia’s start-up ecosystem. They are not sufficiently sharing the challenges they face with start-ups that are potentially better placed to solve the problem. Their processes are not designed to collaborate with riskier, new ventures.”

    A 2018 report by start-up Muster, a key researcher on start-up attitudes (Hurps is its founder and chair), found 59 per cent of 461 Australian start-ups surveyed would not recommend any large companies they had as a customer. “Australian organisations in the public, private and not-for-profit sectors are not tapping into the solutions being developed by start-ups,” says Hurps.

    The survey also implied that large Australian companies are not transforming fast enough to incorporate opportunities presented by start-ups; have low awareness of the benefits of start-ups in solving corporate problems; and poor links with start-up communities.

    Hurps says better linkages between boards and start-ups are a place to start. “We need experienced board members talking to start-ups, learning from them and helping them. And more entrepreneurs on boards of large companies that want to disrupt their market or compete with competitors trying to do the same.”

    Hurps adds: “I don’t understand why boards of Australian corporates visit Silicon Valley or Israel in a staged form of ‘innovation tourism’ when there is so much happening in start-ups in their own backyard. And so many talented local entrepreneurs who would be eager to work with these corporates.”

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