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Governance and the need for startups to think like publicly traded companies

Published on November 26, 2022

If you’re reading this, welcome to the unpredictable world of startups. Whether you’re just getting started in the garage or riding high on a well-funded ‘soonicorn,’ navigating this world can be tricky with a
90% failure rate, especially for the under-prepared. 

There are myriad reasons why startups fail. Some include cashflow problems, a lack of working capital, failure to achieve product-market, poor planning, and ineffective marketing, just to name a few.

While we often discuss the pros of a startup structure (smaller teams, faster decisions, flexible operations, etc), I think there are some essential lessons that startups can learn from their larger, publicly-traded counterparts, namely in the context of corporate governance.

In the wake of the recent FTX collapse and with Elizabeth Holmes now sentenced to more than 11 years in prison, this is a timely topic.

What goes up can come down

Formally, corporate governance is a set of rules, practices, and processes within companies that serve to direct and manage it. 

A board of directors is one of the key mechanisms that influence a startup’s corporate governance. The board (most often comprising a startup’s early shareholders) ensures that founders and company managers adhere to basic principles.

These principles are tied to financial accountability, operational transparency, fairness, social responsibility, risk management, and more. The very existence of a board in the early days of a tech startup’s life is a positive sign, though not always a guarantee of good behavior. 

Over the past few years, the spectacular scandals in Silicon Valley have enthralled founders, investors, and even casual observers. They especially get spicy when it comes to high-profile falls from grace (think WeWork, Theranos, etc). Worryingly, though not surprisingly, it would seem that we’re starting to see the same thing arising in Southeast Asia.

O-Bike, Zilingo, and just recently FTX, are a few examples that come to mind – with the latter making dramatic waves in the global startup ecosystem. In the case of Zilingo, problems such as the lack of financial transparency, management issues, and even financial misconduct were rapidly exposed. Once bullish investors and evangelists were suddenly shy.  

But one of the most prominent cases of the last five years was that of the former darling of Southeast Asia’s startup scene HonestBee. If you’ll indulge me, I want to take a quick stroll down memory lane before offering advice. 

The (dis)HonestBee story

HonestBee, a Singaporean online grocery company launched in 2015, looked like it was on the right track – rapid growth, a lack of real competitors, and market dominance.

But unbeknownst to many, the firm was on a path to destruction, fraught with bad leadership and poor corporate governance.

Under the financially opaque helm of former CEO Joel Sng, HonestBee spent extravagantly, despite lacking an appropriate runway of capital, just so it could keep up an image for potential investors. 

Sng was also accused of creating a culture that “chased away good employees and stifled dissent”. Blurred processes also allowed Sng to commit a variety of governance offenses, including breaching an investment contract and fiduciary duties to HonestBee, and using company funds to purchase personal assets. 

Aside from that, it suffered from a lack of focus and direction, and chased expansion too quickly, leaving the company little time to establish its foothold in its original market and segments. The company dissolved in July 2020. 

Making tough calls

Venture capitalists need to stop overhyping founders and instead focus on building institutions. Fast-paced though it may seem, this sector is a marathon, not a sprint. Optics are important, yes, but stability and sustainability are far more critical. 

Here’s some advice to help young tech companies avoid becoming the next cautionary tale.

For fast-growing startups, overseers should be more discerning about evaluating and tracking the unit economics of the business. Ask: Is this startup effectively acquiring and keeping customers? Is our ambition keeping pace with profits? Do the numbers look realistic?

Avoiding or postponing ‘hard’ decisions such as layoffs or cutting off non-performing aspects of the business can drag losses on longer than needed. Making tough calls sooner rather than later can help stave off bigger problems in the long run.

Problems in management, finances, business trajectory, and staff outlook can clue boards into how smoothly things are running operations side. Give space for a diversity of views, especially dissenting ones (without prejudice), to drive better decision-making at the structural and organizational levels. The presence of dissent may be an effective indicator of possible responsibility or accountability issues, too.

On financial hygiene

Startups can stand to benefit from more formal corporate governance structures, such as those seen in publicly-traded companies.

The transparent way publicly-traded companies are structured fosters better accountability in how decisions are made and how money is spent. 

For publicly listed companies in the US, the Securities Exchange and Commission (SEC) regulates financial reporting, which helps stock markets such as the NYSE responsibly inform investors’ decision-making. The SEC often spots and reports financial crimes and misconduct, thus keeping the market’s overall hygiene relatively respectable and safe. 

Investors prefer as much certainty as possible, so the clarity of public financial filings becomes important. For example, when choosing between two similarly-performing companies, investors are more likely to gravitate toward the one reporting with higher transparency and simplicity (as complex financial reports may sometimes be a screen to hide bad numbers). 

Becoming sexy to risk-averse investors

Sadly, this level of scrutiny doesn’t seem to apply to tech startups today, culturally speaking. But I think it should. Early-stage investing is already synonymous with high-risk poker, so mimicking the financial practices of publicly-traded companies will make your company far more attractive to private investors.

As boards are more independent in publicly-traded companies (and financial information is literally an open book for them) adding at least one non-shareholder to your board can change the dynamics entirely. 

Independent board members can offer unbiased advice, act as an objective voice, and serve as a check against irrational decision-making. Startups in Southeast Asia would do well to start adding non-shareholders to their boards. 

Further, those that can install strong internal audit teams that report to the CEO and independent board members alike will be able to display best ESG practices. This, in turn, will make early-stage companies seen by public investors as ready for the next stages of growth. These elements are no longer nice-to-haves but must-haves. 

Opting to function privately has its risks. As with the cases mentioned above, hazy management practices can lead to severe repercussions arising from abuse and unchecked power. 

Failures within a startup’s corporate governance structure can result in disaster – undermining operations, destabilizing positive perceptions, and affecting its valuation. 

For later-stage founders and their investors, real returns will come in the form of an IPO anyhow (or at least a thorough M&A due diligence process). So to set your company up for success tomorrow, I advise startups to think and act today as if your company has already gone public. 

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