Innovation governance expert John Martin MAICD refers to the Steve Martin movie Parenthood when asked about the challenges of chairing emerging tech ventures.
In a memorable scene, the grandmother character talks about her love of rollercoasters and how some people prefer merry-go-rounds that do not have the same ups and downs – an analogy Martin uses to explain board composition in emerging ventures.
“The top issue by far in innovation governance for emerging tech companies is who you choose as directors,” says Martin. “Some directors do not have the stomach – or the skills and network – for companies that, by their nature, have higher risk and can be a wild ride at times. Such directors are better off governing established companies that have more stable growth paths and easier to understand products and services.”
Martin has been a director of emerging tech companies for more than two decades. He recently retired as CEO of Regeneus, an ASX-listed regenerative-medicine company after also serving as Executive Chairman, and serves on the boards of listed investment company Concentrated Leaders Fund, Sparke Helmore Lawyers, Ai Media and private tech ventures here and in California.
“Know what you are getting into because this type of governance can quickly take directors out of their comfort zone.”
The former corporate lawyer says he has seen experienced company directors regret their decision to govern small tech firms. “I recall a chairman who mostly had large ASX listed company experience tell me he was uncomfortable leading a board of a small newly ASX-listed R&D biotech firm that ran at a loss and was already thinking about its next capital raising. He found it stressful and worried about perceived reputational risks involved. He did not stay long after the IPO.”
Martin cautions directors against joining boards of emerging tech firms because they see them as a path to larger boards or a way to gain innovation experience. “When things don't go to plan or market expectations are not met, the firm’s directors can come under intense pressure. Know what you are getting into because this type of governance can quickly take directors out of their comfort zone.”
Martin’s advice is timely. Listings of information technology (IT) and financial technology (fintech) companies have leapt in the past five years as ASX attracts local and international tech firms. There were more than 200 tech listings in August 2019, from 130 in June 2015, according to ASX.
Capital is pouring into private tech companies as investors seek higher returns. The IT sector contributed almost a fifth of all private-equity-backed buyout deals here in 2018, according to the latest Australian Investment Council Yearbook.
Strong innovation momentum is also evident in the research sector as more universities form innovation precincts and lift collaboration with industry. Co-operative Research Centres (CRCs) and other collaborative structures also require directors with innovation experience.
The upshot is more boards being formed for emerging ventures in IT, fintech, biotech or clean technology – and rising demand for directors who can govern innovative ventures that have higher potential rewards and risks and require different board skills.
Martin says directors must understand the speed of emerging tech companies. “In biotech, the Australian market typically lets small companies raise enough capital to last 24 months. You are racing against the clock from day one. If the company does not hit its targeted milestones, the market can mark the company down savagely. Some biotechs live from one capital raising to the next, putting their board under significant pressure and making directors nervous.”
Boards of emerging ventures must be able to validate the innovation’s potential, says Martin. “You don’t have to be a scientific expert to serve on the board of a biotech company. But you need to know how to look for ‘status elevations’ with innovations – are there prominent and respected scientists involved in the technology and do they have any experience in commercialisation? What data, published research and IP underpins the technology? What is the quality, experience and skills of management and the other directors on the board? What is the calibre of rival companies in the space and is this area of interest for larger potential licensees or partners? Who is staking their reputation in this innovation and who has skin in the game? What journals are publishing the research?”
Directors must have a clear understanding of the market opportunity and the costs, timing of the technology's development path, the “pivot points” for value creation, and the opportunities for commercial exits, says Martin. "It takes an average of 12 years for an experimental drug to make it to market and only five in 5,000 such drugs that enter preclinical testing progress to human testing. Only 20 per cent of those drugs get approval.”
Martin adds: “Directors must be prepared for high failure rates in the biotech sector and the rollercoaster ride that inevitably comes with that. Typically, boards of emerging companies are smaller, so when the big pressure moments arrive, directors need to be clear on the value proposition of the technology and how to secure that value for shareholders, rather than just rely on the group view.”
Working with entrepreneurial founders
Katherine Woodthorpe AO FAICD says prospective directors of emerging tech ventures need to understand the relationship between the board and founder – and how that influences innovation governance.
Dr Woodthorpe is one of Australia’s leading directors in the innovation and technology space, having governed many listed and unlisted emerging ventures, across sectors. She chairs the Bushfire and Natural Hazards Co-Operative Research Centre (CRC), HEARing CRC, National Climate Science Advisory Committee, co-working space Fishburners, and is a member of the National Health and Medical Research Council (NHMRC).
“Founders of innovative ventures often have a big personality, enormous self-belief and an overwhelming sense of ownership of the idea and the organisation,” says Woodthorpe. “Those traits helped them get their idea off the ground and can be a great strength. But they can also cause a constant struggle with the board. Some founders only form a board because they have to, take as little notice of it as possible, or see directors as a handbrake.”
Woodthorpe says prospective directors should meet founders and understand if they can work with them. “You never know how a founder operates until you see the nitty gritty in the boardroom, but the more due diligence you can do beforehand the better. You want to work with founders who understand, value and respect the board’s role. You need to know the founder can transition from working in the lab to running a public company.”
Reining in entrepreneurial founders can be another challenge, says Woodthorpe. “The founder has all these ideas, global ambitions and is moving very quickly. However, the opportunity may not be as big as he or she thinks it is. The board has to find a way to push back, even if the founder is a majority shareholder, without denting his or her enthusiasm or creating conflict. It comes back to being clear on the strategy and milestones.”
Woodthorpe says boards of emerging tech ventures need clear metrics to assess the innovation’s commercialisation potential. “To some extent, directors rely on the founder’s assertions about the technology’s commercial potential. The board then does its homework to test those assumptions and verify the founder’s views. I always focus on sales; it’s no good creating a technology for a global market if the company cannot get that product to market, convince customers to buy it in the right timeframe and make sufficient margin on it.”
Boards of fast-growth ventures need to shape the organisation’s risk appetite,” says Woodthorpe. “The board cannot be overwhelmed by the scary bits of governing a tech venture. It needs to understand the risks involved and directors need to understand personally if they can – and want to – govern within that risk appetite. Directors who have only governed large listed companies might find the organisation’s risk appetite does not match their own. The key is knowing that upfront before joining the board.”
“Tech start-ups need directors who can be more ‘hands-on’ where needed, open doors for management, sell the vision and help bring in investors.”
John Barrington AM FAICD says directors of emerging tech ventures must be prepared for a more hands-on governance role. Barrington is Executive Chairman of Artrya, a promising artificial-intelligence start-up involved in diagnosis of coronary heart disease. He is also a director of the Harry Perkins Medical Research Institute, Creative Partnerships Australia, and Chairs Curtin University’s School of Management Advisory Board.
Before his interview for this feature, Barrington was assisting on Artrya’s data collection. “You have to be prepared to roll up your sleeves when serving on the board of a tech start-up,” he says. “That doesn’t mean non-executive directors should do day-to-day tasks in the organisation, but you are not there just to read board papers and attend meetings. The role is much more about strategy than just conformance matters. Tech start-ups need directors who can be more ‘hands-on’ where needed, open doors for management, sell the vision and help bring in investors.”
Barrington, a strategy consultant, says a form of “agile governance” is needed in innovative start-ups. “Board and management develop the long-term strategy, but within that are lots of sprints as the team pushes towards its targeted milestones. The organisation needs to get good at prioritising, often in fortnightly windows, and the board must be able to respond to sudden changes.”
Barrington says the concept of “unknown unknowns” – a phrase popularised by former US Secretary of Defense, Donald Rumsfeld – is prevalent in tech start-ups. “When you’re creating a solution that has never been done, the board does not know what it doesn’t know. The board must be prepared for rapid experimentation and failure within the organisation, and have contingency plans. The board must foster a culture that is agile and adaptive.”
Directors of tech start-ups should be prepared for low or no board fees and most likely taking equity. “Often, directors must be prepared to buy in and work for little or nothing at the start, knowing the business could fail, and that they might potentially never get anything out of it. That’s the trade-off for larger financial rewards if the venture succeeds.”
An ability to assemble the right investors – “smart money”, as Barrington calls it – in tech start-ups is needed. In Artrya’s first capital raising, the board targeted a small group of prominent Perth businesspeople who understand the nature of tech start-ups. “You want investors who bring more than money,” he says. “They need to be excited and realistic about the innovation’s potential, understand its risks and be there for the long haul. You need investors who believe in the organisation and its people, who can offer assistance when asked and who may participate in future capital raisings as milestones are met.”
Start-up directors should prepare for shorter board tenures, says Barrington. “Most directors are unlikely to serve three terms on the board. As the organisation grows, so too will the board. You must be ready to retire from the board if different skills are needed and to hand the baton over to another director with different skills, for the company’s next evolution. And, equally, to know when to leave the board when things don’t go as expected.”