Hot start-up ventures are used to innovating products, business models and the customer experience. Not governance. Their founders sometimes view boards as a brake on creativity and agility, or a compliance evil for larger firms.

Fishburners has a refreshingly different approach. Australia’s largest space for start-up ventures has turned traditional board thinking on its head this year with a new board structure and constitution that blends established governance protocols with the needs of its community, which operates in a shared working environment.

Fishburners’ board and constitution has four non-executive directors who serve three-year terms (it is looking to recruit the fourth member); and four elected directors from Fishburners’ start-up community who serve one year. Dr Katherine Woodthorpe FAICD, the former CEO of the Australian Private Equity and Venture Capital Association (AVCAL) is chair.

CEO Murray Hurps says the new board model will strengthen Fishburners’ governance and expose dozens of start-up founders to directorship in coming years.

“There is a fantastic opportunity for our members to get their first experience of governance through the Fishburners board, create a diaspora of entrepreneurial directors to help other boards, and apply that knowledge to their own venture,” he says. “They benefit from our board and Fishburners benefits by having dynamic founders as directors.”

In some ways, the Fishburners board mirrors the organisation by acting as an incubator of start-up founders who understand the benefits of governance and can apply board structures earlier in their venture’s lifecycle.

That is an important change. Many start-ups resist establishing boards because they do not see value in them, do not want to lose any control of their venture, or pay fees or provide equity to directors. Or they establish an advisory board that consists of mentors who meet with founders a few times each year, but do not have the same level of fiduciary duties or potential legal liability as members of a formal board.

Other start-ups establish a formal board when external funds are raised. Investors want a board seat to protect their capital, have a say in the venture’s direction and ensure governance systems exist. A small board, often with founders, investors and no independent directors, is their first step into governance. These boards sometimes cause problems if directors do not act in the best interests of all shareholders.

More established start-ups form or expand their board when they list on the Australian Securities Exchange (ASX) through an initial public offering, to meet listing requirements. Typically, these boards are small (often three members) and have low independence. They expand as the organisation grows and its governance needs change.

Although attitudes are changing, few start-ups see a formal board as an early priority. Their focus is on discovering their customer base and business model, validating their product or service, rapidly scaling the opportunity, becoming cash flow positive, and surviving. The introduction of governance systems often lags their growth.

Fishburners, as a not-for-profit organisation, has a significant opportunity to encourage founders to see governance as a strategic asset rather than a cost. It has spawned 621 ventures in five years and members such as goCatch, a taxi app provider, and DesignCrowd, a custom-design marketplace, have starred.

Fishburners currently has 175 companies using its Sydney space and 20 to 40 start-ups are joining each month. It plans to expand fivefold with new spaces in Sydney and Brisbane expected to open later this year.

Hurps is passionate about boards. “Being on the Fishburners board is probably the best thing that has ever happened to me professionally,” he says. “With our new constitution and diverse board, I love attending our board meetings and actually look forward to them. Working with Katherine [Woodthorpe] and the other directors is amazing too and immensely helpful in my role.”

Hurps understands the reservations that entrepreneurs have about boards. The 32-year-old, founder of two successful start-up ventures, had no board exposure before Fishburners. “Like most entrepreneurs, I was so busy putting out fires in my start-ups that I never stopped to think about implementing a board.”

Hurps says time is the biggest impediment with governance. “It’s the single biggest opportunity cost any entrepreneur has when they are pursuing a large addressable market with limited resources. Every minute that takes you away from that opportunity is a cost. It’s hard to imagine investing all that time in establishing a board when the start-up has bigger fish to fry.”

Fishburners’ members have a similar view. Hurps estimates only one in five have formed advisory boards and says it is rare for start-ups in its community to have thought about a board. “It’s a big ask for a start-up to pay director fees or for an experienced director to take on the fiduciary duty for an incredibly risky venture that is still finding its way.”

Start-up spaces tend to attract embryonic ventures that are run by one or two founders who, understandably, have little need for an advisory or formal board. The successful ones quickly outgrow the co-working space as they employ staff and often only consider a board as they move towards capital raisings.

 “Problems often emerge when due diligence is done on the financials and the business during the capital raising,” says Hurps. “The lack of structure and governance in the business is a big issue, just as the start-up needs capital to grow and survive. Forming a board much earlier can lay the foundations for growth.”

Identifying needs

Hurps says Fishburners is regularly approached by experienced directors who offer their services to start-up boards. His concern is understanding which directors suit start-ups and whether they should be recommended to the Fishburners community. “Start-ups need directors who understand the space and can connect them with other start-ups and opportunities – directors who have experienced what founders experience,” he says.

That is a telling observation. As interest in entrepreneurship grows, it is likely that more directors with a corporate background will look to add a start-up directorship to their board portfolio. They will view the start-up as a chance to gain new skills, add to the diversity of their experience, or potentially be rewarded through equity in lieu of fees.

Moreover, as Australia’s entrepreneurship ecosystem develops, extra capital is expected to be directed towards established start-ups. More co-working spaces, incubators and business accelerators will form. Universities, too, are showing greater interest in innovation and entrepreneurship and forming start-ups on campus.

These trends suggest greater pressure on the start-up community to incorporate governance systems earlier through boards.

But care is needed with start-up governance initiates. Professor Alex Maritz, La Trobe University chair in entrepreneurship, says start-ups are not small clones of larger companies, so cannot be governed in the same way. “Due to the unique and dynamic nature of start-ups, successful and experienced corporate board members are not necessarily the right choice for start-up boards,” Maritz says.

He says international studies have shown that start-up boards that do not have director board ties to similar organisations may have a negative effect on start-up performance. The danger is directors applying “corporate” governance principles to start-ups and extinguishing their spark.

“Contextualisation of start-ups and entrepreneurial new ventures is paramount when deciding on start-up board composition,” Maritz says.

Of course, the right corporate directors always benefit start-up boards. Attracting a well-known businessperson as an investor and/or director can raise the start-up’s profile, boost its credibility, expose it to new networks and provide experience and knowledge. It can also help the start-up with future rounds of capital raising.

Maritz says the key is attracting directors who understand the start-up nuances. “Corporate boards traditionally constitute the supreme decision-making authority in a corporation and are the body with ultimate responsibility for its strategy and the co-ordination of tasks to achieve this strategy,” he says.

“Start-ups, however, usually rely upon the founder and his or her vision. Governance of start-up boards is more fluid, adaptive and reactional when compared to larger organisations, and usually equity based as opposed to direct remuneration based.”

Maritz says the most effective board members in start-ups have direct networks and links in the start-up’s industry, and provide tailored mentorship and knowledge. “This correlates with angel investors who not only provide funding for start-ups, but also provide knowledge, expertise and mentorship for start-up entrepreneurs.”

Start-up governance

Fat Prophets founder, Angus Geddes, is an experienced angel investor and director who has seen the highs and lows of start-ups. He was an early investor in Pie Face Holdings, the Australian fast-food franchise that achieved spectacular early success, before store closures, job cuts, the resignation of its founding CEO and voluntary administration.

Geddes remains on the Pie Face board and, through Fat Prophets, now owns half the business, which has a new business model. Geddes has invested in at least half a dozen private ventures and served on their boards.

He says start-ups should form an advisory board early and access advice from experienced mentors. “You don’t need a cast of thousands, but the sooner you have an advisory board the better. It’s always good to get other opinions when you are starting a business.”

Geddes says start-up founders often fall into two camps: those who value and respect external advice and those who will not listen to anybody and are bullies.

He is wary of joining the board of start-ups that live from one capital raising to the next – a trait that often characterises emerging exploration, mining and biotechnology ventures.

“All too often, the start-up is perpetually losing money and there is always another round of capital raising to keep it going,” he says. “I’ve seen too many situations where the founder doesn’t respect the board or external capital, and directors are caught in the crossfire.”

Geddes prefers governing start-ups that are breaking even or losing only small amounts, and where founders are fiercely protective of giving up equity in the venture. “I avoid start-ups that are losing buckets of money and continually needing more funds. The whole thing starts to look like a Ponzi scheme and there is simply too much risk for the board,” he says.

Geddes is wary of start-up boards that are stacked with investors or lenders. “Investors are not independent, and debtholders, who should not be on the board in the first place, are not thinking first and foremost of shareholders, which is the board’s duty,” he says. “You have to be careful joining start-up boards that are full of people with vested interests, or those with CEOs who will not listen to directors.”

The board’s relationship with the founder, often the majority shareholder, can make or break start-up governance. The best entrepreneurs are usually highly motived because they have invested everything in their idea. The board’s challenge is occasionally reining them in and giving them direction, rather than trying to motivate them.

Another potential complication is strategy. Some entrepreneurs effectively carry their the venture’s strategy in their head, constantly changing it or “pivoting” the business (a term popularised through Lean Entrepreneurship theory, meaning to change the business’ direction) as they validate their product. Keeping up with founders who operate at lightspeed can challenge start-up boards.

Patrick Grove, one of Australia’s most successful entrepreneurs, says good boards help fast-growing, disruptive start-ups through mentorship and governance. “If you have built a start-up before, you might not need a board from the start,” he says. “But if this is your first venture, you will need governance to attract and keep investors happy, and mentorship because you have never [built a venture before] from the start.”

The 41-year-old Grove founded Catcha Group, a leading Asia-based investor in disruptive technologies. Catcha spin-outs include iProperty Group (acquired by REA Group in February), iCars, e-commerce platform Ensogo, and the fast-growing video-streaming start-up, iFlix in Asia. BRW estimated Grove’s wealth at $587 million in 2016.

Unusual for a young entrepreneur, Grove has extensive private and listed-company governance experience, having chaired several Catcha Group companies or served as a director. He says start-ups should form boards before they decide to raise capital from third parties – advice that is “applicable to 99 per cent of them”.

Start-up directors must accept that the venture will make many mistakes, Grove says. “There should be a culture of testing, failing, learning and pivoting. A traditional business is essentially doing the same thing each year with minor tweaks here and there. A start-up needs to be growing in excess of 50 to 100 per cent a year and you have to make some changes to do that.

“As long as the board and investors are aware of that, then the founder has the right support team in place to start running,” he says.

High-performing start-up boards do more than help ventures get going. They lay the platform for a larger venture and keep emerging businesses, which often resemble rollercoasters, on the rails. This structure helps founders to scale the venture faster than they would without the support of a strong board.

Fishburners is a case in point. It is doubling in size every 18 months and in the process of organising new spaces. Hurps says: “2016 will be a record year for Fishburners and the Australian start-up ecosystem. It’s great to know we have a strong board guiding Fishburners through this rapid phase of growth.” 

 

10 tips for start-ups with boards

  1. Form an advisory board as soon as possible: A small, informal board of mentors and supporters can provide valuable advice, help the venture look bigger, and be the foundation of an eventual move to a board of directors (formal board).
  2. Understand the difference between advisory and formal boards: An advisory board advises the start-up’s management team, but does not have authority to vote on matters or a legal fiduciary duty, and its advice is non-binding. Start-ups usually form advisory boards to access the knowledge, networks and profile of members, without the cost or formality of a formal board.
  3. Understand the risks of advisory boards: Start-ups must ensure the advisory board has a clearly stated role and that its activities do not blur into those of a formal board. Also, advisory board directors still have significant reputational risk if something goes wrong.
  4. Choose directors who understand start-ups: Corporate board experience, while valuable, does not always suit emerging start-ups. Seek directors who understand the needs of start-ups and can govern through conditions of high uncertainty.
  5. Plan to transition from an advisory to formal board: Every start-up is different, but an advisory board might quickly outlive its usefulness once the venture has validated its product, is rapidly scaling the opportunity, and moving towards its first significant capital raising.
  6. Introduce a formal board well before a capital raising: Strong governance structures can ensure the venture is prepared for external capital and investors – and minimise the risk of “landmines” exploding during due diligence.
  7. Complete the Australian Institute of Company Directors’ Foundations of Directorship Course: This course is the industry standard for those on boards or considering a directorship – and invaluable professional development for entrepreneurs who are serious about good governance.
  8. Plan for board composition and change: Mentors who added great value on the advisory board may no longer suit a more established venture that has external investors and different needs. Consider how board skills should change as the venture grows.
  9. Run like a publicly listed company well before listing: An ASX listing is no place to learn about boards and governance structures for the first time. Bed down board protocols and processes well before listing; it will smooth the transition to public ownership.
  10. View the board as a strategic asset: How can the board create value in the venture? How can directors help guide, shape and coach strategy? How can the board oversee risk-management frameworks that underpin the venture’s sustainability? How can good governance help promote the venture and support capital raisings? Understand the board’s role and powers and view directors as enablers and a valuable resource for the CEO.