At FMO, we believe strong governance standards are critical to the success of fast-growing start-ups. Good governance enhances business performance through better decision-making and alignment, makes startups more attractive to investors and, ultimately, helps to manage risks such as fraud and regulatory non-compliance that can otherwise undermine commercial performance and impact outcomes, and even result in failure.
The startup journey requires juggling priorities to scale the business in the context of scarce time and resources. Founders often accept the importance of good governance in principle, but startups frequently grow rapidly and their systems and controls may not keep up. Gaps are typically only addressed when issues arise. By then it may be too late to prevent financial and impact losses and reputational damage.
Investors in startups, including Venture Capital fund managers, have a responsibility to help founders shape governance and internal controls as the company grows. To prevent major governance failings that could have an adverse effect on a startup’s success, investors should learn to proactively identify governance red flags and act on them. Equally, investors should guide founders in developing governance frameworks that are tailored to startups, in a way that is:
This Guidance Note is the first in a series of three to share actionable advice – including easy-to-use tools and case studies – on ensuring good governance in startups, particularly in emerging market contexts.
This first note provides guidance on how to identify and proactively manage governance risks. The two remaining notes (to be published in 2024) will build on this note, focusing on how to develop governance frameworks for startups and how investors can continue to shape and monitor governance when their rights are diluted.
This guidance note series was jointly supported by British International Investment and FMO through our Ventures Technical Assistance Facility.
You can access the note through the interactive version or as a PDF document.