These are unprecedented times for everyone, including entrepreneurs. The COVID-19 pandemic is forcing startups to abruptly shift from a growth mindset to crisis management. Advice circulating in the startup world involves extending runway, delaying new hires, and focusing on cash flow. In some cases, startups are pivoting business models entirely to provide a new value proposition that works in a post-COVID-19 world.
I believe sound corporate governance plays a critical role during times like these. Corporate governance, or the people and guidelines that manage startups, is essential for optimizing decision-making. An adequate corporate governance, typically in the form of a well-structured advisory board, can have the beneficial effect of balancing the interests of the startup founders, team, investors and other stakeholders. If done well, it will lead to making better informed decisions more quickly and transparently.
Why Founders Should Create An Advisory Board
Founders are the majority shareholders during the early stages of their companies and should control the final decisions. Having corporate governance may add steps to the process, but doesn’t change who makes the final decision. I believe that founders who set up corporate governance structures early on are acting in the best interest of the company over the long term.
A solid advisory board should be formalized as early as possible–and sought out especially during a crisis–for a number of reasons. For one, this is the time for startups to bring in outside expertise and guidance. Startup founders may not have experience handling every aspect of a business during a crisis (accounting, budgeting, risk management, human resources, etc.). Having advisers who have weathered a previous crisis as an entrepreneur or investor, such as the Dotcom bubble burst or the 2008 financial crisis, can be invaluable during this time.
While there are no specific rules for who should be on an advisory board, it’s best to have a diverse mix of members in terms of both expertise and experience. Garry Visontay, partner at Right Click Capital, recommends having an experienced venture capitalist as well as a domain or functional expert on board. Venture capitalists can provide guidance based on their work with other startups and access to broader networks. Meanwhile, a domain expert, or someone with deep knowledge of a startup’s industry or target market, can contribute knowledge to a specific functional area of the business, such as marketing, sales, etc.
Startup founders are high-energy and aspirational, traits that can also hinder a company during a crisis. Implementing an advisory board can help teams avoid this problem and ensure that all stakeholders are working together toward a single mission or solution.
It’s also worth noting that many startups do not have the cash to hire an experienced adviser or lawyer right now. This is where an advisory board can play a critical role in advising and guiding decision-making. Having good corporate governance in place helps identify the roles and responsibilities of the founders, shareholders and board members, and ensures that there are solid procedures in place.
Many venture capital investors are now focused on helping existing investments get through the current crisis rather than spending time looking for new ones. This means a startup’s current investors are going to be a necessary source of future funding, so it’s important that founders be transparent, communicate frequently and maintain trust.
The Role Of A Board And Working Together
The primary purpose of a board is to create a space where people can get together to think strategically about a startup’s future. Founders can start small, with a core advisory committee, and let shareholders know that this group is going to help make strategic decisions.
The Ewing Marion Kauffman Foundation’s Suren G. Dutia lays out the five critical functions of a board, many of which still apply during a crisis:
- Provide mentoring support to the CEO.
- Work with the management team to develop a clear strategic direction and business focus.
- Approve the operating budget and ensure plans are achievable with the funds available.
- Monitor organizational performance and advise the management team on strengths, weaknesses, opportunities and threats, mobilizing resources when necessary.
- Provide general oversight of the business and ensure good governance as well as legal and ethical standards.
The specifics for adequate corporate governance can be unique to each company and change over time; however, the key to a successful board is a willingness to devote time to founders, help them keep up with the constantly changing business environment, and avoid pitfalls.
While it’s common to have a bimonthly or quarterly board meeting, now is a good time to increase the frequency of interactions in order to take stock of a startup’s challenges and opportunities, and refocus any priorities. A solid board is vital during a crisis and can provide entrepreneurs with the strategic perspective and tactical tools to survive in the short term, and get back to thriving over the long term.
The post What Startup Corporate Governance Looks Like in a Crisis appeared first on Crunchbase.
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Author: Jaclyn Robinson