Decoding The Importance Of Building A Strong Governance Structure

Startups generally start off without much compliance, governance or even structure. Every organisation working for the purpose of generating revenue must have good governance to function efficiently and legally. However, there are several pitfalls that can arise when building a governance structure, which can ultimately lead to problems down the line. 

In this article, we will discuss five major pitfalls to avoid, in building a solid governance structure for a portfolio startup.

Before we understand how to build strong governance, let us understand the relevance and importance of good governance, especially in the initial stages of a company. 

Why Is Governance Important In Startups?

Strong governance is essential in an investor’s portfolio startup because it ensures that the company is run effectively and efficiently, that decisions are made in the best interests of the company and its stakeholders, that coordination and alignment are established, accountability and oversight are in place, and that communication channels are open. 

• Ensures effective decision-making: A well-structured system helps ensure that decisions are made in the best interests of the company and its stakeholders. It also helps to ensure that decision-making processes are transparent, fair and consistent and that they align with the company’s overall goals and objectives.
• Facilitates coordination and alignment: Governance is critical in portfolio startups with multiple companies and sectors because it helps to ensure that all the companies are working towards the same goals and that their activities are aligned and coordinated. A good governance structure helps to eliminate confusion and inefficiencies and to make sure that everyone is aware of what is happening within the company and how it affects the portfolio.
• Promotes accountability and oversight: It helps to ensure that everyone within the organisation is held accountable for their actions and that their performance is evaluated. Having a governance structure that promotes accountability and oversight can help to minimise risks and increase efficiency.
• Promotes transparency and communication: A good governance structure helps to create open and transparent communication channels within the company, which promotes trust and understanding among employees, stakeholders and other partners. It helps to keep everyone informed and engaged, and it makes it easier to identify and resolve problems that may arise.

Now that we understand the significance, it is necessary to understand the pitfalls of governance in portfolio startups. 

The Major Reasons For Pitfalls In Good Governance

Lack Of Clear Roles & Responsibilities 

One of the most common pitfalls in building a governance structure is not clearly defining the roles and responsibilities of each team member. Without clear roles and responsibilities, it can be difficult for employees to understand their job duties, which can lead to confusion and inefficiencies. 

To understand better, when there is a startup portfolio with several companies in multiple sectors, if there is not a clear structure that defines who is responsible for each company, there could be difficulties in decision-making, managing operations and coordination among companies

Failure To Align With The Company’s Overall Strategy 

Another pitfall is failing to align the governance structure with the company’s overall strategy. A governance structure that is not in line with the company’s goals and objectives can lead to confusion and inefficiency, and can also make it difficult for the company to achieve its desired outcomes. 

For example, when a portfolio startup focuses on early-stage startups, if the governance structure is not designed to support the fast-paced and agile nature of early-stage startups, it could hinder the portfolio’s ability to move quickly on new opportunities.

A Lack Of Oversight & Accountability 

This can lead to problems with decision-making and execution. In order for a governance structure to be effective, there must be clear lines of oversight and accountability to ensure that everyone is working towards the same goals. 

Imagine a portfolio startup that has several departments, if there is not a clear structure in place to oversee the activities of each department, there could be a lack of accountability, which could lead to confusion and inefficiencies.

Lack Of Transparency & Communication 

When there is a lack of transparency and communication within the governance structure, it can be difficult for employees to understand what is happening within the company, which can lead to confusion and mistrust. 

For example, in a portfolio startup with a complex governance structure, if communication channels are not well defined, it could lead to a lack of clarity and difficulty in coordinating activities between teams.

Failure To Consider The Needs Of Key Stakeholders

Finally, a governance structure should take into account the needs and concerns of key stakeholders, such as investors and customers. Failure to consider the needs of key stakeholders can lead to a lack of buy-in and support for the governance structure, which can ultimately hinder the company’s success. 

When a portfolio startup relies heavily on partnerships with other companies and investors, if the structure does not consider their needs and perspectives, it could lead to disagreements and ultimately harm the portfolio’s ability to grow and succeed.

These are just a few key reasons for a pitfall in good governance. That said, there are ways to avoid pitfalls by following certain guidelines. These guidelines are subjective and particular to each startup. Nevertheless, a few precautions can be taken to overcome pitfalls in portfolio startups.

How To Overcome These Major Pitfalls?

• It is important to clearly define the roles and responsibilities of each team member. This can be done by creating job descriptions and outlining specific responsibilities for each role. Additionally, it is important to make sure that everyone is aware of their roles and responsibilities and to have regular communication to ensure that everyone is on the same page.
• It is important to make sure that the governance structure is aligned with the company’s overall strategy, which can be done by involving key stakeholders in the governance structure, such as investors and customers, in order to ensure that their needs and perspectives are taken into account. It is also important to regularly review and update the governance structure to ensure that it is still aligned with the company’s goals and objectives.
• It is necessary to establish clear lines of oversight and accountability within the governance structure by creating a system of checks and balances, such as having multiple levels of approval for decisions or having regular performance evaluations. Additionally, it is important to have clear communication channels and to have regular meetings and reports to ensure that everyone is aware of their responsibilities and progress.
• Another important thing to do to avoid pitfalls is to involve key stakeholders in the governance structure and to take their needs and perspectives into account. This can be done by creating a system for gathering feedback and input from key stakeholders, such as having regular meetings with investors or customer focus groups. It is equally important to establish clear communication channels and to have regular communication within the governance structure. Also, it is important to be responsive and receptive to their concerns and to make adjustments to the governance structure as necessary.

Ultimately, building a solid governance structure requires a lot of time and effort, but it is worth it in the long run as it will help to ensure that the company is run effectively and efficiently. One has to constantly look at the governance structure and assess its alignment with the overall strategy and make necessary adjustments to overcome the pitfalls.

How Can You Persuade Stakeholders Of The Value Of Good Governance?

Convincing founders and other stakeholders of the importance of good governance from the early stages of the company may take time and effort. However, by highlighting the long-term benefits, linking governance to value creation, and stressing the risks of not having good governance, it is possible to communicate the importance of good governance and implement it in the early stages of the company.

A startup must highlight the benefits of good governance, such as improved decision-making, increased transparency, and better alignment with the company’s goals and objectives. They must reassure that good governance can help increase the company’s chances of success by providing a framework for effective decision-making and risk management.

It is also important to make them understand that good governance practises can help attract and retain investors, as well as increase the company’s valuation and the potential return on investment.

In order to convince founders and other stakeholders, one has to anticipate and address any concerns or objections stakeholders may have about implementing these practices. 

For example, if stakeholders are worried about the cost and effort required, present data on how much good governance practices can save in the long run. It is also important to customise the message to specific stakeholders, such as founders, board members, and investors, to address their unique concerns and interests.

One other main initiative that a startup can take is to ensure regular communication and updates on the implementation of good governance practices. This can help to keep stakeholders informed and engaged and demonstrate the progress and benefits of the same.

In conclusion, it is essential to communicate the importance of good governance in a way that resonates with stakeholders, highlighting the long-term benefits and addressing concerns and objections. It is not just a compliance issue, but also a strategic one that can benefit the company in the long term.