Startup Fundraising: How to Win Investors Through Effective Corporate Governance - Victory Salawu Esq.

Welcome to a new edition of Building Digital Products (BDP).

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Building Digital Product (BDP) by Osita is a monthly newsletter that supports founders, investors, and startup enthusiasts with insights and principles on how to build better products and startups.

This is my 27th edition and tenth edition for the year.

BDP's theme for 2024 is "Resilience."

Great News, this is my first Guest Edition ??

I have been getting emails and DMs from folks all over requesting to collaborate and share their expertise on BDP. I finally decided to give it a go.

Here is a little snapshot of me.

Osita James is a technology entrepreneur and a partner at BlackCrest Legal. The start-up advisory law firm (BlackCrest) has successfully advised start-ups across Africa in investment deals worth over $20 million. He holds an MSc in Innovation Management and Entrepreneurship from the Nottingham Business School, Nottingham Trent University, a bachelor of law from the University of Nigeria, Nsukka and a Diploma in Technology and Innovation from the Nigerian University of Technology and Management. He writes poetry and fiction in his free time.

He supports African founders with professional legal and start-up operations advice and can be reached at [email protected] or here.

Today's edition will explore how startups can improve fundraising prospects by improving corporate governance.

Good corporate governance won’t just keep your companies out of trouble. Well-governed companies often draw huge investment premiums, get access to cheaper debt, and outperform their peers. - International Finance Corporation.

When it comes to attracting investors, founders often focus on pitching the big ideas and ambitious solutions they are creating. However, a reality check will reveal that in today’s fast-paced business ecosystem, over and beyond innovative ideas, investors are prioritising trust and transparency in the businesses they fund. Investors are not just betting on your idea, they are betting on your ability to manage it well.

A popular misconception amongst growing businesses is that corporate governance is a buzzword for big companies and top industry players. Governance is not just for large corporations. It is a powerful tool that startups can use to attract investment and also last long in business.

Corporate governance is not just a box to check, it shapes everything from choosing the right board of directors to hiring competent managers to financial reporting and risk management. It is that secret sauce that can turn your company into a credible contender in the eyes of investors.

Transparency is King in Corporate Governance

Investors are increasingly cautious about where they place their capital, especially given recent high-profile cases of startup mismanagement and financial scandal.

Transparency refers to open and clear communication of business operations, financial status, risks, and prospects. As a founder, you can put structures in place to provide clear, regular and honest updates about the financial health and strategic direction of your company. Transparency can be demonstrated through the keeping of detailed financial records and financial statements. A company that values transparency reassures investors that it is committed to ethical practices and has a clear understanding and control of its finances.

Startups like Theranos and FTX were once hot shots in the global market, yet their downfall was less about poor ideas and more about governance failures.

Whether it is misuse of funds or outright deception, these cases show that poor governance leads to massive losses and your potential investors know this. By establishing clear governance from the start, you are setting a solid foundation that shows you are not just in business for short-term monetary gains, rather, you are in it for the right reasons.

Corporate governance goes hand-in-hand with risk management. An effective board does not just set rules, it actively reduces risks by implementing checks, balances, and accountability. For example, startups that adhere to sound governance policies have better control over their finances, which means fewer surprises for investors.

Consider Wirecard, a casualty in the fintech space. Once a thriving payments company, Wirecard's collapse was tied directly to a lack of transparency and inadequate financial controls.

For startups looking to navigate high-risk markets, governance practices can be the safety net that keeps the business alive and running even when turbulence strikes.

Key Governance Practices Founders Should Implement

1. Effective Board Structure and Independence

A startup with a balanced, independent board is appealing to investors. An effective board structure includes members with diverse but relevant skills and expertise who can challenge management when necessary, providing oversight and guidance. Board independence is crucial for unbiased decision-making and ensuring that the startup remains focused on long-term success rather than short-term gains.

2. Clear Leadership and Defined Roles

Your leadership team should have distinct, defined roles that prevent any one person from holding too much control. For instance, WeWork’s board struggled due to the overreach of its founder, leading to disastrous decision-making and a missed IPO.

3. Transparent Financial Reporting and Disclosure

Investors need to see detailed and accurate records of revenue, expenses, and cash flow, including potential liabilities and risks. Investors want to know where every dollar is going. Frequent updates and accurate financial reporting signal to investors that your startup is a low-risk opportunity. Luckin Coffee, a popular coffee chain, suffered heavily when it became clear that financials were being falsified, and investors quickly lost faith. Transparency in financial reporting reassures investors that the company is financially responsible, stable, and committed to honest communication.

4. Compliance with Legal and Regulatory Standards

Adherence to relevant laws and industry regulations is essential in building investor trust. Startups should stay updated on general compliance matters, tax requirements, labour laws, and industry-specific regulations to avoid legal setbacks that can deter investors. Compliance reduces potential legal risks and reputational damage that accompanies heavy fines and penalties.

5. Standing Out in the Crowd

Startups with strong governance are better equipped to handle growing pains. The larger your company gets, the more complex the challenges become. Effective governance helps anticipate these challenges, meaning you are always ready for what’s next. This layer of preparedness is why established companies like Apple and Microsoft invest so heavily in corporate governance. By putting transparent practices in place early on, you are signalling to investors that you’re a safe and sure bet. Corporate governance may not be glamorous, but for investors looking for credibility and sustainability, it’s often the deciding factor.

Conclusion

In this second part, I have discussed the implications of scaling virtual business operations from three pillars: Payment, Team management and Taxation. Companies that have virtual operations have to communicate effectively, choose the right digital systems for their operations and hire the right talent. Effective building always requires effective planning.

In all you do, keep building.

Remember that you only fail when you stop trying.

I am rooting for you.

If you loved this edition, please share it with another founder.

Keep building,

Osita.

About the Guest

Victory Salawu is an experienced startup attorney from Nigeria with a law degree from the University of Abuja. She is passionate about regulatory policy and corporate compliance.

PS: If you would like to be a guest in the next edition, shoot me a DM. I don't bite.