Start-ups see benefit of implementing governance structures earlier in their journey

But fast-growth emerging companies need directors who understand their needs.

Prashan Paramanathan, CEO and founder of Chuffed.org, has had more experience than most young entrepreneurs with boards. Chuffed, a leading social-crowdfunding platform, had to form a Board of Directors when it launched in October 2013 as a registered charity.

Like many charities, Chuffed started with a small board that included Paramanathan and two volunteer non-executive directors. He wanted directors who shared Chuffed’s passion to raise money for social causes and who had experience and skills that could help the venture.

Chuffed had a strong start, securing a $460,000 grant from the Telstra Foundation and quickly gaining traction in the fast-growing crowdfunding market, where organisations or projects raise small amounts of money from a large audience, via the internet.

Like other start-ups, Chuffed needed to scale its operations rapidly and required equity capital, something not possible as a charity. Relying on philanthropy would take too long, so Chuffed converted in 2016 from a charity to a social enterprise. A new board formed.

Chuffed’s incorporation was broadly based on the United States model of public benefit corporations – a transition Paramanathan believes was among the first of its kind in Australia. He describes Chuffed as a “public benefit company”: one that has a private-company structure and ownership but remains true to its original mission as a charity.

At the same time, Chuffed secured $1.1 million in seed funding from Blackbird Ventures, technology entrepreneur Bevan Clark and Telstra Foundation. As part of the deal, Niki Scevak, co-founder of Blackbird Ventures and Startmate joined the Chuffed board, replacing a founding director who retired from her directorship.

Chuffed’s transition from charity to private company (the original charity owns shares in the new venture) and the venture-capital involvement through Blackbird shows the benefits of entrepreneurial ventures forming experienced boards early in their journey.

Paramanathan was able to draw on the board’s expertise during Chuffed’s transition to a private company, which required complex legal advice and could become a model for other entrepreneurial charities to convert to private ownership and raise equity capital.

“The original Chuffed board was fantastic in helping guide the charity in its early days and govern its transition to private-company status,” says Paramanathan. “The new board has been great as well and has new skills that can help accelerate Chuffed’s growth.”

Not all entrepreneurs are as positive about boards as Paramanathan. Many start-up founders resist forming a Board of Directors and often only do so when external capital is raised.

Others form an Advisory Board, which is a board in name only. Advisory board members are typically mentors of the founder rather than directors of the organisation (directors of advisory boards can, theoretically, get into problems if they are viewed by the law as de facto directors and do not have a written agreement outlining their advisory role).

Some Advisory Boards are more formal than others. The advisers and entrepreneurs might meet monthly in a board-meeting format, with a board pack and minutes taken. Often, Advisory Board meetings are more of a sounding board for the entrepreneur to seek advice.

Other entrepreneurs see less value in Advisory Boards or Boards of Directors. Jen Sharpe, founder and CEO of Think HQ, a fast-growing marketing and communications firm that focuses on purpose-led organisations, prefers to have mentors whom she can draw on as needed, rather than the formality of a board.

“I’ve thought about forming a board over the years but have always steered away from it,” says Sharpe. “At peak times in an entrepreneurial business, it’s very time-consuming for the CEO to have to prepare board packs, attend board meetings and follow up on board issues. Like a lot of founders, I don’t have time for the formality or cost of a Board of Directors.”

Sharpe, the sole shareholder in Think HQ, is wary of reporting to a board. “I’m very protective of my vision for Think HQ. I was told many times over the years that we’d never make money dedicated to working on purpose-led projects and we’ve continually proved the doubters wrong. I don’t want a board distracting me from that vision.”

Sharpe recognises the benefits of external advice. She has several mentors and breaks them into technical advisers, such as the firm’s accountant, and the “been there, done that” advisers – experienced entrepreneurs who have launched and grown successful ventures. “I like the idea of calling on advice as and when I need it, rather than through a Board structure.”

She has not ruled out forming a Board of Directors if Think HQ raises capital or expands internationally in the next few years, strategies that are on the firm’s radar. The business has 25 staff and its revenue grew 60 per cent last year, so it has the sufficient scale for a board.

Sharpe last year launched Lumin, an online communications capacity-building platform for the social-change and community sectors. As she juggles two businesses and two young children – “life soup, where business and life are mixed together”, as Sharpe puts it – she feels she has enough business support without the burden of a board.

“I’m not against boards, I just don’t think we would benefit from one right now,” she says.

Evolving board

An entrepreneurial venture’s approach to a board and formal governance structure is often dictated by the stage of its life cycle. Most start-ups that are still discovering their products and services, business model and customer base have little need for a Board of Directors.

The start-up is rapidly changing and usually does not have resources to pay fees to professional company directors. The focus is on business survival and a board, particularly one comprising directors with little start-up experience, could hamper the venture’s speed and risk taking.

As the venture moves from a start-up to a “scale-up”, the founder recognises he or she needs different skills to draw on, so seeks additional mentors. As the business grows, those mentors might join an Advisory Board, which provides more formality to the advice the entrepreneur receives and could be used to raise the emerging venture’s profile.

Entrepreneurs often look for well-known businesspeople to join their Advisory Board, as much for their profile as their skills. Having a prominent director on the board of a start-up can help it secure corporate or government customers, raise capital and attract staff.

Moving to the first or second round of funding is often a trigger for the venture to convert its Advisory Board to a Board of Directors, where directors are bound by duties under The Corporations Act. Here, an external investor, such as a venture capital firm, wants a board seat to safeguard its capital and have a say in the organisation’s direction.

As the venture moves to an Initial Public Offering (IPO) on a stock exchange, earlier investors might exit their investment and retire from the board. Thus, the IPO becomes a trigger to form a new company structure and often a larger, more independent board.

Not all entrepreneurial ventures follow this path with boards, but it’s fair to say the smaller the venture, the less likely it is to have an Advisory Board or Board of Directors.

Finding middle ground in governance

Jack Delosa, founder and CEO of The Entourage, Australia’s largest education institution for entrepreneurs, believes in the value of boards for ventures with at least $5 million in sales. “Anything less than that and the board is not going to add a lot of value to the founders. You don’t want too much governance structure for a business still finding its way.”

The 32-year-old Delosa, a member of the BRW Young Rich List, says ventures with $5 million to $20 million in sales should at least have an Advisory Board, with a view to transitioning to a Board of Directors as new capital is raised and the venture grows.

“There’s no magic figure, but when the business is growing very quickly you need to put strong reporting and governance and foundations in place to support a much larger enterprise. Founders need to think carefully about forming a Board and accessing new skills.”

He believes founders should view Advisory Boards more formally, mindful of ensuring the advisers do not act as de facto directors who are bound by The Corporations Act. “The risk of informal Advisory Boards is you end up with a bunch of mentors telling the entrepreneur what he or she wants to hear, and are more like cheerleaders than people who can challenge and help the CEO.”

Delosa says the key is attracting people to the Advisory Board who have start-up experience and skills. “I’ve seen too many emerging ventures over the years bring professional company directors to their boards who don’t understand the start-up space. These directors might have great skills for a large organisation, but it’s very different governing a new venture.”

The Entourage’s three-member board meets monthly, has a detailed board pack and takes minutes of each meeting. The business pays the advisers a fee for their time. Delosa says: “The benefit of an Advisory Board is you can see if the advisers genuinely add value to the business and would suit joining the Board of Directors if one is formed. At that point, the business might grant options to the directors to incentivise and align them to the business.”

The Entourage’s strategy is working. It has 35 staff and turned over $15 million last year. The business survived a setback in 2016 after a short-lived stint as an accredited education provider in the troubled vocational education & training sector. When the Federal Government froze student funding in the sector, The Entourage was caught in the storm.

At the time, The Entourage had a Board of Directors, Academic Board and compliance-based board as part of its regulatory obligations as an accredited education provider. Delosa is glad to be back to an Advisory Board, but still sees value in governance and reporting structures. He wants to add another member, with a background in brand-building, to his Advisory Board.

“Entrepreneurs who run a reasonable-sized venture and say they don’t want a board are intellectually lazy. Not having a board, or having an informal Advisory Board, can allow the founder to duck accountability and avoid other views. A good board should make entrepreneurs feel uncomfortable from time to time and constructively challenge them to keep improving the business and their own management skills and experience.”

That does not mean entrepreneurial ventures cannot adopt board processes to their needs. Chuffed’s Paramanathan says his board meeting is structured into the “ugly, bad and good”. “I present to the board the ugly issues that are concerning me most and where I need a second opinion. Then we focus on the bad issues and spend the least time on those going well. Everything is about overcoming challenges so that Chuffed can keep growing.”

Paramanathan adds: “It can be a bit jarring at first to talk about the most difficult issues in your business to the board, particularly when you are the founder and majority shareholder. But you quickly realise the value of accessing the knowledge of people who have done it before.”

Chuffed has raised more than $30 million for over 10,000 campaigns and has expanded to the United States, United Kingdom and Canada. Paramanathan believes the US business will overtake the Australian operation within a year or two. “International growth or another capital raising might be the point to expand the board again, but the current board structure is working well. The key is forming a board that really suits the needs of a high-growth venture.”