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Startups fail to advance in governance as they grow, research finds


Brazilian startups have a good start in terms of corporate governance right after being founded, but they fail to evolve this structure as they grow and seek to position themselves in the market, points out a survey by PwC Brasil and Liga Ventures, an open innovation network that connects companies and startups, obtained by Estadão. The situation can become an opportunity, becoming a differential for those seeking investment if they manage to improve in the subject. The survey was the first edition and heard 169 entrepreneurs and 37 investors. The companies were divided into four phases: ideation, validation, traction and scale, according to the development of products and business models until the moment of receiving investments to occupy a space in the market. The pillars evaluated in each phase were four: Strategy and Society; People and resources; Technology and intellectual property; and Processes and Accountability.


It is expected that in the first two stages, governance is not very evolved, both according to investors and the framework used, developed by the Brazilian Institute of Corporate Governance (IBGC). However, in the two finals, controls must advance to ensure that the company attracts resources and uses well what it has. Positive data about startups in the ideation phase were that 83% adopted a network of mentors and advisors, which shows that they are increasingly structured at the beginning. Those that are in the ideation and validation phases show high maturity in relation to some practices suggested in Strategy and Society, being above the expectations of investors for topics such as Contribution of partners; Expectation of each partner; Output and/or input rules; Authorities, roles and responsibilities; and Bylaws or Articles of Incorporation. However, as demands increase for larger companies, companies fail to meet investor expectations. An example is in the Strategy and Society pillar: 20% of startups in the Traction phase claim to comply with practices related to the themes Formal process for strategy and risk management, and Ethics and conduct, but investors expected at least 41%. In the People and Human Resources pillar, investor expectations exceed 46% in all practices, but startups at the moment of traction do not reach the expected requirements, a scenario similar to that seen among those in the scaling phase. Regarding technology and intellectual property, the situation is even worse: 45% of startups in the traction phase have a low level of maturity and almost half still adopt practices from the ideation phase, even though they are in an advanced stage of development. 25% of scale-stage startups do not adopt any of the corporate governance practices associated with technology and intellectual property. Finally, the Processes and Accountability pillar has ambiguous results: 82% of startups have internal controls for calculating results and 77% have structured planning and budget management models. On the other hand, practices related to the relationship with complementary inspection and control Bodies and Investor Relations Function/Area remain with low implementation maturity.


Reasons


The situation is explained by the fact that startups are start-up companies. In the beginning, they are expected to first seek to develop the products and a sustainable business model before structuring the internal control processes. However, as it grows and proves itself, these structures are required. “It's like a teenager reaching adulthood”, compares Luiz Ponzoni, a partner at PwC Brasil. “There is a shock in the level of corporate governance required, resolving this in the traction phase is perhaps an insight from the survey. When you reach the traction phase, it is time to have more formalization.” Starting to have some structures in the early stages is a good situation, even if they don't need to be so evolved. Thus, it is easier to work with them and adapt them to the market as it grows. “From the front it is much more painful to structure, having to deal with vices that the entity has already acquired. When traction and scale start to improve, you need to stop and re-access the policies and procedures to correct problems”, reinforces Rodrigo Marcatti, also a partner at PwC Brasil. Among these topics, the relationship with investors is a priority - the scale phase is when startups seek more resources to occupy a space in the market. Even so, 38% of investors expect this area to be their own department, which only 16% of companies say they have. “Being so low was really surprising, as these are companies that are in the funding phase or are seeking. Having this area is a great differential”, comments Isadora Faria, senior manager of the new business area at the consultancy that carried out the survey. “It's a question of where to allocate the resources. There is a limited amount and part of the relationship with investors is not a priority at the beginning, sometimes it is in the background”, explains Marcatti. Both he and Faria recommend, however, that the area be structured as soon as possible.


Ways


The good news for startups that have already reached the traction and scale stages is that, if they reached these stages, they probably have more resources to cover the gaps indicated in the survey, as they already have a product and an established business model. “If before it focused on the commercial aspects, on the fight for survival, there comes a time when it needs to put the house in order”, says Ponzoni. “Does it need to wait that long to resolve the issues or should it look to resolve investor expectations in some respects? There is always a critical moment to turn the key to this super demanding level of governance”, he points out. For those that are still in the initial stages, the study helps to indicate possible paths. With better prepared governance, it becomes easier to attract investors - even more so at a time when resources for startups have diminished. In the first three quarters of 2022, resources invested in startups reached US$ 3 billion, compared to US$ 9.1 billion recorded in the same period last year, an atypical year. “Investors are increasingly selective. So, for startups, back to the point of governance, at a time when you need to look at more sustainable business models, which demonstrate that the startup has investment control and the ability to grow, everything starts to make a difference. They are more selective in seeking the most promising alternatives in having a sustainable business model”, evaluates Faria. As it is the first publication of the research, it is not possible to compare it with previous years. However, in the coming years, more issues may be measured as a way to help move discussions forward. “We started planting now to harvest in the future. It is a continuous process, there will always be a new theme”, projects Marcatti. Source: Estadão

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