This blog is part three of a three-part series discussing Start-up Scandals, Board of Directors Criteria, and Governance Measures for start-ups to reduce risk and gain the trust of investors and boards. See Part1: Startups, Scandals and Fraud. Oh My! (The scandals) — Part2: Startups Scandals and Fraud. Oh My! (Board of Directors) – Part3: Startups, Scandals and Fraud. Oh My! (Governance Mechanisms)
Oh, the Scandals!
When coaching executive technology leaders, they ask how to elicit trust with a desire to influence, inspire, and be trusted by investors. I tell them it involves more than coaching. Mechanisms for trust to avoid scandals and fraud include measurable controls for organizational functions and activities.
The recent FTX scandal and FinTwit Fraud raise the matter of funding and faith of founders for investor dollars. But responsibility and accountability cannot rely solely on an innovative and likeable founder. Start-ups must ensure investors and Boards have confidence that scandals like these don’t arise in the future.
Why Early-Stage Governance?
Contagious excitement swirls around claims of innovations uniquely solving problems; the buzz is intoxicating. People are eager to become part of the innovation before the founding investment opportunity disappears.
Understandably, when funding rounds are in the millions of dollars, speed, execution, and marketing precede checks and balances. Here’s the rub, waiting to set controls is a colossal risk to those investments. Taking risks is in the start-up founder’s makeup, who views governance as controlling and limiting to the innovative process. They put traditional policies and constraints on the back burner, believing they’re unnecessary.
Corrective policies and procedures introduced by Dara Khosrowshahi’s redirect of Uber following the scandals by Travis Kalanick are an example of a start-up that initially failed in governance, creating a toxic and misogynistic environment.
An Open Door To Scandal
People outside of the Venture Capital (VC) space find it difficult to imagine handing over millions without significant checks and balances, yet, it occurs repeatedly. So why is that?
The legal sentencing of Elizabeth Holmes and Ramesh ‘Sunny’ Balwani for their convictions in the Theranos fraud shows how easy it is to make unsubstantiated claims when reporting does not run through a well-defined audit process. Sam Bankman-Fried‘s deflection of blame for the FTX collapse shows how poorly defined roles and responsibilities and the lack of controls get out of hand. These scandals and fraud make investors of new and innovative technology significantly cautious, as they should.
How Do Scandals and fraud Happen?
“We’ll figure it out when things have settled, and we can breathe.”
The above statement is typical of prospective clients in our sales calls. Start-ups prioritize innovation and speed in their drive to revenue and fail to implement well-managed governance to avoid scandal and fraud. The problem is that without those checks and balances, scandals like those below will continue to arise.
- Uber’s CEO, Travis Kalanick and his long list of nefarious activities caused investment and reputational loss.
- Another example is Mozido’s mobile payment app fraud and indictment of Michael Liberty, who pocketed funds and misreported accomplishments. Even with a stacked Board of seemingly experienced big names.
- The gift card app CEO, Renato Libric, overstated Bouxtie financials and forged documents that indicated he had the authority to sell shares.
Start-ups need to take risks; we argue that controlled risks are better than blind ones. Our goal with entrepreneurs, their boards, and investors is to reduce risk with scalable mechanisms in place from the beginning. They can start slow with a minimum foundation and grow their governance model as the company grows.
Okay, governance is necessary, so where to begin?
Start with Advisory and corporate Board membership, which we’ll address next week in Part 2: Start-ups, Scandals, and Fraud. Oh My!
Disclaimer: The Board Structure and Governance Risk Management considerations in this series are not to be construed as legal, CPA, or other Professional Services advice. GlobalSway recommends that you consult with the proper professional services, such as legal, human resources, financial, and consultants, as part of a collaborative ecosystem in governance design.
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GlobalSway works with Boards, Executives, and Professional Services providers to facilitate excellent governance for start-ups and well-established companies. Our goal is to ensure you have the mechanisms in place, so governance is a living, dynamic process that reduces risk and protects the business. Your reputation is everything! We are resellers of a governance platform called Corethix.
Sign up for a free trial of the Corethix Platform, or book a Demo to see how Corethix can help your organization.
