Enhancing Private Equity Governance

Entrepreneurs, especially first-time founders, face a number of challenges as they work to create and grow their venture. Irrespective of their motivation and talent, many studies have identified that their future success is heavily dependent on luck. In his 2015 Ted Talk, Bill Gross reported that over 42% of start-up success was due to timing. This finding supports the contention that a start-up entrepreneur should focus their attention on identifying a scalable busines model using a technique such as the Lean Start-Up methodology. This methodology is an iterative process that involves repeated observations of potential customer interactions with the venture’s minimum viable products.

This business development approach suffers from a number of shortcomings. It ignores the critical need for an entrepreneur to be able to access financing from increasing sophisticated investors as their venture grows. In addition, it ignores the importance of being able to attract high quality mentors. Among other benefits, these mentors will help an entrepreneur identify potential customers, make introductions to them, and provide an “outside” perspective when assessing feedback. Many studies have identified that being able to attract mentors is a key element of a corporation’s development.

Being able to attract financing and mentor support depends on an entrepreneur’s ability to “signal” their quality and their ability to effectively execute their business strategy. Investors in early-stage ventures have two important decision criteria: the venture must be investable, and the entrepreneur must be coachable. A key question to answer is whether an entrepreneur who follows a systematic approach to the overall development of their venture is able to send a credible signal about their venture and about their willingness to listen to advice.

To examine this issue, I recently conducted a study of the success of ventures enrolled in the Creative Destruction Lab Rockies program. The study found that entrepreneurs who demonstrate an understanding of the need to develop their governance and financing systems, in conjunction with their ability to identify a viable business model, are significantly more likely to receive mentor support and graduate from the CDL-Rockies program. These findings held during all investment phases of a corporation’s early-stage development: Ideation, Pre-Seed, Seed and Series A. These results reinforce the importance of addressing governance issues even during the early days of a corporation.

An entrepreneur’s challenges will change as their corporation grows and creating an effective governance structure that can evolve over time will prevent past decision from creating future problems. A seasoned lawyer who specializes in providing counsel to early-stage corporations indicated that the majority of their practice entails dealing with what they called “pay me later” files, i.e., situations where a problem has developed based on a failure to adequately plan for growth. In some cases, past decisions will create an insurmountable barrier to a corporation’s ability to raise financial capital and ultimately lead to business failure.

Fortunately, there are well established processes that an entrepreneur can follow to establish an effective corporate governance structure that will help attract both mentors and financing. Based upon academic research, and interviews with leading practitioners, the Haskayne Executive Education area has developed a course designed to provide needed education to entrepreneurs with respect to these processes. Our Enhancing Private Equity Governance program has been offered three times over the past year and participants have identified that the program has greatly increased their knowledge and confidence with respect to governance matters. In addition, it has allowed them to develop a network of peers, and potential advisors, that they will be able to draw upon in the future. This program feedback indicates that how to create an effective corporate governance structure is a “teachable” skill that will be of great benefit to all entrepreneurs, especially first-time founders.

The fourth offering of this program will begin in the winter of 2022. This blended learning program will bring together high-potential entrepreneurs with seasoned business advisors to create an opportunity to share insights and develop relationships. Further program details can be found on the Haskayne Executive Education website.