“The hallmark of good corporate governance is an independent-minded board of directors to oversee management and represent the interests of shareholders. In a typical corporation, the vast majority of this work is carried out through board meetings and specialized board committees.” David F. Larcker Stanford
This is true for businesses with external and diverse financing, with their own legal status, but is this also true in a corporate group, for corporate start-ups, new businesses? What are the possible differences in governance between intrapreneurship and entrepreneurship?
The creation of a legal structure and the entry into the capital of several investors make the creation of a supervisory board with legal responsibilities a no-brainer. This, however, is not true for a corporate start-up. In this case, its choice.
The first question for a corporate start-up is therefore not which composition for the board but is a board needed? The temptation to remain in hierarchical, classic managerial governance with exploitation KPIs is strong, despite findings highlighting the relevant governance is one of the 7 key areas to increase the scale-up success rate from 22 to 60% (Mc Kinsey dec 2020). Agile governance is one of the 3 components of success for corporate venturing (BCG – June 2022).
What would then be the principles for setting-up governance by boards and what would be the nature of these boards? Supervisory (Tier1) or Advisory (Tier 2)? Would there be one board per initiative or for several? Finally, what would be the roles and responsibilities of this governance?
A corporate start-up (intrapreneurship) and a start-up (entrepreneurship) still have a lot of common tasks such as defining the right vision and then a strategy, attracting and retaining talent, finding the product market fit, succeeding in their scale, including internationalization. That withstanding, some of the problems that exist for one do not exist for the other.
The link with the core business is specific to the corporate start-up. This begs the questions: Is this corporate start-up strategic for its corporate? Who will sponsor and host that new business? Fundraising, cash management are critical for the start-up as well as its future valuation. This is less critical for the corporate start-up. Equity and dilution issues are sometimes unknown for corporate start-ups as intrapreneurs/CEOs are even often not shareholders.
What is the appropriate governance?
New exploration businesses generate an autoimmune reaction from the core businesses which naturally reject these new businesses. Relevant choices about governance and associated organizations can maximize the chance of their scale-up success. A positive confrontation between the corporate start-up and its corporate is a premise to maximize the success.
A corporate start-up will spend a lot of time internally justifying its existence, burning cash while the core business often finances it at its expenses. The temptation to arbitrate against uncertain new businesses is high. Isn’t the success rate of creating a new large business very low? 0.2% greenfield start-ups in the USA would achieve 100M€ (Chris Zook, Bain & Company, Dec 2016) and in corporate, 22% would succeed to scale and achieve more than 50M€ (Mc Kinsey, dec 2020 & 2021).
The governance of this corporate start-up should therefore be able to preserve it from internal “risks” that could suppress its autonomy, stop it through misunderstanding of exploration and scale-up specificities. It should even more maximize its external focus and ability to leverage the distinctive corporate assets.
1st principle: The more the strategy of the corporate and the corporate start-up are different, the more the interest of having a supervisory board with strong influence within the corporate is essential.
This tension with the corporate is even more important while scaling-up as the necessary amounts in cash and CAPEX become substantial. The temptation to stop this corporate start-up would then be strong. Business entities hosting and financing the corporate scale-up can be very anchored in the core business or be dedicated to new businesses or even more to scale-ups (groups like BP, BASF have their entity dedicated to Scale-up, Build-up Gmbh & BP Launchpad respectively)
2nd principle: The more the corporate business entity hosting and financing the corporate scale-ups will be experienced and receptive to new business (mindset, ambidexterity, etc.), the less critical it is to create supervisory boards. Advisory boards (Tier 2) plus an influential line management could be a smart option.
What about roles and responsibilities of this governance?
On the question of strategy, to begin with: for a start-up, the supervisory board decides on the strategy based on the CEO proposal. The advisory boards can be an asset in defining it. Pivots are usual.
For the strategy of the corporate start-up, that could be more complex, it has to be consistent with its corporate, and even more with the entity hosting and sponsoring. The freedom of the corporate start-up could be therefore more restricted. Like always, people’s mindset may mitigate the risks.
3rd principle: For a corporate start-up, the more it fits into the corporate strategy, the less it deserves a strong and independent governance to express itself and validate its own strategy and to challenge the strategy of the corporate or entity hosting and sponsoring.
On the question of fundraising
A start-up will spend a lot of time and energy to get funding, which will lead to a lot of discussion with the supervisory board on the choice of new investors and the financial impacts (equity, dilutions). For a corporate start-up, especially if it remains 100% financed by its corporate, the question will be less about dilution than about the release and protection over time of the funds.
4th principle: For a corporate start-up, having strong and influential governance in the group is an asset to increase its chance of obtaining the necessary funds, and then to earmark the budget.
Many other points to be addressed, such as the presence in corporate start-up governance of the CEO’s manager, the question of independence between the two arises. Indeed, if the option of a supervisory board is chosen, a simple analysis of the influence of the links between the stakeholders (ARCANTE group, MIRA MATRIX) shows the importance of adding an independent member to keep the board efficient. On creating or not creating a legal structure: opening-up the capital of the corporate start-up to external investors would request further deep dive.
To summarize, the choice of governance for a corporate start-up is not a give in as it is for a non-corporate start-up. A supervisory board (Tier1) is not the only option. Other choices are possible such as a supervisor/manager with or without an advisory board (Tier 2), or even more a single supervisory board approach for several corporate start-ups.
Four principles are proposed to guide toward the relevant choice, all being more or less relevant depending on people skills and mindset.
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The more the strategy of the corporate and the corporate start-up are different, the more the interest of having a supervisory board with strong influence within the corporate is essential.
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The more the corporate business entity hosting and financing the corporate scale-ups will be experienced and receptive to new business, the less critical it is to create supervisory boards. Advisory boards (Tier 2) plus an influential line management could be a smart option.
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For a corporate start-up, the more it fits into the corporate strategy, the less it deserves a strong and independent governance to express itself and validate its own strategy, to challenge the strategy of the corporate or entity hosting and sponsoring
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For a corporate start-up, having strong and influential governance in the group is an asset to increase its chance of obtaining the necessary funds, and then to earmark the budget.
It would be interesting to compare this first analysis and principles with a benchmark of several corporates and to establish the link between the % of success of corporate start-ups at scale and the chosen governance if any.
Read Pascal’s interview in our “Meet the Scaleup Board Member Series” here!
Author Bio
About Pascal Paemelaere
Pascal is Class 11 ScaleUpBoard alumni and a self described scaleup and start-up addict. He is the former Head of Global Marketing at Michelin. At Michelin, Pascal discovers hi-tech coated fabrics businesses for aerospace, automotive and energy markets. He has coached 10 venture teams (deep tech) and aims to create new business with a positive impact on the planet. He is currently based in Bangkok, Thailand.
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