Survey by Better Governance shows that only 17.6% of young companies are in most mature stages of governance
06/29/2022
In the last decade, the Brazilian startup ecosystem has become the most solid in Latin America, with a growing number of companies, investors and success stories. But this expansion has not been accompanied by an item considered fundamental to the long-term success of the business: corporate governance.
A survey conducted by consultancy Better Governance shows that while 60.1% of startups declare to be in the most advanced stages of business development, only 17.6% are in the most mature stages of governance. The majority (82.4%) are still in the early stages.
“There is a mismatch. It’s like a teenager, with growth spurts but still stumbling,” said Sandra Guerra, the founding partner of Better Governance. “Lack of governance increases the risk of a startup entering the valley of death,” says the expert, who has served on boards of directors for more than 25 years. The mortality rate is high among startups. One in four startups die in the first year of life, and half don’t make it past the fourth year, according to a study by Fundação Dom Cabral.
Better Governance heard 146 startups from 20 states, most of them (74%) with up to five years of founding, annual turnover of up to R$1 million (43.4%) and B2B model, with sales directed to other companies (45.2%). The results will be detailed this Wednesday in Miami, during an event of the Inter-American Development Bank (IDB). At the meeting, questionnaires in English and Spanish will also be launched, with the expansion of the survey to other Latin American countries.
The investments in startups in Brazil reached a record value of $9.6 billion last year, with an increase of 165% compared to 2020. For 2022, the projection is for expansion of at least 20%, reaching something around $11.6 billion to $12.9 billion, said Nelson Azevedo, director of Better Governance, based on data from the Distrito platform.
“Funds are not going to decrease, but investors are pickier in the selection of startups,” the expert said. The so-called “spray and pray” era, in which venture capital funds sprayed funds and waited patiently for the results, “praying” for them to be positive, is over, Mr. Azevedo said.
With the crisis triggered by Covid-19 and the unfavorable economic scenario, marked by inflation and high interest rates, startups are having to show more solidity to attract the attention of investors, whose evaluation criteria have also become more sophisticated as the checks get fatter. In this scenario, Mr. Azevedo points out, a well-structured governance system can make a lot of difference for startups.
Instead of rarities such as “unicorns” and “decacorns” – startups whose market capitalizations exceed $1 billion and $10 billion before they even hit the stock market, respectively – the funds are now interested in identifying “camels,” Mr. Azevedo said. These are companies that do not grow so fast, but show constant evolution and are resistant to bad weather.
The governance maturity model proposed by Better Governance takes into account the criteria for small and medium-sized companies of the International Finance Corporation (IFC), which is linked to the World Bank. There are six governance levels, classified by four stages of maturity. The results are then compared to the four stages of development of startups established by the Brazilian Institute of Corporate Governance (IBCG).
The biggest mismatch is in the control environment – which evaluates the financial, accounting, and strategic control structure – and in the field of financial information disclosure and transparency. In the first case, 66.4% of the companies are still in the initial stage of maturity. This reflects the fragility of startups in practices such as auditing (with 80.5% of the companies in the basic stage) and risk management (47.7%). In relation to transparency, the share of companies in the developed or advanced stage does not reach 14%. When it exists, the work of auditing the rendering of accounts is restricted to the founders, without greater visibility to the other stakeholders.
The concern with ESG occupies an intermediate level of attention. About 71% of the companies say they are advanced in issues related to the formalization of the business, such as articles of association and bylaws. But items such as sustainability and implementation of governance bodies (such as boards) only occupy a similar status in 20% and 15% of startups, respectively.
The same occurs with decision-making and strategic monitoring. Almost 46% of the companies are in the most mature phases of the remuneration policies, for example, but very few are prepared for the succession of their executives: 86.5% are still in their infancy in this aspect.
“Succession is not a taboo only in startups; it is a problem in any company,” Mr. Guerra said. In the case of new companies, this is aggravated because, in recent businesses, the entrepreneur or CEO hired has more difficulty in considering his own obsolescence and recognizing when the business requires another manager profile. The recommendation, however, is to consider a succession plan even if it is not to be effective in the short term, says the partner at Better Company. Unlike what the saying goes, never change a winning team, in a startup, it is necessary to be prepared to change at any time.
*By João Luiz Rosa — São Paulo
Source: Valor International