The Renaissance of Venturing
In today’s era of disruption, when everything seems to be new, it is instructive to look back at history. Every period of disruption has been characterized by concurrent developments. Schumpeter (1942) neatly summarized this process as “creative destruction.” Accepted norms of economic value creation are challenged by new, more effective and more efficient approaches. This eventually leads to the destruction of old companies and the formation of new ventures.
Creative destruction follows a structured path that has implications for the perception of venturing. In the initial phase, few pioneers actually envision the new, and they are usually ignored or ridiculed by the establishment. But, as these pioneers start to prove themselves and find their fellowship with clients and customers, elements of the establishment slowly awaken. They either begin to embrace or fight off the change, as neatly described by Rogers (1962) in his analysis of the diffusion of innovation. Disruptive innovation eventually prevails, leading to true value innovation and rendering an existing solution obsolete, as postulated by Bower and Christensen (1995).
The Venture Board – the Glue that Bonds the Venture Ecosystem
For ventures to flourish, they need to be embedded into a venture ecosystem that provides the key ingredients for success, and allows for an efficient and effective allocation of those resources and capabilities. If we view venturing as a series of interactions between the key players at various stage of a venture, as suggested by Dinnar and Susskind (2019), we can distinguish three key players with distinctive roles, functions and motivations:
Entrepreneurs: The founders turn opportunities into business value. Entrepreneurialism provides the capabilities to realize ideas and capitalize from value creation by selling or living from the companies they create.
Investors: Investors provide the much-needed capital to scale the business. They expect a risk-adjusted return from their investments. They also serve as validators, as they choose between different options in which to invest.
Venture Boards: One of the key functions of the venture board is to align the interests of entrepreneurs and investors, with the company’s success as the primary objective. They provide co-direction and control and expect to be remunerated for their services.
Historically, most of the focus has been on entrepreneurs and, to a lesser extent, investors. Venture boards have only gained attention more recently. The two catalysts have been well-known cases of failure in venture governance (Garg and Furr 2017) and a greater level of research at the intersection of corporate governance and entrepreneurship. The roots of this research can be traced back to Mace (1948), a Harvard professor who stressed that the venture board can be a valuable resource of advice beyond acting as a supervisor (Gabrielsson 2017).
The pivotal role of venture boards, however, is becoming better understood, as summarized by Garg and Furr (2017, 327): “Although the exact role of the board may vary across ventures and institutional contexts, venture boards are typically central to the most significant actions within ventures.”
The Four Waves of Venture Governance
While the key players in the venture ecosystem have remained the same, the institutional context has evolved over time. As outlined above, ventures have always been the driver of economic progress, from hunting ventures in the Ice Age to pillaging ventures by the Vikings. In history, the alignment of interests was ensured by ad-hoc governance arrangements, i.e. for each mission, specific rules were defined and enforced.
The start of the second wave, the special purpose venture governance, can be attributed to the Medici in the 15th century who invented double bookkeeping to finance the first trade missions. Given the scope of these global quests and the risks associated, investors were sought to pre-finance the missions. The investors were guaranteed a pre-defined return upon the successful completion of a mission. The process was perfected in the 17th century by the establishment of the British and Dutch East Indies Companies. These entities set the foundations for the limited liability organization and facilitated much of the innovation that would follow.
The early stages of industrialization were mainly driven by formalized ad-hoc ventures, such as the construction of railways and critical infrastructure. This era gave birth to large industrial firms whose focus on innovation was guided by general-purpose venture governance, i.e. companies started ventures within their corporations without needing to find investors for each single venture. Passed by the British parliament in 1844, the Joint Stock Companies Act enabled companies to incorporate for the first time without a Royal Charter. Enshrined in 1855, the Limited Liability Act was also instrumental in the rise of general-purpose ventures (Bevir 2012). In that age, corporates, and to a lesser extent merchant bankers, became the venture capitalists.
The emergence of a formal venture capitalist industry, pioneered by Doriot, “the father of venture capitalism,” in 1946 (Spencer 2008) marked the dawn of the fourth wave, the specialized venture governance. In that model, investors that identified and co-developed ventures became driving forces of value creation through ventures. The megatrends of financialization and specialization in asset management boosted the popularization of this governance model. Before long, corporates accustomed to applying the general venture governance model shifted their focus to the specialized venture governance model.
The Changing Role of Venturing in the Business Lifecycle
The birth of the modern business organization, both as an institutional outcome and a driver of venturing, was a historic economic breakthrough. The modern business organization, however, assumes many forms. Taking into account the heterogeneity of an organization, we may focus on the business lifecycle, which helps us to better understand the different levels of relevance of venturing. As such, we can define four phases of a company lifecycle:
Formation phase: The initial phase of a company is characterized by opportunity seeking. Creativity is a key capability to help the company develop a viable product and requires capital injections.
Acceleration phase: Fast growth, entering new markets and capturing market share define the acceleration phase. The company needs to invest in market development to ensure it reaches consumers and clients before potential competitors. As companies at this stage often lose money, they are still owned by private investors.
Consolidation phase: Once an organization is established and operates in a well-defined industry, the focus shifts to increasing efficiency and effectiveness to preserve its position. The same optimization focus is applied to the capital structure.
Energization phase: As industries evolve, every business reaches the point where it needs to re-invent itself to ensure the industry-solution fit. It needs to re-discover opportunities by forgetting and learning, which requires preservation and re-creation of capital.
Venturing can be seen as one of three dominant paradigms for organizing a business, as defined by Hilb and Casas (2015). In contrast to managing and administrating, venturing focuses on creating absolute value beyond existing industry boundaries, while management revolves around protecting absolute value by creating relative value, i.e. gaining market share. The administrative paradigm, on the other hand, concentrates on protecting relative value, which equals absolute value due to a lack of competition.
Hence, venturing can occur in all lifecycle stages, although its relevance, scope and scale may differ – as will the requirements for effective governance:
Formation phase: Almost all company activities in the formation phase center around venturing, i.e. creating value by identifying and capturing new opportunities. This phase defines the culture as well as the capabilities needed to succeed. In this context, the main objective of effective governance is to ensure survival by facilitating entrepreneurial freedom while maintaining compliance with relevant legal requirements.
Acceleration phase: While venturing is still a dominant paradigm in the acceleration phase, the managerial paradigm gains extra relevance, i.e. how to create value within pre-defined boundaries. At this juncture, the role of governance is mainly to facilitate fast growth, but also to professionalize the governance structures.
Consolidation phase: Venturing is least relevant in the consolidation phase. Managerial or even administrative paradigms prevail as organizations adapt and formalize their governance systems to meet the complexities of large and often inter-twined operations.
Energization phase: The venturing paradigm gains in relevance in the energization phase, as value protection is not deemed sufficient to survive. Once again, venturing becomes a source for survival of the organization, and governance structures need to provide sufficient flexibility.
Principles of Excellence in Venture Governance
As discussed above, venture governance should not be mistaken with the governance of a startup. Rather, venturing is a fundamental value-creation mindset that companies embrace across their lifecycle. As a result, the governance challenges evolve through the lifecycle.
Nevertheless, there are common characteristics of venture governance that help to define the principles of venture governance. To ensure a comprehensive and integrated perspective on corporate governance, we utilize the Board Diamond framework. This stipulates that a full understanding of corporate governance takes into account three key dimensions: the board composition, board collaboration and board culture.
Board culture: What values are important to enable effective corporate governance?
Board collaboration: How does the board interact with the key stakeholders?
Board composition: Who should be part of an effective board?
As previously stated, a venture board is the glue that bonds entrepreneurs and investors. All players in the venture ecosystem face diverging expectations, and mastering dilemmas is a core skill of successful entrepreneurship (Wasserman 2012). The venture board cannot escape the management of dualism, i.e. the active dealing with diverging interests. At the same time, the venture board, in its role as a bridge between entrepreneurs and interests, must apply a dualistic approach to corporate governance that focuses on how to relate and integrate opposite requirements. Six dualistic principles are proposed for the three dimensions introduced above.
The key dimension of any effective corporate governance is the culture that drives decisions. Two characteristics of effective governance are of particular relevance to venturing: the way the board deals with uncertainty, and the perspective on time that the board takes.
Principle 1: Embrace uncertainty with certainty
Dealing with uncertainty is central to venturing, so a venture board member must understand the opportunities and pitfalls of managing uncertainty. He or she should be equipped to thrive in such circumstances. At the same time, the management team expects guidance from the board to deliver a certain direction in times of uncertainty. The same applies to investors who base their investment decisions on the ability of the venture team to master uncertainty. They also seek certainty, especially when managing the time horizon of their investments.
Principle 2: Pursue a far-reaching vision with a near-sighted view
A proactive approach to dealing with uncertainty embraces the long-term vision while focusing on short-term activities. Mid-term planning is considered ineffective in such a context. The board should acknowledge and embrace this mindset in their interactions, both with the management team and investors. It acts as a validator and a translator, should challenge the underlying assumptions of the vision, and ensure that the venture is on the right trajectory to meet the long-term vision. Meanwhile, the board can help translate long-term aspirations into short-term objectives, both for the management team and vis-à-vis the investors.
Two further principles emerge when assessing the role of the board in collaboration with other stakeholders, i.e. the entrepreneurs and the investors. These are the way the board challenges the management team in a constructive manner and how it provides the venture team with autonomy while instilling discipline.
Principle 3: Act as a friendly foe
Given the unsuitability of most traditional key performance indicators to the controlling and supervision of ventures, the personal involvement and active engagement of board members with the management team is crucial to ensure progress. The board has to display a critical distance when challenging the work and plans of the management team while demonstrating empathy with the mental state of the entrepreneurs, i.e. they have to act as friendly foes. The same applies to interactions with investors. Here, the board must understand the expectations of investors while always acting in the best interests of the company. These interests may sometimes diverge, particularly with regard to financing decisions.
Principle 4: Grant autonomy in a disciplined manner
Since the entrepreneur is vital to entrepreneurial value creation, the relationship between founders, funders and the board can be delicate. On the one hand, entrepreneurs want and need a high level of autonomy to succeed. Autonomy is a cherished motivation that entrepreneurs embrace when embarking on an entrepreneurial journey. At the same time, the board is expected to instill a degree of discipline and build a constructive counter-weight to a potentially free-wheeling and over-confident founder. The better the board masters this duality, the more trust they earn from investors.
When it comes to the optimal composition of a venture board, two aspects must be considered: the profile of the board members and the duration and timing of their tenure.
Principle 5: Be a specialized generalist
The expertise challenge in ventures is two-fold. Firstly, as fast growth is imperative for successful ventures and entrepreneurial organizations are constantly in transition (Gabrielsson and Huse 2017), the capability requirements change over time. Secondly, entrepreneurs have to think in terms of options, and hence require a broad range of capabilities to act quickly if a timely option emerges.
Ventures usually experience five strategic trajectories in their quest to survive and succeed:
Spin-around: Ventures are primed to pivot their strategies or business models should the market fail to respond as expected, or conditions change. Given the limited resources and market experience, approaches like pretotyping (Savoia 2019) or prototyping are well suited.
Scale-up: To survive and thrive against competing ventures, rapid growth is essential (Thiel 2014; Hoffman and Yeh 2019). This requires a concerted approach to rapid scaling-up and winning clients and customers.
Sum-up: As markets mature, being in the driving seat of industry consolidation becomes vital for success. Relevant skills in deal-making and organizational integration are essential.
Spin-off: At the same time, successful venture leadership teams require the courage to offload businesses that may thrive under different ownership. This posits the mental maturity to accept new realities and detach from personal connections to a business.
Smarten-up: Along the way, ventures that professionalize their operations will be better positioned to compete with other new upstarts or smartly managed existing businesses. This, again, requires a different skillset.
The specific capability requirements of ventures should be reflected at the management and board level. This challenge is accentuated because ventures are limited by their financial resources (Feld and Ramsinghani 2014), and may have smaller boards (Garg and Furr 2017). Consequently, managers and board members often wear multiple hats. At the same time, they need a deep expertise in venture-specific areas based on their experience and exposure to similar situations.
Principle 6: Be temporary, but be persistent
One method of dealing with the specialized generalist challenge, as described above, is to change the composition of the board as circumstances dictate. Different stages in a company’s lifecycle and special strategic challenges, such as a public listing or an acquisition deal, require diverse profiles and personalities. Hence, members of venture boards should accept temporary tenures. Though shorter, the tenure will be no less intense given the many challenges to tackle, meaning that persistency and experience of overcoming obstacles are pre-requisites.
Look Forward by Not Forgetting to Look Back
Venture governance in the 21st century shares many characteristics with the approaches forged in the 15th and 16th centuries, when entrepreneurial sailors headed to unknown parts of the planet. They too needed financing, and investors devised mechanisms to enforce the agreed terms. While much has changed in the past six centuries, not least the evolution of a specialized approach to venture governance and the emergence of a professional industry of venture capitalists, several basic principles remain relevant. Today, venture boards are pivotal to mastering the dualities of venture governance, especially when addressing board culture, collaboration and composition:
#1: Embrace uncertainty with certainty
#2: Pursue a far-reaching vision with a near-sighted view
#3: Act as a friendly foe
#4: Grant autonomy in a disciplined manner
#5: Be a specialized generalist
#6: Be temporary, but be persistent
History has shown the role of ventures to be closely linked with the disruption cycle. In times of intense creative destruction, the interest in and attention paid to ventures flourishes. As soon as transformation creates a new normal, ventures are viewed less enthusiastically. Effective venture boards need to be prepared for both phases.
Venture governance delivers a lasting impact in two ways. Firstly, many principles that evolved from venture governance are adopted into the dominant model of corporate governance. Dealing with uncertainty and agility has become a key requirement for any board member beyond the world of startups. Secondly, the emergence of the next wave of creative destruction is just a question of time. Let us hope that when this next thrust arrives, businesses will remember and learn the invaluable lessons from the previous cycle.
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This article was published as a chapter in the book Governance of Ventures in March 2020.