Good governance may not be the most scintillating topic, but it can deliver real value to growth company founders facing investors increasingly concerned about risk amid the current market uncertainty.
Flutterwave trouble and its ramifications
The more ‘frontier’ the market, the safer international investors require their investments to be because risks in such markets are both capital and reputational. Given added risks in Africa like FX, regulation, and even occasional political risks, companies will be held to higher individual governance standards than elsewhere, partly to compensate.
Flutterwave’s recent and very public issues have, unfortunately, shone a bright light on African growth company governance standards and showed firsthand how easily things can unravel without proper governance standards. Olugbenga Agboola, the company’s Founder and CEO, is currently under fire for alleged (as yet unproven) dubious business and personal practices. Among the many accusations is a lack of adequate governance standards and business processes which may have led to a failure of the company to administer critical operations such as recruitment and termination and the management of valuable share options.
The Flutterwave story is even more stark because the company already had several rounds of international capital under its belt. It was one of the continent’s success stories, often held up as the poster child of progress and transformation in Africa’s startup ecosystem. Whether some or none of the accusations are eventually proven doesn’t matter. International investors now perceive that if these problems can happen to Flutterwave, then governance is now a risk factor for other African growth companies yet to raise international funding.
Unfortunately, the issue of poor governance in Africa is not new. Some years ago, the Abraaj Group, which was at the time a leading frontier market private equity investor, very publicly went through a fraud scandal where senior executives were proven to have defrauded investors of a significant amount of the fund’s capital. To be clear, poor governance isn’t a distinctly African/MENA issue either. Many growth companies in the US and Europe have gotten into much worse trouble; WeWork, Robinhood, Theranos, the list goes on and on. The reality is that even the most capable management can make bad or downright criminal decisions that lead to undesirable results if left unchecked, no matter the market.
But this issue now has a much more significant effect on valuations for African/MENA companies in particular. Such companies will likely be judged more harshly due to elevated risks and have to ‘prove’ strong and complete governance systems to qualify for international money. Whereas up to now, governance was a ‘hygiene factor’ or a tick-box item for international investors, we expect it to become a bigger and bigger focus during due diligence before closing a round. Any gaps will likely result in the investment failing to close or valuation being significantly cut.
What does good governance mean exactly?
In our view, there are several areas where growth companies can improve their governance efforts to satisfy increasing investor concerns and reduce the likelihood of scandals, fraud, and other issues cropping up in the future. For a start, many companies do not think hard enough about the Chairman/or woman position. A strong and recognised Chairperson with credibility, who international investors can vet, can help steer and oversee the company’s governance and will be a source of significant additional value in future fundraisings.
Many growth companies in Africa/MENA also do not yet have diverse boards. While boards of growth companies are inevitably dominated by larger shareholders, adding independent board members early on can be another source of enduring additional value. Reducing the perceived risk for incoming international investors reduces their ‘discount rate’ applied to a company’s future potential earnings and directly increases the round’s price per share.
Another shortcoming we’ve observed is that many growth companies do not invest heavily enough in an experienced CFO. They often operate with a CFO, who is an internal accountant. While this is sufficient for managing the early phases, in the current environment, we believe African companies can get a premium valuation by over-investing in CFO talent that is ‘bigger than the company’s size.’ Hiring such talent is more possible today than ever because of the attraction many experienced international CFOs have to work in the world’s last truly untapped market.
Many of the best growth companies in Africa/MENA have also gone through one or more vetting programs, be it Y Combinator, Endeavor, or others. Having the ‘box-tick’ of at least one such network program again goes a long way towards creating the perception of strong governance.
Finally, many companies need to improve basic fundamental business processes. Many growth companies simply don’t have them because they are not considered ‘sexy’. They don’t generate revenue. But, in today’s market, the ability to demonstrate deep business processes that are consistent in areas like hiring, training, contracting, and compliance reduces the perception of risk, sometimes significantly, which can only improve valuation in the next round.
It’s hard to overstate the value of this. Business processes simply mean a company has an established way of completing an activity. This is not a manual that gets filed away, never to be looked at again. It’s a set of processes that generate consistent and trustworthy outcomes and behaviours. Putting these in place is the first requirement. Marketing them as part of the fundraising story is the second, equally critical, piece of the puzzle.
As concerns about risk grow, so will the importance of governance
Flutterwave’s recent issues are a wake-up call to the ecosystem. The market downturn is the other. The African/MENA companies that successfully raise large rounds in the future will be those that get ahead of these issues and start viewing governance from an investor perspective. Ultimately, a significant portion of investment decisions comes down to trust, and a key driver of trust is the oversight that comes from strong corporate governance. It’s all part of growth companies looking more mature, more established, and lower risk than international investors might expect.
In the past few years, these steps were frankly optional. Growing companies could raise while cutting corners. Going forward, expect international investors to scrutinise every corner and demand basic business practices and oversight are in place before investing, rather than taking the risk they will be implemented afterward. That, in a nutshell, is the real difference African/MENA growth companies face raising large rounds in the coming years.
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