In today’s rapidly evolving venture capital (VC) landscape, corporate governance is emerging as a cornerstone of sustainable growth. As VCs invest in startups with transformative potential - that often come with considerable risks - a structured governance framework not only reduces risk but also sets a trajectory toward long-term success. Strategic oversight, ethical accountability, and organizational resilience are no longer optional; they are the guiding principles that enable innovative companies to scale responsibly and achieve success.

From WeWork’s and FTX’s fallout to the SEC’s [1] new playbook: why governance matters now more than ever

Present-day regulatory changes are primarily a response to recent financial scandals within tech startups that have shaken the VC industry, underscoring the need for stricter oversight across the board from founders to investors.

WeWork's downfall, once a high-flying startup valued at $47 billion, exposed the dangers of unchecked ambition, inadequate oversight, and misaligned incentives. The company's rapid global expansion, driven by lofty market assumptions, masked underlying financial instability. Founder Adam Neumann’s leadership raised red flags, from self-dealing practices to leasing personal properties back to the company, while WeWork’s board failed to exercise effective oversight, allowing a concentration of power that hindered accountability. The lack of gender diversity on the board further underscored governance gaps, alienating investors and stakeholders alike. These issues came to a head during the company's IPO attempt in 2019, led by its largest investor, SoftBank, through its Vision Fund. SoftBank, which had heavily backed WeWork in earlier funding rounds, played a significant role in both the company’s meteoric rise and dramatic fall. Questions surrounding WeWork’s valuation, governance, and financial sustainability led to a failed IPO attempt, culminating in Neumann’s resignation and a collapse in valuation. Following the failed IPO, SoftBank stepped in to provide a bailout, taking control of the company, restructuring its operations, and significantly reducing its valuation.

The collapse of FTX in 2022 is another example that served as a pivotal moment for the industry, exposing vulnerabilities in due diligence and compliance. Despite securing significant investments, FTX’s collapse —driven by alleged fraud and mismanagement—resulted in substantial financial losses, including a nine-figure write-off by one firm. This incident highlighted the critical importance of rigorous governance practices for both startups and investors, underscoring how lapses can erode trust and impact the long-term credibility of the VC ecosystem.

These developments underscore the critical role of corporate governance in VC, where ethical leadership, transparency, risk management, and accountability to limited partners (LPs) [2] form the backbone of successful firms. Effective governance not only enhances investor confidence and regulatory compliance but also fosters stronger fund performance. In the context of our industry, corporate governance comprises systems, rules, and processes that direct the firm’s operations and strategic decisions, ultimately protecting stakeholder interests and promoting sustainable growth.

How transparency, accountability, and ethics are redefining VC success

The Theranos scandal underscores the critical importance of transparency, accountability, and ethics in redefining venture capital success. Despite raising over $700 million and reaching a $10 billion valuation, weak corporate governance enabled unchecked founder control, poor board oversight, and a culture of secrecy that concealed its technological failures. With a board lacking industry expertise and investors prioritizing hype over due diligence, the fallout highlights the need for VCs to implement robust governance frameworks, foster balanced power dynamics, and champion ethical practices. By doing so, VCs can safeguard investments and redefine success beyond financial returns.

The SEC's updated Investment Advisers Act of 1940, revised in November 2023, marks a transformative moment for VC and private equity (PE). Seen as the most significant regulatory shift since the Dodd-Frank Act of 2010, which came into place in response to the 2008 financial crisis and brought VC firms under greater regulatory oversight, increasing transparency and accountability to protect investors and reduce systemic risk, the new SEC rules push for greater transparency, fairness, and accountability. Now, private fund advisers are required to provide investors with detailed quarterly reports covering fund performance, fees, and adviser compensation. Annual audits for each fund are mandatory, and advisers are expected to secure fairness or valuation opinions for secondary transactions. Importantly, preferential treatment is off the table unless fully disclosed and shared with all investors, ensuring no unfair advantages. Even the smallest regulatory fees now require investor consent, leveling the playing field and enhancing trust across the industry. These changes are set to redefine the industry’s operational standards, holding firms to a new level of transparency and equity.

Regulatory frameworks such as FATCA,[3] CRS, [4] SEC oversight, and the Dodd-Frank Act, while frequently referenced in this article in the context of venture capital (VC), have a far-reaching impact across multiple asset classes, including PE and other private market allocators. These regulations were established to enhance transparency, accountability, and risk management across the entire investment landscape, underscoring their broad applicability beyond VC alone.

Corporate governance in VC goes beyond essential compliance; it is about creating a foundation for trust and transparency. For VCs, having a solid governance structure means a clear framework for decision-making, better alignment between stakeholders, and minimizing risk exposure. Equally important is ensuring startups have sound governance practices, achieved through thorough due diligence during capital allocation and throughout value creation efforts. This dual focus fosters accountability and sets the stage for sustainable growth.

Corporate governance within VC allows investors to monitor company performance closely while empowering founders to make informed, strategic decisions that fuel growth. This is particularly vital when transitioning from early-stage funding rounds to Series A, B, and beyond, where the stakes grow and the pressure to deliver positive commercial results increases.

At its core, corporate governance in VC is about creating alignment between stakeholders and providing the strategic framework for sustainable growth. The GP-LP structure is a crucial feature of this framework, balancing the active management of General Partners (GPs) [5] with the capital contributions and oversight of Limited Partners (LPs). Many VC firms establish advisory committees composed of LPs, which provide non-binding advice on strategic matters like conflicts of interest, valuations, and governance concerns. Although advisory committees do not have decision-making power, they add an extra layer of oversight, giving LPs an independent perspective on the fund’s operations and a forum for raising concerns if necessary.

Robust corporate governance and ethical considerations: the key to the  future of VC

Compliance protocols are integral to VC governance. When investors join a fund, they undergo onboarding steps like Know Your Client (KYC) checks, where individuals provide tax forms and bank statements, and LLCs and corporations submit registration documents. Anti-Money Laundering (AML) checks, along with adherence to FATCA and CRS requirements, ensure compliance and transparency in financial reporting. For instance, FATCA, a US law, requires reporting on US taxpayers with accounts abroad to combat tax evasion. Compliance with these protocols assures investors of the firm’s commitment to legal and regulatory standards, maintaining the integrity of the investment process.

Ethics are foundational to VC governance, guiding decision-making and fostering trust among investors, startups, and stakeholders. At the core of this responsibility is the fiduciary duty of GPs to act in the best interests of LPs, emphasizing transparency, accountability, and fairness – akin to how a board of directors operates within a startup, safeguarding the interests of its investors. Ethical governance means disclosing conflicts of interest, providing accurate information to investors, and prioritizing long-term value over short-term gains. Breaches of ethics, such as undisclosed conflicts of interest or fund mismanagement, can erode trust, damage the firm’s reputation, and impact future fundraising efforts.

Ethical governance in VC also extends to fairness and transparency in investment decisions, fee disclosures, and conflict management. Recent SEC rules now require VCs to disclose any preferential terms given to specific LPs, ensuring fairness across investors.

The future of VC with governance at its core

Robust corporate governance offers VC firms multiple benefits, from increased investor confidence to improved operational efficiency. A well-structured governance framework that prioritizes transparency, ethical decision-making, and accountability strengthens investor relations and helps firms attract top-tier LPs. Strong governance also enhances risk management by establishing internal controls that prevent conflicts of interest and financial mismanagement.

As the asset class starts to mature, the focus on governance is set to shape the industry’s future, with VCs recognizing it as a critical success metric. Investors are progressively drawn to companies that demonstrate not only financial growth but also a commitment to responsible practices.

Looking forward, corporate governance is becoming central to the VC landscape as advancements in automation and AI-driven tools streamline compliance, risk management, and reporting. With global regulations tightening, VC firms are increasingly integrating robust compliance systems placing transparency, investor protection, and sustainable governance at the core of their operations.

[1] SEC (Securities and Exchange Commission): The US federal agency tasked with enforcing securities laws, protecting investors, and maintaining fair, efficient, and transparent financial markets.

[2] LP (Limited Partner): An investor who puts money into a fund but doesn’t get involved in managing it; they rely on the fund managers to make decisions and aim to earn returns on their investment.

[3] FATCA (Foreign Account Tax Compliance Act): A US regulation mandating foreign financial institutions to disclose information on accounts held by US taxpayers to the IRS, designed to combat offshore tax evasion.

[4] CRS (Common Reporting Standard): An international framework established by the OECD for the automatic exchange of financial account information among participating jurisdictions to enhance tax compliance and transparency.

[5] GP (General Partner): The fund manager who runs the fund, makes investment decisions, and actively manages the money contributed by the LPs, typically earning a management fee and a share of the profits.

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