Amid chaos at Byju's, what is the other side of startup ethics debate?

The goings on at Byju's and some other startups raise questions of not only governance but also the board's role

In June, Byju’s, the world’s most valued education-technology startup, encountered an out-of-syllabus problem. Russell Dreisenstock of Prosus, G V Shankar of Peak XV Partners, and Vivian Wu of Chan Zuckerberg Initiative resigned from its board of directors.

It took about a month — the gap should tell a story of its own — for the reason to come out. Prosus, one of the earliest and largest investors in Byju’s, said the edtech firm’s executive leadership “regularly disregarded advice and recommendations relating to strategic, operational, legal, and corporate governance matters” despite repeated efforts.
 

You have heard about the funding winter at India’s startups, marked by investors tightening their purse strings. Now comes the autumn of trust deficit, with board members falling like dried leaves and a chasm emerging between investors and founders.

Sure, it has not been good going for several Indian startups (see in Search of Answers), but, while putting the founders and chief executives in the dock, the events of the recent months are also putting the role of startup boards under the scanner. Experts believe corporate governance to be the joint responsibility of founders, investors, and the board.
 

“Investors and the board are complicit and accountable for the current mess,” says Sriram Subramanian, founder and managing director of InGovern Research.
 

At Mojocare, a health-tech startup, after financial irregularities came to the fore, investors realised that its business model was not viable. Some of the investors on the company’s board included Chiratae Ventures, Peak XV Partners, and B Capital — all of them formidable names. Ashwin Swaminathan, the Mojocare founder, was earlier with Chiratae, which had been an investor in the company right from its seed stage.
 

Even outsiders could tell from a distance that something might be amiss at BharatPe, Trell, Zilingo, 4B Networks, Mojocare, or GoMechanic. Those on the inside could have seen and heard more.
 

Take Byju’s, for instance. It has been in the news for its falling valuations as existing investors revise the value of their holdings. But it has also featured in news reports for its allegedly aggressive methods for getting business, many of its acquisitions have been questioned, and it has received a visit from the Enforcement Directorate, the government agency that looks into foreign-exchange violations. What’s more, Byju’s has made a mess of its financial reporting — something to which the board members would have had a ring-side view.
 

The kindest thing one hears is that India’s startup founders mired in controversy might not be wilful defaulters; they could just be short on due diligence and in following governance norms. The harsher critics say the lapses are a result of the mad rush to raise funding and chase valuations.
 

During and immediately after the pandemic, there was a liquidity boom in the markets. There was an abundance of capital chasing limited deals. “In order to raise additional capital at higher valuations, certain founders resorted to representing the financial position and key business metrics of the company inaccurately,” says Nikhil Bedi, partner and forensic leader at Deloitte India.
 

A venture capitalist, who did not wish to be named, says the last 18 months saw a frenzy among startups to give the fastest term sheet — a non-binding agreement with the terms and conditions of investment, but one that is taken to be more or less a done deal — and be the first to sign a deal.
 

“All these vanity metrics are out now. Cutting corners on due diligence is unacceptable and it will come to bite you at some time,” the venture capitalist says.
 

The Ministry of Corporate Affairs has granted several exemptions to startups. They do not have to give a cash flow statement as part of their financial statement and are exempt from procedural compliance such as issue of an offer circular or creation of a deposit repayment reserve.
 

Is it time, then, for a stricter policy intervention for startups?
 

Experts say that could add to the compliance burden and hinder startups’ growth. “A clear balance may need to be struck to not strangle innovation in the startup ecosystem… This may act as a catalyst for startup leaders to voluntarily adopt these practices,” Bedi added.
 

Listed companies with high levels of corporate governance, for instance, command premiums in valuation.
 

“Startups have to understand that spending time and money on governance is an investment and not an overhead. Good organisational behaviour and culture can add at least 30 per cent to the company’s value,” says Nishith Desai, founder, Nishith Desai Associates, a law firm.
 

In spite of the exemptions, the board engagement is very much there. Startups are required to conduct at least one meeting of the board of directors in each half of a calendar year. This should give board members the opportunity to smell a rat if there happens to be one. The board members at startups should be particularly good at smelling a rat because a startup board, unlike listed companies’, has an abundance of representatives of investors. In guarding stakeholders’ interests, which is a board’s responsibility, they are guarding their own.
 

Nithin Kamath, the founder of Zerodha, India’s largest online stock broker platform, says corporate governance issues coming to light in Indian startups will only increase with time.
 

“While founders will be blamed, the venture capital ecosystem is equally to blame. The root cause of this is the overestimation of the size of Indian markets by founders and VCs,” Kamath has said in a tweet.
 

Zerodha is boot-strapped, meaning Kamath did not raise investor funding to grow his company.

The kindest thing one hears is that India’s startup founders mired in controversy might not be wilful defaulters; they could just be short on due diligence

In search of  answers

2023

June

Prosus says Byju’s executive leadership “regularly disregarded advice relating to strategic, operational, legal, and corporate governance matters”
 

Info Edge initiates forensic audit into the operations of 4B Networks
 

Investors in Mojocare say they have found “financial irregularities”

JANUARY

GoMechanic co-founder confesses to “grave errors in judgement” in financial reporting

2022

An internal governance review at BharatPe alleges fraud by Ashneer Grover and his family members; Grover retaliates
 

Fashion startup Zilingo launches an internal investigation into its financial practices; CEO Ankiti Bose is out
 

A group of investors at social commerce platform Trell commissions a forensic audit into alleged financial irregularities