Some of the investors that Business Standard spoke to agreed that this could potentially slow down funding momentum in the short term.
A founding partner at a venture capital firm that backed BluSmart in its early stage said the episode is likely to make investors more cautious about putting money into home-grown startups.
“This incident has understandably caused concern, especially among institutional investors who value governance as much as growth. For foreign capital, particularly from countries like Japan where compliance and transparency are foundational, events like these tend to create hesitation and prompt deeper due diligence,” he said on the condition of anonymity.
Sanjeev Bikhchandani, Info Edge founder and startup investor, referred to BluSmart fallout as a setback for the startup ecosystem, saying that companies must build viable businesses emphasising corporate governance. “The business must be viable. Corporate governance has to be good for a company to sustain,” he added.
The Indian startup ecosystem saw a major shakeup in 2023 when many firms were found lacking governance. Firms such as BharatPe, Zilingo, GoMechanic, Mojocare, and Zest Money showed how audit oversight and compliance issues were taken lightly.
Lloyd Mathias, an angel investor, pointed out that the early-stage startup ecosystem has been a cause of concern among investors, especially after the downfall of edtech firm Byju's.
“The larger issue for investors is the standards of corporate governance in India in general and specifically for the early-stage startup ecosystem. I think this (BluSmart case) doesn't speak very well and it will make both international and domestic investors far more cautious. Why should someone take a risk investing in an early-stage startup where anyway the percentage of success is very small,” Mathias said.
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Indian startup ecosystem raised a total of $11.3 billion in 2024, an increase of 6 per cent compared to 2023. This increase in funding had come after two years, as it was only in 2021 that the ecosystem raised its highest ever funds at $42 billion.
Anirudh A Damani, managing partner of Artha Venture Fund, said that founders who wish to raise capital will face increased scrutiny.
“The saddest part of the whole Gensol and BluSmart saga is that from now on, founders with real intent who step in front of investors will have to face the burden of this deceit. Unfortunately, the hundreds and thousands of investors that form shareholders of both these companies will raise the bar when they look at a new founder. The next time an Indian founder wants to raise debt, the covenants on them are going to go up. This scam is going to hurt,” Damani said in a social media post.
However, investors and startup founders also said that India’s startup ecosystem is resilient, and while companies will continue to attract capital, the level of investor scrutiny and due diligence is expected to increase.
“Founders will now be evaluated not only on how fast they scale, but also on how well they build systems. In many ways, this could be a reset the ecosystem needed. If it results in cleaner governance, tighter internal processes, and more disciplined cap tables, we will emerge stronger. The serious capital will still come. It will just come with sharper questions,” the partner quoted above said.
Showcasing optimism for the Indian startups, Bikhchandani said, “There are 1.6 lakh registered startups in India, and if we include the unregistered ones, there are nearly 7-8 lakh startups. There will be some bad actors, but for the most part, 95-98 per cent of startups are honest.”
Siddarth Pai, partner, CFO and ESG officer, 3One4 Capital, said that the Gensol-BluSmart episode underscores the importance of governance and oversight in business.
“These situations affect investor confidence and will lead to delayed financing rounds. While these are thankfully the exception and not the norm for the startup industry, the effect it has on perception will be adverse. Diligence and vigilance is essential in investing, regardless of the size of the business,” he added.
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