 "startups, funding, business")
The recent forensic audit of healthtech player Mojocare has yet again brought to the focus the need for stricter governance practices among startups. While most of the time fingers have been pointed towards founders, many now say that investors are equally to be blamed for lapses.
Cases like BharatPe, GoMechanic, Trell, Zilingo, and most recently, edtech major Byju’s do raise questions in the mind of the investors and also bring additional scrutiny to the market, several players are now saying it is good to have this being sorted now.
Hence, conversations among startups and founders around governance have, of late, been on the rise, several industry insiders told Business Standard. These have come in the form of industry-led initiatives and closed-door discussions with up-and-coming entrepreneurs and fund managers.
According to Rajat Tandon, President, Indian Venture and Alternate Capital Association, this is a consequence of the Indian start-up ecosystem being fairly nascent.
“Our domestic fund structures, or AIFs, were formed in 2012. India’s start-up policy came about on January 16, 2016. DPIIT registered start-ups, which started out at 400-500, are now touching 100,000,” he says.
The rapid growth rate of Indian start-ups, both in number and scale, Tandon says, has also led to “black sheep” emerging among “the herd.”
Sachin Paranjape, Partner, Risk Advisory, Deloitte India, concurs, saying, “Governance, in simple terms is backing the right intent with appropriate actions. The speed at which start-ups tend to grow, can at times lead to a gap between the stakeholder expectations on governance and management capabilities to meet those.”
The rapid influx of funding into Indian fledgling firms during 2021 and the first half of 2022 also has a part to play.
After raising just $10.9 billion in 2020, Indian startups raised a record-breaking $35.2 billion in funding across 1,106 deals in 2022. The following year, startups raked in $23.6 billion across 1,021 deals, according to a report by PwC.
“Anything in excess gets wasted,” says Tandon, who likens the Indian startup realm during 2021 to the Gold Rush as investors looked to capitalize on the country’s burgeoning growth prospects. “The matrices of Indian start-ups are, however, being redefined. Founders and investors alike are looking towards profitability and unit economics,” he added.
Conversations around proper governance among startups, he says, are already increasing and the emerging instances of misgovernance among companies will be addressed as the ecosystem matures.
However, Nithin Kamath, founder of Zerodha – India’s biggest online stock broker platform, is of the view that corporate governance issues coming to light in Indian startups will only increase with time.
“Most of the governance issues coming to the fore now and in the future will likely not be traditional fraud but misreporting things to justify the stories founders have oversold to raise capital,” Kamath had said in a tweet earlier.
“While founders will be blamed, the venture capital (VC) ecosystem is equally to blame. The root cause of this is the overestimation of the size of Indian markets by founders and VCs,” he said.
The size of the Indian target market (TAM) by revenue, he added, needs to increase significantly to justify the valuations of the start-up ecosystem in the country.
“I think most VCs have miscalculated this and maybe oversold the India opportunity to their investors (LPs). In a small market like ours with limited M&A opportunities, large exits within 7 years (the lifecycle of a fund within which founders are expected to give exits) are hard,” he added.
Kamath dubbed it the illusory truth effect, the tendency to believe false information to be correct after repeated exposure. “Believing in a TAM that isn't there yet and then burning out by chasing it,” he said.
Investors that Business Standard spoke to also shared that there is a difference between wilful defaulters and lapses in due diligence. “I think in India it’s the latter. In the 18 months of frenzy (2020-21) and the rush to be the first to come out with a term sheet, or to be the fastest to sign on the dotted lines and close the fund fast…some things were overlooked and now they are coming back,” said a senior VC investor.
To minimize such instances of misgovernance in the future, IVCA, in partnership with Deloitte, recently launched its Startup Governance Playbook with the aim of providing a holistic framework of different corporate governance recommendations for start-ups to follow.
The Association has also launched initiatives like #VC101, an industry-led knowledge-sharing programme for first-time fund managers (FTFMs) organised by IVCA in collaboration with Knowledge Partners Price Waterhouse & Co LLP and IC Universal Legal to educate FTFMs on strategic portfolio management, corporate governance, exits, and returns.
