Uneasy lies the start-up head

While start-ups in India are not inherently better managed, their promoters seem less secure compared to shareholder-driven, board-managed companies

India Inc is overwhelmingly family-owned and managed. This is true of the start-up world, where the concept of management by friends and family is its unique selling proposition. Yet the investor ethos that governs the two could not be more different.

Few promoter-managers of family-managed entities have been ousted from their companies by boards or shareholders for mismanagement — and there are plenty of examples — unless they are guilty of outright fraud and malfeasance (such as YES Bank).

Compare this with the start-up world where private equity and venture capital assess performance through “valuation”. This inherently opaque metric gets a lot of stick by corporate analysts, not without reason. But one of the consequences of the valuation game is that it makes the founder’s position inherently precarious. 

Consider, for example, the increasingly shrill demands for the ouster of Byju Raveendran from the company he founded in 2011 for a range of strategic decisions and transgressions that would have cost any professional CEO his job long ago. The unicorn’s board now comprises Mr Raveendran, his brother and his wife with independent board members and the statutory auditors bailing out. Government agencies are scrutinising its books.

Mr Raveendran’s assurance to irate stakeholders is that the edtech giant that bears his given name is not his work but his life. It is unclear how much this touching declaration will allay investors’ misgivings. But there is no doubt that he is feeling the heat.  

If he is forced to step down, he won’t be the first promoter in India’s go-go start-up world to face this fate. In 2015, Rahul Yadav, founder and CEO of online real estate search portal was fired by the board of directors following charges of misconduct with investors and the media. Last year, the board of fintech giant BharatPe removed co-founder Ashneer Grover and his wife on allegations of misappropriation of funds.     

This recent history is worth contrasting with some slightly older corporate history. Satyam Computers’ implosion is one. In 2009, B Ramalinga Raju confessed to a Rs 7,000 crore-plus embezzlement scheme including some Rs 5,000 crore of phantom cash and bank balances with a little help from the statutory auditor. The Satyam board at the time contained such blue bloods as a dean of the Indian School of Business, a former Union cabinet secretary, a former IIT director, a feted Silicon Valley innovator and two Ivy League worthies. But Mr Raju’s serial deception, which appeared to have been in operation for years, seems to have eluded them.

A year before they demonstrated their singular ineffectualness by approving unquestioningly a $1.6 billion acquisition of an infrastructure subsidiary Maytas. Shareholders later angrily opposed the deal on grounds that it would sink Satyam, then the company’s fourth largest IT company, under debt. Later Mr Raju confessed that the Satyam-Maytas deal was an attempt to fill fictitious assets with real one. Note that there were no calls, neither from the board nor activist shareholders to remove Mr Raju from his CEO role; he removed himself by his public confession.

Satyam was a listed company, so the United Progressive Alliance government moved with admirable speed to protect shareholders and employees and find another owner, with the Mahindra group finally stepping in. But it is worth wondering whether things would have panned out differently had Satyam been driven by private equity or venture capital, where hard questions would have been asked much before the company imploded. 

Anil Ambani, the bankrupt younger son of the storied Dhirubhai Ambani, inherited several profitable businesses in power, telecom, infrastructure, financial services and entertainment following the split with his brother. But he managed to systematically run them all to the ground. His headlong descent appeared to have been unchecked by his company’s boards or shareholders.

At back-to-back AGMs of his companies in 2019, at which bouncers were deployed, some shareholders threatened a class-action suit against him for eroding shareholder value. But others, incredibly, gave him a standing ovation and suggested his two sons join the boards of his companies. He stepped down from his listed companies only after the market watchdog the Securities and Exchange Board of India barred him from associating with any listed company for allegedly siphoning funds.

Malfeasance is one thing. Poor management decision-making and vigilance, the key causes of Byju’s crisis, rarely exercises boards and shareholders. Vijay Mallya exiled himself to London after defaulting on loans. Instead of calling him (and his son) out for serial blunders, board members of Kingfisher Airlines rapidly headed for the exits well before the airline was grounded.

If the late Cyrus Mistry is to be believed, his struggles to manage India’s largest group were the result of poor strategic decisions of his predecessor Ratan Tata. History bears this out; Tata Steel had problems with the Corus buy, the telecom business eventually had to be virtually given away free, Tata Motors had to write off crores after the Nano “people’s car” had to be scrapped…Mistry listed out several other sub-optimal strategic decisions.

The upshot? The Tata Sons board voted to sack Mistry. Mr Tata, on the other hand, continues to head the two key trusts that control the group.

This is not to say start-ups are inherently better managed than shareholder-driven, board managed companies. But there is no doubt that in India, promoters in the former group are less secure.