Startup Governance: Founders' Lack of Obligation to Return Capital Raises Concerns
Feb 27, 2024 18:02
Indian startup investors express concerns over founders neglecting governance and failing to return capital, leading to value destruction in companies like Byju's and BharatPe.
New Delhi, Feb 27 (PTI) With investors baying for the blood of founders in top start-ups like Byju's and BharatPe, some of India's best-known startup investors say founders not feeling obligated to return capital they got from financiers is the reason behind corporate governance issues and value destruction at what were the nation's most valuable startups.
Some of the top-rated global investors have had run-ins with founders of startups such as BharatPe, Zilingo, and Byju's as they feel the founders hit blindspot on governance in their drive for passion and need to step aside for the companies to be run professionally.
According to Yagnesh Sanghrajka, Founder and CFO, 100X.VC, "The fact that founders don't feel obliged to return the capital, leads to issues of corporate governance and value destruction".
He said that corporate governance issues have been a longstanding concern, not just for startups, but for companies in general, whether listed or unlisted.
"These are observed and have often come to light once the stakes are large. It's not that corporate governance issues are not there in smaller companies, Sanghrajka said.
Founder and Chairman of Sorin Investment Fund, Sanjay Nayar, said that over-enthusiastic behaviour on account of startups often leads to neglect of important processes like compliance and governance.
"Founders should focus on profitability, but governance cannot be at the backbench," Malik said.
Ritesh Malik, founder of Innov8 Coworking, said that corporations should invest more time, resources, and money into smaller startups so that they can train them on governance and compliance issues.
Co-Founder and Global Head of Accounting and Reporting Consulting at Uniqus Consultech, Sandip Khetan, noted that every startup is focused on building technology on the customer side, but isn't equally focused on building technology for the internal systems, processes, and compliance.
Khetan said that companies need to ensure optimal allocation of resources and capital, towards both growth and internal governance. One can chase growth and achieve profits in the short term, but if there is an imbalance in allocation, the business is bound to collapse in the long term, he said.
"When businesses run ahead of the processes, and if the process breaks down, it disrupts the business significantly, and the cost of that disruption is far higher than the amount of capital that may have been required to establish a GRC (governance, risk, and compliance) system," he further said.
At times, a management override of controls can raise red flags.
So much that it reaches an extent where one cannot salvage anything, he added.
Prashanth Prakash, founding partner of the global venture capital firm Accel Partners who has led investments in BookMyShow and Rentomojo said that investors too need to do their bit and should focus on helping companies with proper governance.
It's not an entrepreneur problem or an investor problem alone, a combined effort is what is needed. Entrepreneurs need to understand that there is no shortcut and quick money in this industry, only a long-term foresight will help create a thriving business. It's a long marathon, Prakash said.
Founder of InfoEdge which owns Naukri.com, Sanjeev Bikhchandani, however, said that 95 per cent of startups in India are well governed, honest, and compliant.
"The industry is robust and healthy, it's just that bad news makes headlines faster. In the long run, one cannot build a large sustainable, valuable business without being well-governed, therefore one should pay special emphasis on governance, he said.
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