Start-Ups More Proactively Seeking Governance Advice: Experts

In 2022, an auto-tech start-up was eying the possibility of turning into a unicorn—driving down the path several other start-ups had taken in the preceding months. It seemed to have the ingredients to achieve this milestone: a big problem to solve and a huge unorganised market it could tap into.

Besides, several marquee investors were looking at it with interest, willing to pump capital—the lifeblood of any start-up. The founders of the Gurugram-based start-up struck an in-principle deal for a Series-D round with SoftBank at a $1.2 billion valuation. 

However, a little over a year later, the Sequoia (now Peak XV Partners)-backed garage services start-up GoMechanic had shifted gears, from a feted unicorn in the making to the possibility of shutting down operations on the back of financial irregularities. Its co-founder, Amit Bhasin, admitted in a LinkedIn post, “Our passion to survive the intrinsic challenges of this sector and manage capital took the better of us, and we made errors in judgment as we followed growth at all costs, including regarding financial reporting, which we deeply regret.” 

In 2023 and 2024, more start-ups joined the bandwagon of scripting their downfall by chasing this ‘growth at all costs’ temperament by sidestepping corporate governance. This list now includes some of India’s earliest billion-dollar-valued companies, such as Paytm (now a listed public company), Byju’s (once valued at $22 billion), and BharatPe. While some were involved in faulty accounting practices and fraudulent activities, others took the need to abide by mandatory compliance for granted. 

Experts told Outlook Start-up that a lot of these issues could have been avoided if checks and balances were in place and the founders took them seriously rather than just a checkbox to be ticked.  

“The absence of proper governance mechanisms has contributed to the closure of over 35,000 startups in 2023, the erosion of valuations, and huge layoffs. Had there been robust governance practices in place, many of these failures could have been averted,” said Priyanka Gulati, Partner, Grant Thornton Bharat. 

A Dismal Report Card 

While 2023 and 2022 saw 65 startups turn unicorns and around $65 billion being pumped into India’s start-up ecosystem, this now seems like a distant memory. Last year, only two start-ups joined the coveted unicorn club, and a paltry $10 billion was raised in the world’s third-largest startup ecosystem. This could mean that the days of chasing growth at all costs are a thing of the past, as industry watchers hoped. 

“Gone are the days of just focusing on financial metrics. Now, tracking start-up governance best practices is key to long-term success,” said Arpinder Singh, Global Markets & India Leader, EY Forensic & Integrity Services. 
 

Taking a cue from the irregularities happening in the ecosystem, more founders have been approaching corporate governance consultants to embed systems that ensure they are on the right side of the regulations. 

“Even a Series-B start-up is interested in employing an internal audit for certain procedures; founders want to be on the right side of things after the damage caused to the ecosystem,” said Ritesh Kumar, Partner, M&A Tax & Regulatory Services, BDO India. He added that the founders have realised that if they don’t course-correct, it is very likely that the investors will withdraw support. 

Others also agreed about seeing a lot of proactive efforts from start-ups towards improving their governance. 

“More start-ups are reaching out for corporate governance-related advice, and there is more traction for our IPO-readiness consulting programme,” said Shriram Subramanian, founder and managing director of InGovern. 

Sticking to the Rulebook 

While many start-up founders were unaware of, and even unbothered about, corporate governance requirements in the past, advisory firms have seen a changing trend in the last 12 months. 

“Certainly, a lot of very young start-ups, based on instances that have happened, have become wary of finding the right balance between growth and corporate governance,” said Siddharth Manchanda, Partner, IndusLaw. 

However, a few others flagged that awareness of governance is still patchy and seasonal among start-ups. 

Unfortunately, governance in the start-up sector comes in ebbs and flows, said Jamil Khatri, co-founder and CEO of Uniqus Consultech. There are phases where “everybody becomes focused on governance until they have enough liquidity to not worry about it,” he added. 

Kris Gopalakrishnan, the co-founder of Infosys and chairman of Axilor Ventures, an accelerator that helps early-stage start-ups, also highlighted that corporate governance cannot be thought of seasonally. 

“You can't look at corporate governance based on season. The flavor of the day may be many things; you can't really react to that. You have to do what is right based on the company's requirements,” Gopalakrishnan told Outlook Start-Up. 

A Job for the Professionals 

Cases of misgovernance in start-ups have also made investors wary of the role founders play and have pushed them to relinquish the top management seats to pave the way for more experienced executives. 

“We are seeing a lot more professional management coming into place and a lot of cases where founders are being asked to vacate their CEO roles and hire a professional in their place,” said BDO India’s Ritesh Kumar. This is to ensure that the company doesn’t suffer due to the founder’s tunnel vision. 

In April 2022, Singapore-based B2B technology and commerce platform Zilingo’s board sacked its India-origin co-founder and CEO, Ankiti Bose, citing financial irregularities and suspicious payments. 

More recently, Paytm’s co-founder Vijay Shekhar Sharma also stepped down as the chairman of its payments bank unit after the RBI's regulatory snub. The parent company, One97 Communications, also announced the appointment of banking veterans and retired IAS officials as independent directors at Paytm Payments Bank. 

In the start-up landscape, the once highly valued Byju’s has also witnessed an erosion of investor confidence in its co-founder and CEO, Byju Raveendran. Many of the edtech unicorns’ backers have asked the top head to relinquish his seat, though the latter has yet to relent. 

Legislative changes won’t help; intent is key. 

The Companies Act 2013 enlists the need for the appointment of independent directors for certain classes of established companies, including publicly listed entities. Independent directors are those who do not have a vested economic interest in the company and advise the company's board of directors in certain areas of business. 

Start-ups are usually exempt from this due to their size of business. However, having an independent director brings discipline and checks within the governance of an organisation, said experts. 

“There are some aspirational best practices that include going beyond regulation and mandate. While there is no need to include startups in regulations, some companies, such as Swiggy, have appointed independent directors on their boards,” said Subramanian. 

When asked if India needs legislative changes to bring start-ups into its fold, experts said that law cannot always ensure governance, but the intent to do what is right will. 

“Taking care of key pillars of corporate governance such as integrity, culture, financial discipline, and ensuring independence will help; legal prescriptions will only get you so far,” said Kumar. 

G20 Sherpa and former CEO of Niti Aayog, Amitabh Kant, reiterated this at the recently held Startup Mahakumbh event. “Start-ups are innovators and risk-takers, and as you grow and expand, you must ensure that there is proper financial management and a proper audit. Here, self-regulation is key. If there is no self-regulation, regulators will get in, and the government will get in,” he emphasised.  

While legislation is in place, what is more important is for start-ups to find ways of implementing governance frameworks, IndusLaw’s Manchanda said. 

Although corporate governance is a blanket term that could include a host of best practices to ensure independence, transparency, and accountability, start-ups at different stages of their lives could do different things to ensure good governance. 

“Corporate governance varies from the ages of start-ups. In the beginning, it's about survival. It's about looking at product-market fit and making sure that you have the right people in your organisation. As you grow, you need to strengthen your corporate governance structure, and it must come from the top. Corporate governance gets implemented if the founders believe in it,” summarised Gopalakrishnan. 

Source : - Business Outlook India