The recognition Indian start-ups are getting globally is undeniable. In a study, Ilya Strebulev, a Professor of Finance at Standford Graduate School of Business, disclosed that 90 out of 1078 founders of 500 US unicorns were from India. This number is approximately double the number of founders from the two following countries on the list – Israel and Canada.
In addition, 35 of the Fortune 500 companies are headed by Indian-origin CEOs. Indians hold leadership roles in numerous influential officers in GCC (The Gulf Cooperation Council) countries. These accomplishments highlight the characteristics commonly attributed to Indians: leadership, innovation, and diligence coupled with strong moral values, ethical behavior, and adherence to the law. However, despite this commendable track record, the striking discrepancy is noticeable within India’s startup ecosystem.
Turmoil at Byju’s
Once valued at $22 billion, the Indian Edtech pioneer is exposed to various issues and has been unsuccessful in addressing them for over a year. One of the Big 4, Deloitte, quit its auditor role mid-way, blaming senior management for its non-cooperative approach and delay in financial statements. Three of the company’s investors left the board seats due to differing opinions about the organisation’s operational activities. Additionally, the company is accused of suspected violation of foreign exchange laws. All these issues have ignited concerns about misgovernance and supervision in the rapidly growing Indian startup ecosystem.
Financial Misreporting at GoMechanic
Backed by XV Partner (Previously known as Sequoia Capital India), GoMechanic fired 70% of its staff after the misreporting of financial statements came to its attention. XV Partner is the same company whose representatives left Byju’s board due to operational inefficiencies. Besides GoMechanic, BharatPe, Trell, and Zilingo are some other startups in Sequoia Capital’s portfolio that are accused of accounting irregularities.
The Roots of Misgovernance
The startup ecosystem in India often glorifies founders prematurely. They received accolades from the media like ‘30 under 30’, even before they had proven long-term success in business. Often, their main achievement is the amount of capital they’ve managed to raise. This premature recognition can lead to a false sense of achievement, where founders feel they have already made it big, which can be harmful in a rapidly changing business environment. A recent article in the New York Post highlighted how some celebrated ‘30 under 30’ entrepreneurs were facing fraud charges.
As a startup gains early success, funders can become disconnected from customers, their company, and reality. The pressure to constantly succeed mounts on these founders, who may be unprepared for the challenges ahead. As a result, they often adopt the mindset that ‘no news is good news,’ which leads to either a lack of innovation or a reluctance to communicate openly with investors and boards.
Funding Fomo
India’s startup sector witnessed investments exceeding $131 billion from 2014 to 2022 as global venture capital firms rushed to include promising Indian companies in their portfolios, according to data from Inc42. In the past 2-3 years, there has been a significant amount of FOMO (fear of missing out) among investors, wherein due diligence became less prioritised while entering into deals became more crucial.
Also, the Western concept of ‘low-touch investment’ doesn’t work in India and struggles in the Indian context. India’s business environment is more complex than that of Western countries due to its diverse culture, languages, various customer preferences, and intricate regulatory frameworks, which require a more active approach. All these factors make it difficult for a founder to navigate the challenges with nominal monitoring and guidance.
Typically, early-stage investments rely on a conceptual plan and trust. At this stage, venture capitalists (VCs) perform background checks on founders and other key stakeholders to assess investment potential. At this juncture, investors possess limited information about the business, and if there are any nefarious intentions, there is little investors can do initially.
Current Scenario
However, since last year, the Indian startup community has faced a funding drought as available money decreased, causing many to question the timing of recent revelations. According to a report by PwC India, funding for Indian startups decreased by 33 percent to $24 billion in 2022 compared to the previous year. While there may not be a direct connection, industry experts agree that the funding shortage may have contributed.
As we deal with the current funding challenges, it’s important to focus on the basic principles of business management. This period has shown the resilience of the Indian consumer, whose ability to adapt and spend has softened the impact of the global economic downturn on the local market. However, it’s essential not to underestimate this consumer base, which is value-oriented and discerning, meaning that startups must continually evolve to meet their expectations.
