Last month, the Indian startup ecosystem witnessed two back-to-back catastrophes – sexual harassment allegations against The Viral Fever Founder Arunabh Kumar and the other being the controversial shutdown, followed by the arrest of Stayzilla co-founder and CEO Yogendra Vasupal.
Both the startups, founded by ivy-league college pass outs, are facing their own set of legal battles in their respective worlds. Both Stayzilla and TVF, were backed by some of the most prestigious investor firms such as Nexus Venture Partners, Matrix Partners, Tiger Global Management. The bizarre state of events has forced the ecosystem goers to think whether it’s time for startup investors to rework their funding strategies and due-diligence before backing entrepreneurs.
Investor community and experts believe that even though each fund has their set of due-diligence criterias in place, these two events have definitely ticked off investors in certain aspects.
Human resource policies, regular update of cash burn, work place ethics, legal framework in place – are some of the norms that need today need to be duly checked and prioritized today.
Timely pay increase, policies for women, basic amenities, proper documentation have also been cited some of the other important criterias on the checklist.
Pranav Pai, Founding Partner at 3one4 Capital said, “We have always seen a comprehensive list of diligence checks being prioritized before an investment goes through. Most investors insist on policies, compliance declarations, filings, and background checks as pertinent, and that is standard today. Having this in place, and most importantly, having processes in place to deal with events like this that may come up in the future, are always going to be part of a round of investment,”
Pai further went on to say that the two events shouldn't be looked upon as a reason to reactively bolster diligence. Rather, it is about calling the relevant processes into action quickly and correctly when the need arises.
Industry experts had also suggested previously that investors should play an active role in helping a startup wind up its operations if needed.
Anil Joshi, Managing Partner at Managing Partner at Unicorn India Ventures said as far as due diligence is concerned his fund does necessary checks on team along with reference check.
“The early stage investments are more on team than anything else hence it is very important to back right team. While we do DD as a normal process, we also spend substantial time with team to understand them as human being,” he added.
Funding woes to get graver?
These two incidents and a series of job cuts by startup flag bearers like Snapdeal have cast a sense of ambiguity and fear amidst ecosystem goers.
The first quarter of 2017 saw funding come comparatively better if not worse. According to research firm Tracxn, the ecosystem saw $2.23 million of funding during the first quarter this year versus $1.56 million during the same period last year.
However, the number of companies that got funded dropped to 213 from 296 last year.
Puneet Manuja, who runs a marketplace for counselors and psychologists, told Entrepreneur this week that his platform- YourDOST, has witnessed a sharp rise in queries and concerns coming from entrepreneurs and startup employees. The recent string of events has definitely created a situation of insecurity amongst industry goers.
As popular startup names and investors associated with these events continue to face the grind, investors are now bound to watchful about more areas before signing a funding round.