5 Things Startup Founders Can Learn from Recent Corporate Governance Lapses Edtech startup Byju's coming under scrutiny has sparked debates on the right and wrong ways of building and scaling a startup

The increasing number of corporate misgovernance cases has put a black mark on India's burgeoning startup ecosystem. The latest one is the corporate affairs ministry ordering an inspection of edtech giant Byju's. Before this, financial irregularities at GoMechanic, BharatPe, Trell and Zilingo particularly shook up the industry. We also saw PhonePe calling off its plan to acquire Zestmoney. The talks to acquire the fintech startup for $200-$300 million were ongoing since November 2022. However, the deal went off due to the latter's due diligence not meeting PhonePe's standards. Another recent instance of the irregularity was Mojocare inflating sales bills.

"Indian startups are facing corporate governance challenges primarily due to the overestimation of the Indian market's size by founders as well as VC firms," said Nithin Kamath, co-founder, Zerodha in a tweet.

In fact, the after-sales service startup GoMechanic's cofounder Amit Bhasin, in fact, publicly admitted to committing "errors in judgement". "Our passion to survive the intrinsic challenges of this sector, and manage capital, took the better of us and we made errors in judgement as we followed growth at all costs, including in regard to financial reporting, which we deeply regret," Bhasin said in a post on LinkedIn.

Here are some of the lessons for startup founders from these incidents.

Sustainable Growth Over Growth-at-all-costs

Startup success has today become a game of chasing investors' attention, even if that sometimes means an exaggerated projection of numbers. While early-stage startups have to convince the investors about their business model by demonstrating certain traction, late-stage companies have to showcase solid revenue growth and profitability in terms of numbers. Entrepreneurs who have built successful businesses say that its time startups focused on long-term sustainability over short-term growth.

"Building a resilient business in India takes time. I can't think of many who have done it in <10 years. If VC funds have 7-year lifecycles and push startups for exits within 7 years, how can anyone build a good business? Maybe the fund lifecycles for India should be longer," tweeted Kamath.

Moving Away From the Urge to Project Positive Image

"Some entrepreneurs may misrepresent these numbers to show their companies in the best possible light operationally and financially. A typical example of this is consumer startups showcasing their Gross Merchandise Value (GMV), which is, in fact, the value of goods transacting on the marketplace, as their earned revenues," said Aparna Pittie, principal, Artha India Ventures, in an earlier interview.

It's ok to dilute ownership

Entrepreneurs also try to preserve their ownership by any means. They are thus constantly striving to reduce this dilution as they raise rounds, which is based on valuation. "The enterprise valuation is assessed on the basis of various financial parameters apart from qualitative assessment of the founders, product, sales & execution status & capability. Hence entrepreneurs, in the interest of conserving their ownership, they present their financials or revenues or user base in an optimistic (sometimes hugely over optimistic) light in the interest of positioning the valuation of the company," said Padmaja Ruparel, co-founder, IAN and founding partner, IAN Fund.

Clear and Upfront Communication From Day One

Honest and clear communication between founders and investors can go a long way in ensuring it is a win-win for both. Even if the time is tough, investors can leverage their expertise and networks to help out the startups, provided they are kept in the loop. "Tough times do not undermine investor confidence; lack of honesty and transparency does. When faced with situations of compromised integrity, we will be forced to ask more questions, re-assess governance frameworks, and take a stringent view of the business and the founding team. Our fiduciary accountability to our LPs means we will assess any reputational risks with utmost seriousness," added Pittie.

Self Regulation is Key

The Union Minister of Commerce and Industry, Consumer Affairs, Food and Public Distribution and Textiles, Piyush Goyal, recently urged startups to consider putting in place some standards, "maybe for self-regulation", to bring in greater transparency in the way they conduct their businesses and report their financial status. He mentioned how startups should develop corporate governance standards on the basis of which financial auditors can scrutinize accounts and report any wrongdoings."Any such standards will also make life easier for even auditors, who can then declare to the world the transparent governance and ethics system that is driving the Indian start-ups," the minister said. Many in the ecosystem agree with the minister and feel that good governance is very important for keeping the confidence of all the stakeholders in the ecosystem.