Indian start-ups and the crisis of corporate misgovernance: Here's what needs to be done

The global acclaim of Indian entrepreneurs is undeniable. A study conducted by Ilya Strebulev, Professor of Finance at Stanford Graduate School of Business, revealed that 90 of the 1,078 founders behind 500 US unicorns were from India, almost double the number of founders from the next two nations—Israel and Canada.

Additionally, 35 of the Fortune 500 companies have Indian-origin CEOs. Besides, Indians are increasingly leading many influential family offices and sovereign wealth funds in GCC countries. These achievements are a testament to the traits often associated with Indians: leaders, innovators and hard workers with strong moral values, ethical conduct and a law-abiding nature. Yet, despite this track record, a stark contrast is evident in India’s start-up ecosystem. Here, we encounter many governance challenges that mar the landscape. This raises a critical question: Why do Indian entrepreneurs face such challenges in their own country?

This paradox shows an anomaly in our societal conduct,which prompts us to question whether the Indian start-up ecosystem might inadvertently nurture a culture that compromises governance. Hence, aligning our domestic success with our international reputation is critical to sustaining India’s entrepreneurial spirit.

Causes of Misgovernance

India’s start-up landscape is rife with a culture of founders being prematurely idolised. Media accolades like ‘30 under 30’ or ‘40 under 40’ are bestowed upon individuals who have not yet demonstrated sustained business success, with their primary achievement often being the capital they’ve raised.

This can instil a false sense of success, and an “I have arrived” mentality, disastrous in an evolving landscape. A recent New York Post article highlighted how several celebrated ‘30 under 30’ entrepreneurs were facing fraud charges. Start-ups often falter as founders—overwhelmed by their initial success—lose touch with their customers, company, and reality.

This early acclaim places founders under immense pressure to succeed continuously, a challenge for which the majority are unprepared. Hence, driven by the belief that ‘no news is good news’, the result is either stagnating innovation, or a reluctance to communicate openly with investors and boards.

Additionally, the behaviour of some venture capitalists exacerbates these issues. In their eagerness to be perceived as dynamic and founder-friendly, due diligence and governance checks are often overlooked. This undermines the investment process and sets a risky precedent for the start-ups.

Besides, the concept of ‘low-touch investment’ popular in Western countries struggles in the Indian context. India’s diverse business environment, replete with various cultures, languages, customer preferences, and complex regulatory frameworks, demands a more hands-on approach. Which makes me wonder if a founder can truly navigate these challenges with minimal guidance and oversight.

The pursuit of being ranked for the highest number of investments within a year, often at the expense of thorough due diligence, creates short-term wins but seeds long-term problems. The result is an ecosystem riddled with founder-investor conflicts, legal disputes, and, unfortunately, the eventual shutdown of promising ventures. Therefore, it’s clear that for India’s start-up ecosystem to mature and thrive, a shift in both founder and investor mindsets is crucial. It involves embracing a more balanced approach towards leadership, governance, and investment practices.

Embracing Change

Enhanced Involvement of VCs: Venture capitalists’ engagement needs to extend beyond financial backing. It’s about being integral to building strong management, developing robust governance frameworks, and advocating for ethical practices. Boards must interact with various departments to develop a holistic understanding of the business, and ensure that strategic decision-making aligns with the company’s long-term goals.

Navigating Market Sentiments: Boardrooms often transform from cheering squads during boom times to arenas of critique during downturns. This dual nature, where investors push for growth and reprimand the management if it’s not achieved, highlights a shared responsibility in governance lapses. Hence, a balanced approach to governance, regardless of the market sentiment is critical.

Frequent Board Meetings and Open Communication: India’s start-ups would benefit greatly from monthly board meetings. Such frequency would ensure issues get tackled promptly and successes and challenges are shared openly.

VC, Beyond Funding: Venture capital is integral to a start-up’s and founder’s journey. Successful start-ups benefit from their investors’ involvement as customers, suppliers and marketers, who provide crucial on-ground insights and strategic guidance.

Building a Resilient Ecosystem: India’s start-up potential is vast, yet unlocking it demands more than just capital. It requires a commitment to solid foundations, ethical conduct and a culture of accountability. Such an approach will ensure success and resilience in an ever-evolving market landscape.

A New Dawn

As we navigate the current funding winter, it’s crucial to return to the fundamentals of business acumen. This period has highlighted the resilience of the Indian consumer, whose adaptability and spending have cushioned the local market from the harshest impacts of the global downturn. Yet, it’s imperative not to underestimate this consumer base, whose value-driven and discerning nature means that start-ups must continuously evolve to meet their expectations.

India’s start-up ecosystem offers a unique learning ground. Founders and funders need to realign their focus towards creating sustainable and robust firms, capable of withstanding various market conditions. It’s encouraging to see a shift in the ecosystem, where profitability is starting to gain the recognition it deserves. Businesses should strive not for perpetual capital raising but creating value, satisfying customers and impacting society positively. 

 

Views are personal. The author is managing partner, Artha Venture Fund