When funding takes precedence over governance, start-ups go bad

For Ashneer Grover, the co-founder of Bharat Pe, a phone call cost him his reputation, his job, and several other perks, forcing him to put his stake on sale.

PayTM co-founder Vijay Shekhar Sharma’s corporate communications head was allegedly found to be misappropriating funds and later blackmailing him. A few months later, Sharma took her back and denied any wrongdoings on her part.

Hundreds of small restaurants accused Zomato and a few other food delivery apps of indulging in unfair trade practices. It was later followed by several other complaints, which showed Zomato in poor light.

Better.com founder Vishal Garg did something worse. He fired over 3,000 employees over a mere Zoom call.

Many more such missteps have gone unreported but it all adds up to the fact that there is something very rotten in the Indian start-up ecosystem.

Overnight unicorns

What gets reported widely and continues to be seen as driving the economy is that more and more start-ups keep getting funding and several of the existing ones receive a lot more, turning them into unicorns overnight. In 2021 alone, nearly ₹16,000 crore was poured into 63 companies.

Let us take the case of Bharat Pe, a fintech start-up founded in 2018 which caters to small merchants and kirana stores. In 2020, it was valued at $425 million, and the following year, it grew to $900 million, and by August 2021, its valuation had shot up to $2.86 billion.

But within nine months of the start-up turning into a unicorn, its co-founder was accused of misappropriation of funds, and several other charges were hurled against him.

Also read: BharatPe MD Grover opts for voluntary leave after spat with bank

What triggered the accusations was an abusive call to a bank employee threatening him if he did not help him get shares of an IPO-bound start-up. The audio recording of the conversation went immediately viral, and Grover was left defending himself.

Within a fortnight, Grover’s dream run came to a halt as the start-up’s chairman threw him out of his job. He also issued a statement saying that the company reserves the right to take further legal action against the founder.

Recently, Ola’s co-founder’s move to buy a startup, Avail Finance, launched by his brother, raised issues about related-party transactions. A similar accusation did not find much traction in the media when two employees left a major e-commerce company to launch a fintech start-up.

Once it started its operations, the e-commerce company bought the same start-up, paying vast sums of money. The e-commerce company could have incubated the same start-up and would have saved money.

What’s happening in start-ups

There are several reasons for several start-ups founders routinely crossing the line:

1. The entire start-up ecosystem is geared towards raising funds and several rounds of additional funds. Hence, the focus is on rolling out the product or service and getting as much traction as possible. Almost everyone who joins a start-up works round the clock. This is the first red flag that investors either are unaware of or choose to ignore.

2. Keeping investors happy is of primary concern because more funding rounds entirely depend on them and new investors.

3. During one of the earlier press conferences, Ola Electric’s co-founder claimed that the company’s electric scooters would be rolled out within months of setting up the factory. But the promise was not followed up. Those who got the delivery of scooters found out that there were faults in the product which needed to be fixed. It was clear that the rollout was carried out in haste. It shows that several start-ups are big on promise but short on delivery.

Also read: BharatPe owner sends legal notice to Kotak Mahindra Bank over Nykaa IPO

4. In most cases, neither the investors nor the founders focus on institution building because they are driven by valuation and later M&A.

5. Even if the founders are keen on putting in place a structure based on good corporate governance, they have very little power to do so as their stake in their start-ups keeps getting reduced every time the valuation gets higher.

6. Lastly, as there are not enough checks and balances in place, it becomes easier to flout norms till one of them is caught with his hand in the till.

It is up to the investors to insist that startups follow all corporate governance norms and put a structure for sound business practices.

Only then will such instances start coming down. For that to happen, the entire industry consisting of angel funds, VCs, PEs, need to self-regulate and set their benchmarks for any startups to qualify for funding.