Feeble corporate governance hitting startups

Bengaluru Lack of solid processes, aggressive accounting principles, negligence in oversight by investors and chasing growth at any cost are the reasons behind the current state of affairs in the startup ecosystem, which has seen several instances of corporate governance lapses.

Industry experts are of the view that funding winter has revealed the functioning lapses in several startups. Recent happenings at edtech major Byju’s and many other startups like GoMechanic were the reflection of the malaise in the system.

“Normal rules of accounting were not followed. Many startups appointed small time auditors. Many startups including Byju’s problem is that they have not recognised revenues properly and have showed some inflated revenues to investors for raising money. When the auditors signed up the financial statements, then the revenue came down with losses increasing,” V Balakrishnan, Chairman of venture capital fund, Exfinity Ventures & former CFO of Infosys, told Bizz Buzz.

He said that the first line of defence for corporate governance of any company is the entrepreneur himself. “Entrepreneur has to understand that he/she has to build an honest business. If you take shortcuts, it will catch up at some point of time,” Balakrishnan added.

Amid continuing funding winter, Indian startups raised a total of $3 billion in Q1 (January-March) 2023, down 75 per cent from $12 billion raised in Q1 2022. Most of the declines came in the mega deals space, which declined 77 per cent YoY to seven in Q1 2023. Many startups are witnessing fall in revenue and mounting losses, leading to complete shutting down of business ventures.

According to data from Traxcn, as many as 2,404 startups wound up operations in 2022, more than double the 1,012 that had shut shop in the previous year. Among these startups, 266 were funded by angel investors, VCs, family offices or institutional investors. Corporate governance officials said that mindless chase of valuation over profitability has led to such situation.

“Reasons for such incidents are these companies largely chased valuation at the cost of putting business processes in place. Some of them obviously used stretched metrics. For instance, startups like GoMechanic, even for that matter Byju’s revenue recognition were not in line with GAAP. Everybody knew it but nobody pointed it out. In a bull market, everybody is happy but a bear market separates the men from the boys,” Shriram Subramanian, founder &MD of InGovern Research Services, a proxy advisory firm told Bizz Buzz.

Currently, India’s most valued startup and edtech major Byju’s is going through a difficult period after resignation of board members and previous auditor as the company is yet to file its audited financial statements for the previous fiscal year. Severe lapses in corporate governance standards have also been seen in multiple startups since last year.

“Investors should make sure that the capital they put is used effectively. Also, they should make sure that an effective governance structure is there to take care of the entity. To take your eye off, and go behind growth, then all these blow ups are bound to happen,” Balakrishnan said.