Corporate Governance: Wake-up call for Startups?
The start-up sector of India is struggling for the ability to sustain frenetic growth with high-quality corporate governance. Relentless expansion without a corresponding increase in revenue, high investor expectations and pursuit of unicorn status at all costs have resulted in poor decision-making at several trailblazing start-ups. The result: blurring of ethical boundaries and erosion of governance standards. Once considered game-changers of a thriving start-up ecosystem, the apparent downfall of companies valued in billions of dollars not too far back, such as Byju’s and Paytm Payments Bank (PPBL), has rattled the start-up world. PPBL, Paytm’s fintech entity, recently got a rap from Reserve Bank of India (RBI), which imposed restrictions that effectively halted operations. RBI attributed its action to PPBL’s recurrent failure to adhere to banking regulations and ‘know your customer’ norms. Edtech firm Byju’s has been embroiled in allegations of money laundering against founder-CEO Byju Raveendran. He is also facing allegations of Foreign Exchange Management Act violations which he denies. Once valued in billions of dollars, Byju’s has witnessed a significant decline in market value from its heydays. Raveendran’s net worth has fallen from $2.1 billion a year ago to zero, according to Bloomberg Billionaire Index 2024.
Out of 1,26,037 DPIIT-recognised start-ups as on October 3, 2023, 111 are unicorns with a total valuation of $349.67 billion, says Invest India. Of these unicorns, 45, with total valuation of $102.30 billion were founded in 2021 while 22, with valuation of $29.20 billion, were born in 2022. Indian start-ups raised around $26 billion in 2022, 2.1 times more than in 2020. Experts say such massive capital inflows triggered spike in start-up valuations which, in turn, created pressure for growing fast at all costs — one of the key reasons for lapses in corporate governance.
The start-up community is also divided between the need for self-regulation and enforced regulation. Absence of self-regulation is likely a significant factor for Byju’s downfall, though it also points at failure of investors and auditors. Serious corporate governance failures at well-funded start-ups have made investors cautious about betting large sums.
While increased oversight and due diligence may promote accountability, there is a looming question of whether this will rejuvenate the ecosystem or stifle innovation and investment. The balance between investor protection and entrepreneurial freedom is delicate, and it’s yet to be seen whether the current wave of scrutiny will pave the way for a sanitised and resilient start-up environment or choke the flow of funds and stifle the very innovation it seeks to safeguard.
