Bengaluru, April 18

Global VC firm Sequoia’s statement on corporate governance has sparked conversations on ‘people risk’ in making investments at both early and late stage start-ups. 

In a statement released on Sunday (April 17), Team Sequoia India and Southeast Asia said, “in investments made at seed or early-stage there is hardly a business to diligence. Even at a later stage, investors can face negative surprises, post-investment, if there is willful fraud and intent.” Sequoia is an investor in BharatPe, Trell, Zilingo, and Zetwerk, and corporate governance issues have been reported at all four startups.

Moral code from the top

Closely after Sequoia’s statement, InfoEdge co-founder, Sanjeev Bikchandani said in a tweet thread that good governance starts in the founder’s head.  “No amount of oversight by investors, boards, audit committees or auditors can ensure a company is well-governed if the founders are not committed to this objective,” he added. Bikchandani also noted that Info Edge Ventures is wary of investing in companies where the founders are running two companies and making investments into one and not the other. As this makes for a “clear case of potential conflict of interest.” 

“If the other company succeeds but the one we have invested in does not, then we would have failed but the founder would have succeeded,” Bikchandani said. He believes that there needs to be complete alignment of interest between founders and investors; founders cannot succeed while investors fail. For the same reason, Info Edge Ventures is also uncomfortable when founders want to do a secondary sale of shares. 

Dubious dealings

In the past few months, start-ups have become the focal point of corporate governance issues with the most recent being the B2B fashion e-commerce platform Zilingo, which witnessed an internal probe into the company’s financials and accounting practices. Zilingo CEO Ankiti Bose was also suspended amid this investigation.

This was preceded by the Thane-based construction marketplace Infra.Market undergoing income tax raids at multiple offices. The search operation revealed evidence of bogus purchases, huge unaccounted cash expenditure and accommodation entries aggregating to over ₹400 crore. In addition to this, BharatPe’s former MD and co-founder Ashneer Grover’s family and relatives have been accused of engaging in “extensive misappropriation of company funds” by the BharatPe board. The tussle between BharatPe and Ashneer Grover continues to get murkier every week. Similar allegations have also surfaced at social commerce start-up Trell, among others. 

People’s risk

Speaking to BusinessLine, about the growing cases of corporate governance in India’s start-up ecosystem, Siddarth Pai, Founding partner at 3one4 Capital said, “We’ve often believed that the greatest risk in early-stage investing is not macro risk or capital risk – it’s actually people.  More often than not, early-stage investors are taking a bet on two founders with laptops and an idea. At that stage, there’s no financial analysis or legal due diligence that one can do, because the founder could have incorporated the company, a month ago. So people’s risk is actually an exceptionally large risk that investors end up taking.”

Pressure on founders

3one4 Capital has created a practice in-house to assess this risk. Pai said that the firm has had a governance team and business integrity team for a very long period of time.  Further, talking about the possible reasons for the growing number of corporate governance issues in the ecosystem, Ashish Kumar, Partner at The Fundamentum Partnership said, “the amount of money that has been deployed in the past 18 months, has added some pressure on the founders to grow faster than what was natural. This fast paced growth has also led to some of the practices not getting due importance. This is all a matter of growing up.”

The rate at which companies are growing, there will be some people who are able to keep a calm head and some who may not. “But, when we look at the broader ecosystem these cases of corporate governance are more exceptions than rules. Very few companies have issues of that order,” he added.