While Indian start-ups have managed to secure funding with ground-breaking innovation, the current geopolitical landscape is spurring venture capitalists to exercise caution. So how will start-ups strike a balance between sustaining financial progress and fostering sustainable growth to uphold investor confidence and secure consistent funding?
By demonstrating a laser-like focus on investor expectations through a robust governance framework and integrity agenda, home-grown ventures can pave the way for long-term success.
Companies that inculcate financial discipline early on in their journeys are better poised for success down the road. Building a foundation of accountability conveys responsibility not just within the organisation but also to investors in their risk assessment.
Having the right internal financial controls in place mitigates concerns and demonstrates the company’s commitment towards responsible risk management.
A sound Internal Audit Program can also act as an enabler for implementing and adhering to internal financial controls and can also highlight value adds to bring in efficiencies, automation, and other improvement opportunities.
The board of directors play a crucial role in shaping a start-up’s strategic direction, implementing mechanisms to ensure sound governance, and safeguarding the interests of the stakeholders. The board’s ability to deal with complex challenges and crises is directly proportional to the diversity of its members and their unique perspectives, which is why a balanced ratio of founders, Independent Directors, and investors is ideal.
Recently, the importance of maintaining a sound gender ratio is also being recognised and adhered to.
While focus on innovation and growth can help start-ups attract funding, compliance with regulatory norms can serve as the cornerstone of long-term success. It reassures investors that their funds are being wisely directed in ways that are legally appropriate.
Regulatory compliance also helps reduce legal and financial risks, ensuring that the company’s reputation and value remain intact, providing it with a competitive advantage in the market, and presenting further opportunities.
The Companies Act 2013, Section 188 (1) and SEBI’s revised Clause 49 of the Listing Agreement reinforce the need for increased oversight on related party transactions from the board and auditors. While these regulations are focussed towards mature and listed companies, referring some these guidelines can bring in improvement in governance at start-ups as well.
With non-compliance resulting in penal consequences, start-ups will have to keep a close watch on their transactions with related parties such as founders, employees, friends, and relatives as well. There should also be an arm’s length arrangement with other business interests of the founders and key managerial personnel. Companies can display their proactiveness in meeting regulatory demands.
In the volatile landscape of early-stage businesses, building robust risk and crises management strategies is key to continued progress. By becoming cognisant of the risks, both companies and investors are better poised to make informed decisions that will have long-term consequences.
Introducing feedback, whistleblowing mechanisms, implementing good governance practices, maintaining transparency — can have a cumulative effect on building a culture of integrity from the ground up. Investors are drawn to organisations that foster a culture of well-being and co-operation.
The writer is Partner, EY Forensic & Integrity Services