The Indian start-up ecosystem has grown rapidly over the past few years, making India the third-largest start-up hub with over 1.14 lakh start-ups and 100+ unicorns. Indian start-ups raised more than $10 billion in 2023 and expect around 36 per cent year-on-year (y-o-y) increase in start-up funding in 2024. These new-age companies have provided a much-needed push to the economy by developing innovative products and services, thereby generating new avenues for employment and catalysing India’s growth.

While the preceding years saw robust investment activity and favourable valuations for start-up companies, there were many instances of fraud, including misrepresentation of data, revenue inflation, creative accounting, and governance lapses. These have significantly affected the trust and credibility of the industry.

A heightened pursuit of higher valuations by start-up founders, coupled with the “Blitzscaling” phenomenon emphasising top-line growth over the need for robust systems and processes, has contributed to these vulnerabilities.

Studies show that only 20 per cent of start-ups survive beyond five years, with just 8 per cent surviving beyond 10 years. While there are many reasons for this, the real challenge for several start-ups has been the inability to sustain the frenetic pace of growth. To sustain momentum and build a sustainable business, founders must understand the importance of corporate governance.

Evolving landscape

A robust governance framework encompasses every aspect of how decisions are made and executed within a company, ensuring adequate checks and controls are in place.

Corporate governance plays a vital role in upholding transparency and integrity in an organisation. It ensures that stakeholders’ interests are safeguarded by setting up robust frameworks, fostering accountability, and promoting ethical conduct across levels. Through effective oversight and adherence to best practices, corporate governance strengthens trust and sustains long-term value creation.

The absence of an effective governance framework can lead to various challenges and dysfunctionalities within start-ups, increasing risks in an already volatile economic environment. Decision-making processes may become erratic without clear guidelines and oversight, resulting in conflicts of interest, mismanagement of resources, and the inability to meet strategic objectives. Inadequate governance structures can also deter potential investors and partners, hindering a start-up’s growth prospects and eroding investor trust.

Start-ups require a curated approach when it comes to framing corporate governance principles within this evolving investment landscape. Governance is not a one-size-fits-all concept; it evolves with the stage and maturity of the start-up, the nature and composition of the board, and the external environment. While traditional corporate governance frameworks offer valuable guidelines, start-ups must modify these principles to suit their unique needs and challenges, ensuring compliance with investors’ expectations and regulatory requirements.

Start-ups must, at the very least, adhere to the governance standards prescribed by the law, such as annual audits, board meetings, and secretarial compliance. As start-ups evolve and become larger, they must implement an effective whistle-blower programme that provides regular updates to the board on the complaints received and the actions taken. Furthermore, the board should review the related-party transactions to ensure that the required disclosures have been made per the statutory requirements.

At the growth stage, the board should form a separate risk sub-group to oversee risk management, even if it is not mandated by law or regulation. Key executive management should have access to the risk dashboard and share it with the board regularly. Founders should work towards building an accounting system as the only reliable source for reporting requirements, including MIS. Start-ups should see governance as a value driver rather than just a legal requirement. Founders must also prioritise diversity, equity, and inclusion in the governance structures to foster innovation and mitigate bias in decision-making.

Indian start-ups have transitioned from being mostly service-oriented to becoming pioneers in revolutionary ideas and product innovation, exhibiting technological effectiveness across sectors. This transformation has solidified India’s position globally and led to comparisons with more developed countries. While founders primarily focus on products and customers, it is equally imperative to acknowledge the importance of a robust corporate governance framework. Corporate governance must focus on the interests of stakeholders to ensure the success of organisations.

Bedi is Partner and Leader, and Madan is Partner, Forensic, Financial Advisory, Deloitte India. Views are personal

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