Don't Fall, Stay Rooted

Background & Context

Building a business is a multi decadal journey. More so when the goal is to transform your startup into an institutional legacy.

Focusing on long-term results can really suck sometimes and requires a lot of discipline, perseverance, pivoting and mental strength. It can feel like a grind for the founders, and it can leave one frustrated with the lack of immediate results.?

How do you build that unending stream of intrinsic motivation?

With this simple formula:

Values > Value > Valuation

When your values - principles, beliefs, mindsets & behaviour drives you to create value for your customers & stakeholders which in turn soars your valuation.?

When you chase them from right to left, you are putting off anything that appears difficult, in order to do something that’s a lot simpler, and usually offers instant and noticeable results.?

In this day and age, when founders look for quick wins and play a short game they are bound to make mistakes compromising on values which lead to governance issues creating a deeper hole for themselves and their startup.?

Current State & Paradox

Let's put this straight, the global acclaim of Indian entrepreneurs is undeniable. A study conducted by Ilya Strebulev, Professor of Finance at Stanford Graduate School of Business, revealed that 90 of the 1,078 founders behind 500 US unicorns were from India, almost double the number of founders from the next two nations—Israel and Canada.

Additionally, 35 of the Fortune 500 companies have Indian-origin CEOs. Besides, Indians are increasingly leading many influential family offices and sovereign wealth funds in GCC countries. These achievements are a testament to the traits often associated with Indians: leaders, innovators and hard workers with strong moral values, ethical conduct and a law-abiding nature.?

Yet, despite this track record, a stark contrast is evident in India’s start-up ecosystem. We have seen corporate governance lapses from Unicorns - BharatPe & Byju’s to e-commerce marketplaces - Zilingo and Trell to auto-workshop platform GoMechanic and health tech startup Mojocare.

Here, we encounter many governance challenges that mar the startup ecosystem landscape. This raises a critical question: Why do Indian entrepreneurs face such challenges in their own country?

This paradox shows an anomaly in our societal conduct, which prompts us to question whether the Indian start-up ecosystem might inadvertently nurture a culture that compromises governance. Hence, aligning our domestic success with our international reputation is critical to sustaining India’s entrepreneurial spirit.

Embracing Change

If Ashneer Grover had to exit today over glaring corporate-governance issues at BharatPe, his 9.5% stake, currently worth Rs 2,000 crore, would shrink to Rs 95,000. That is, if one considers the new “exit clauses” that are implemented in Shareholder Agreements (SHAs) by leading Venture Capital (VC) firms.?

This clause, part of the ‘Promoters Lock-in & Vesting’ section of the SHA ensures departing founders exit at ‘nominal value’ and not ‘market value’—sharply reducing potential payouts to them specifically when they are part of a ‘Bad Leaver situation’.?

Imagine a founder who owns 10% of a company with 100,000 shares, each valued nominally at Rs 10. That means, their stake is worth Rs 1 lakh (US$1,200) [10,000 shares * Rs 10]. But if the market values each share at Rs 500, their stake balloons to Rs 50 lakh. But if constrained to the nominal value, they would pocket only Rs 1 lakh when they are leaving on bad terms from the business.

Who would be defined as a bad leaver from a VC perspective?

Typically, founders who exit due to serious misconduct, criminal charges, breach of non-compete or shareholder agreements, voluntary resignation, or leaving before hitting key milestones like full vesting of their shares. Exit of founders on account of gross negligence and wilful misconduct also triggers bad leaver provisions.

Negotiations—once fixated on valuations—now dance around affirmative rights, information rights, liquidation preferences, board-seat composition, and founder exit terms. There is a renewed focus by VCs to conduct reference checks at customer sites, employees and at vendor partners of the startup to ensure that there are no surprises in the future.

Importance

Startup governance is critica!

A commitment to strong governance is not just a matter of compliance, it's a strategic imperative for sustainable successful business in the dynamic world of startups. Yet we have seen that it is the most neglected aspect of a startup journey. Governance, often viewed as a non-financial aspect, has a direct and substantial impact on financial performance.

Good governance is about being fair, having a long-term vision. This can be done by maximizing shareholder value, creating symmetry in information dissemination across stakeholder groups and by building a culture and value system.

Transparency in operations, not only builds trust but also elevates brand value, not just for individual companies but for the entire industry and country.

Today governance also goes beyond governance in the sense of how you run a company. It also involves environmental issues, sustainability and ESG is a big issue.?

A New Dawn

No matter how many checks and balances are put in, there is nothing more important than Self-regulation. Doing Things Right when no is watching over your shoulder holds the key for startup founders.?

Now more than ever - India’s start-up ecosystem, Founders and VCs need to realign their focus towards creating sustainable and robust firms, capable of withstanding various market conditions. It’s encouraging to see a shift in the ecosystem, where profitability is starting to gain the recognition it deserves. Startups should create value by unlocking innovation, generate employment, satisfy customers and impact society positively. This is the only path for Viksit Bharat and it starts with the founder first!

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