Start-up Survival Guide: How Strong Corporate Governance Can Fuel Your Success

In a landscape where many start-ups have been making headlines for governance failures and ethical lapses, the conversation shifts to the importance of robust corporate governance. Is it merely a regulatory checkbox, or does it hold deeper significance beyond ensuring annual compliance??

India’s start-up ecosystem, ranked third globally in terms of the number of start-ups, has been consistently creating new job opportunities and attracting capital investment. However, the journey to reach full maturity is still quite tedious for start-ups with more than 90 percent of them failing within the first five years.??

We see founders in their early years focus heavily on achieving product-market fit, building a strong sales pipeline, and ensuring consistent top and bottom-line growth, but neglecting their governance systems. This neglect is driven by competing priorities. However, prioritising corporate governance plays a critical role in the long-term success of any start-up.?

Corporate governance is the system by which companies are directed, managed, and controlled. It encompasses the practices, rules, and processes that ensure a company is run fairly and in the best interests of all stakeholders. Essentially, it’s about maintaining integrity, fostering stakeholder trust, and adhering to legal and ethical standards.??

Governance challenges have brought even the world’s most highly valued start-ups to their knees. Ambitious start-ups in a race to secure more funding often face legal troubles due to misreporting of financials, concealing business problems, and improper reporting standards. These issues can significantly damage brand reputation and lead to the quiet downfall of initially promising companies.?

Integrity in corporate governance means consistently doing what is right, even when not under scrutiny. For start-ups, this translates to being honest with investors, employees, customers, and the community. Another key element is transparency. It is the cornerstone of good governance. Transparency in financial reporting, for instance, helps start-ups navigate due diligence requirements, secure investment rounds, and drive long-term growth. There have been many start-ups in the news recently for governance failures and ethical lapses. This teaches us a key lesson - Integrity and good governance are imperative in the journey to becoming a top-class company.?

Structured processes and long-term thinking are also instrumental in transforming start-ups into unicorns. A study of successful unicorns reveals that those with strong governance practices achieve sustainable growth and stability. Start-ups that maintain detailed financial records, adhere to regulatory requirements, and implement clear operational procedures are better equipped to handle the challenges of rapid growth.??

The board and investors play crucial roles in implementing corporate governance in start-ups. They can challenge founders with difficult questions and ensure that the business operates in the best interests of all stakeholders. Investors also need to scrutinise potential governance issues that may be concealed behind pitch deck numbers to ensure accurate and realistic business evaluations.??

The regulatory landscape is complex, and compliance can often be perceived as cumbersome and costly. However, regular audits and legal check-ins can pre-empt compliance issues and mitigate risks. In an environment where stakes are high and margins for error are narrow, robust governance is the foundation upon which enduring companies are built.??

To encourage better governance among start-ups, numerous initiatives and legislative changes have been implemented recently. For instance, Startup India has established the MAARG (Mentorship, Advisory, Assistance, Resilience, and Growth) portal, and the Confederation of Indian Industry (CII) has launched a corporate governance charter. These resources are crucial for start-ups seeking guidance on corporate governance. The Companies Act (2013) also mandates that companies form a board of directors, with 10-15 percent constituted by independent directors. This ensures that start-ups have the necessary oversight and guidance to operate responsibly and sustainably.??

In conclusion, strong corporate governance is not just an overhead; it is a critical enabler of long-term success. Start-ups that prioritise integrity, transparency, and compliance are better positioned to navigate challenges, attract investment, and achieve sustainable growth.? ?

- Priyanka Gupta , Director - Finance, Social Alpha