Indian Startups: A Significant Reminder To All Startups, Investors And Founders

Indian Startups: A Significant Reminder To All Startups, Investors And Founders

Many adopt a “fake it until you make it” strategy; they must establish internal governance committees as soon as possible. Four buddies searching for a better car maintenance experience established GoMechanic in 2016. They were dissatisfied with the expensive charges and unsatisfactory service they received from neighbourhood garages. They came up with a straightforward solution: launch your own business.

The voyage had been incredible: according to the company’s annual report submitted to the Registrar of Companies, GoMechanic generated total revenue of almost Rs 97 crore during 2021–22, more than double that of the previous year and more than 5x expansion in four years as of 2018–19.

The company had revenue of around $285 million in December 2021, and the developers requested a valuation of $1.2 billion in early 2022. That is an exact 4.21x valuation in a short period. But it took no time for the cookie to disintegrate. GoMechanic co-founder Amit Bhasin has stated in a media interview that their focus has been on “stability in quality of service and cost.” He was unaware that the company’s books had been routinely falsified to obtain even larger valuations.

Bhasin admitted that the company disregarded financial reporting standards in an extraordinary remark that was startlingly similar to one made by Satyam’s Ramalinga Raju back in 2009. We profoundly regret that we “got carried away…followed expansion at any costs, even regarding financial reporting.” The “regret” was not of one’s own volition because it surfaced only after SoftBank, with whom GoMechanic negotiated a sale, selected EY to conduct the due diligence.

The EY investigation exposed some apparent company accounting and business practices flaws. The use of fictional garages to exaggerate sales figures, selective payments to specific garage units, anomalies in revenue and user metrics, and other issues were among the warning signs that EY noted. A forensic investigation by an outside party has been initiated to find out if this is the story of yet another startup that took the phrase “fake it till you make it” far too practically.

According to a Bloomberg article, the company allegedly has 60 of the more than 1,000 GoMechanic service centres breaking accounting rules to inflate sales and transfer funds. The regrettable incident also highlights the weak corporate governance processes in many startups, even when they are supported by well-known companies like Sequoia Capital, Tiger Global, and others (remember Zilingo, BharatPe, Trell, etc.).

Of course, some of these startups are still involved in a public conflict where the emphasis is on politicking and dredging up past allegations. But that is a different tale. Lessons to be learned are not tricky at all. Founders cannot outsource governance, which is a requirement and cannot be an option. However, many startups are excessively preoccupied with development at all costs and fail to form internal committees to monitor accountability in the workplace’s decision-making procedures.

There are other explanations as well. Founders are usually young people passionate about demonstrating their ideas’ validity and wanting to take their businesses further. However, their passions and wants frequently find the perfect counterpoint in their lack of time, expertise, and business skills. Many companies put corporate governance on the flip side or completely disregard it to concentrate on the “big picture” and make the organization “look appealing” to a potential investor.

Decisions are frequently made poorly due to investor pressure and promoters’ unrestrained determination to achieve unicorn status at all costs. In addition, the founders of the startup, who are primarily technologists, need more knowledge of money. Add an investor to that who only looks at the top line. For instance, Housing.com, a startup based in Mumbai, encountered significant difficulties due to the founders‘ lack of effective mentorship, which caused the company’s goal to derail.

Elizabeth Pollman of the University of Pennsylvania Carey Law School claims in an interesting research article that, despite venture-backed startups’ immense social and economic impact, little attention is paid to their internal governance. Traditional theories of corporate ownership and governance need to adequately account for the unique characteristics of startups.

They have the potential to become very large with ownership distributed among a variety of parties, and they encounter problems that need to match the traditional narrative of controlling shareholders in closely held corporations or the dominating principal-agent paradigm of public corporations.

According to Pollman’s research, venture-backed startups involve heterogeneous shareholders in overlapping governance responsibilities, which can lead to disputes between founders, investors, executives, and employees on both a vertical and horizontal level. As a company evolves and has more people with various interests and claims, these conflicts frequently worsen.

This startup governance framework indicates that more consideration should be given to how corporation law concepts apply in the startup context and provide fresh insight into present debate concerns, such as startup board monitoring failures and late-stage governance complexity.

Formal oversight mechanisms should be established later since the founders would need the freedom to innovate and experiment without being constrained by conventional sets of rules in the beginning. But that needs to be a better strategy. The absence of an advisory board increases the likelihood of errors, can result in serious mismanagement, and can enable unethical and fraudulent behaviour to go unchallenged.

While board members are not required to oversee daily operations, they need to ask management the right questions. They have access to reliable information streams so that they can keep an eye out for ethical or compliance issues and choose how to address them.

The bottom line is that strong governance, which includes responsibility, openness, honesty, and a focus on long-term success, must be ingrained in an organization from an early stage. There are a lot of startups that are excellent in this aspect. However, occasionally a few bad apples can genuinely ruin the party.

Edited by Prakriti Arora