While corporate governance has been a top matter of discussion over the past year, the latest incident of Mojocare founders confessing to its investors on inflating revenue has underlined the need to keep a close watch on the operations of startups. Venture-funded startups like BharatPe, Byju’s, Zilingo, Rahul Yadav’s 4B Networks and Trell are among companies that have allegedly had governance issues in the last one year.
Everyone is cautious about what might be happening even in early-stage firms and it’s better to get it checked in early stages given the current state of affairs. India is emerging as one of the fastest-growing start-up nations in the world, with over 98,000 start-ups, 400+ incubators, and 108+ unicorns. Indian start-ups are making their presence felt across the world,
contributing to both the socio-economic growth of India and other emerging economies, as well as gaining recognition from global investor communities, including governments.
The start-up sector in India has, over the last few years, become a key indicator of the economic growth of the country. A start-up is faced with several issues that must be dealt with in order for it to grow into a successful organization. Apart from planning the most effective business strategies, a start-up needs to look at the regulatory, legal and tax regimes of the country where it is proposed to be set up and carry on business. In many instances, appropriate structuring for a start-up helps to prevent future complications and mitigate risks at a future stage. Introducing corporate governance norms early in a start-up has several benefits that can outweigh the potential diversion of focus.
Here are some of the key benefits:
▪ Enhanced accountability: Corporate governance norms ensure that the startup is accountable to its stakeholders, including investors, customers, and employees. This can help establish trust and credibility, which is essential for the long-term success of the business.
▪ Improved decision-making: By establishing a clear framework for decision-making, corporate
governance norms can help the startup make better decisions that align with its values and
objectives.
▪ Reduced risk: Corporate governance norms can help the startup identify and manage potential risks, including legal and regulatory compliance, financial reporting, and data privacy.
▪ Increased access to capital and partnership: Investors and lenders are more likely to invest in startups that have established corporate governance norms. This can help the startup raise capital more easily and at more favorable terms. Furthermore, start-ups that adopt good governance practices tend to attract higher valuation premiums, which can assist in their overall fundraising and growth journey.
▪ Stronger reputation: A startup that upholds high standards of corporate governance is likely to have a stronger reputation in the market, which can help attract customers, employees, and partners.
While there is a potential risk that corporate governance norms could increase costs and/or curtail innovative thinking, it is possible to mitigate this risk by balancing governance with a culture of innovation and regularly reviewing and updating governance frameworks. The overall benefits far exceed the possible downsides.
Start-ups are growing at a fast pace and with strong aspirations. The Indian start-up ecosystem is poised to create jobs, generate wealth, and transform societies. The governance framework has the potential to act as a catalyst for start-ups to remain conscious during important decision-making processes.
LegitPro Associates Corporate Governance team completed 2 assignments of Drafting Comprehensive
Governance framework for one Series A funded start-up and another for Series B funded start-up.
Corporate governance acts as a knight in shining armor, rescuing both founders and partners at all stages, during and after fund-raising. As the saying goes, right begets right and wrong begets wrong. Following the sound principles of corporate governance will always enable a start-up to make sound investment decisions, establish best practices in the form of rights, duties, obligations, and liabilities, and ensure its smooth functioning and growth. This framework is the first step of many in the right direction!