The meteoric rise in the number of startups, with nearly 100,000 being recognized as of July 2023, highlights the significance of corporate governance within the entrepreneurial ecosystem. While government initiatives and policies have certainly provided a structure, these are only as effective as the stakeholders who implement them. The real test of entrepreneurship, infused with the principles of honesty and responsibility, manifests in the day-to-day operations and decisions made by both entrepreneurs and their backers.
Over the past year, the Indian entrepreneurial landscape has been rife with tales of inflated revenues, fund misappropriations, and questionable decisions. While the investor community has very casually let the founders take the fall for everything, is it really that simple? Instead of falling into the blame game, it’s vital to diagnose the root causes leading to these governance mishaps.
Navigating the Challenging Waters of Entrepreneurship
Every entrepreneur embarks on a journey filled with challenges and pressures. From securing the next round of venture capital to outpacing competitors, the race can sometimes become overwhelming. This relentless pursuit of success often pushes entrepreneurs to adopt the “fake it till you make it” mindset, hoping that the next influx of capital will remedy existing internal issues.
While this façade might appease external stakeholders for a while, internal teams live in constant apprehension, fearing that the house of cards might collapse any moment. Such an atmosphere not only affects morale but also threatens the very foundation of the venture.A Dual-Edged Sword: The Roles of Entrepreneurs and Investors
Entrepreneurs undoubtedly hold the rudder, guiding their ship through turbulent waters. But it’s essential to remember that investors often serve as the compass, pointing towards potential opportunities and pitfalls.The investors’ fiduciary duty goes beyond merely providing capital. They need to ensure that the companies they back adhere to good governance practices. This responsibility begins right from the initial stages with thorough due diligence. Such due diligence must delve deeper than financial metrics, examining the very fabric and culture of the startup. As the startup grows and evolves, the stakes get higher, amplifying the consequences of any oversight.Post-investment, active participation from investors is crucial. Regular updates, active board participation, and a keen eye can help identify and rectify potential governance issues before they snowball into significant problems. Often, the vast experience and insights that seasoned investors bring to the table can act as the guiding light for startups, ensuring they stay on the right path.
However, investors too can sometimes be blinded by attractive financial returns, overlooking glaring governance issues. In their quest for impressive Internal Rate of Returns (IRRs), some might even tolerate governance inadequacies. Such compromises not only jeopardize the investment but can also tarnish the reputation of both the startup and the investor.
At the end of the day, the real question remains is how are the investors able to sleep at night knowing that they are handling external capital and are aware of these potentially life threating governance issues?
The Way Forward
Entrepreneurship, with all its challenges and rewards, is a collective journey. Both founders and investors play pivotal roles in shaping the destiny of a venture. Ensuring transparency, accountability, and ethical conduct is not just the responsibility of a single party but a shared one.
A thriving entrepreneurial ecosystem thrives on mutual trust and respect. It’s vital for both founders and investors to nurture a transparent and honest relationship, where expectations are clear, and processes are robust. Regular internal audits and checks can ensure that small oversights don’t turn into tomorrow’s headlines.
In the end, the true hallmark of successful entrepreneurship lies in an unwavering commitment to honesty and responsibility, ensuring that the venture remains steadfast even in the face of adversity.
The writer is CFO & Partner at Aeravti Ventures.
