The music has stopped, but the party is on? Well, here music refers to ‘easy ‘ capital provided by the investors. And the party, the disruptive ideas/opportunities being promoted by the founders.
The lack of responsibility & ownership of the fiduciary capital displayed by the ‘startups’ over the years has led to this state.
But then, you require two hands to clap. What role have the angel investors, Venture capitalists, et al, played that it has reached to this state!!!
Following a model or mimicking one prevalent globally, without considering whether the prevalent eco-system is open to it? or is it relevant?
In a country, where value is key – remember this TV ad of a car which says, “Kitna mileage deta hein”? ‘aka “what is the mileage”?
Investing in startups began as a “Halo “effect (it one can state that). The mushrooming of angel investors, accelerators, Venture funds post 2010, was an exciting period. Here the vibe was of a different nature. The promoters & investors were working hand-in-hand (obviously, it was new & each one was trying to understand the ecosystem in the early days… with camaraderie being up in the quotient).
Till about 2015, there were ~ 500 startups, which today is closer to 1.60 lacs. As more & more startups came into existence, dilution & slackness in governance started creeping in.
Investments came in for ideas & spends were happening for ‘growth’. ‘Growth’ can seldom be bought & it requires constant inflow of capital. The moment the ‘tap’ of capital stops, we find blowups in this eco-system. Storytelling is an art, which very few have mastered. And where a founder, with this skill was in place, raising capital, was a ‘walk in the park! But then, the application of this capital was a challenge, and opulence & extravagant spends became the norm.
In Sep’ 12, the commitment amount in Category I AIF was – Rs. NIL. (Yes! believe it or not]. In 2015, it was ~ Rs 12,000 Cr ($1.5bn). In 2020, ~ Rs 282,000 Cr ($33bn). And today it is – Rs 2,10,30,000 Cr ($121bn). What a long way, in little over a decade’s time. And to think of it, ~ 17 lacs, direct jobs have been provided by these startups.. kudos…
What has not helped to grow further is the lack of discipline in the ‘governance’ matters.
Fudging the books, buying growth, extravagant spending, related party transactions, you name it, all has been there to see. And to top this – lack of oversight by the capital providers. Why, Why, Why?
And this has come to bite today. There is a sense of mistrust and capital raise today is taking a lot more time.
Is there a way out? Absolutely!!
- Why can’t the money be deposited in an ‘escrow’ account & the withdrawals be based on budget, – which has been shared upfront?
- The investors on the Captable could appoint one amongst themselves to monitor the progress in the company.
- As in any listed/public company, why not have an Internal auditor, who shares the governance aspect at regular intervals?
- Related party disclosures to be made upfront & to be approved by the designated lead identified by the investors.
These are but a few measures, which can create confidence among the investors. This can also ensure that capital raising can be swifter.
Change is the only constant. The Indian Capital market is one of the most regulated ones.that has helped keep major mishaps in check.”
The change begins with self. Let’s drive this change together.
Author
Brijesh Damodaran
