While founders will be blamed, VC firms equally responsible for corporate governance issues: Zerodha's Kamath

The cases of corporate misgovernance are rising in the Indian start-up ecosystem, the third-largest in the world. The turbulence at ed-tech startup BYJU's is the latest example of it. Last week, the country's corporate affairs ministry ordered an inspection of ed-tech startup Byju's after it took cognizance of various corporate lapses by the company, according to a media report.

Meanwhile, on June 29, Nithin Kamath, online broking firm Zerodha's co-founder, shared his thought through a Twitter thread, saying, "Indian startups are facing corporate governance challenges primarily due to the overestimation of the Indian market’s size by founders as well as VC firms."

“While India is a fast-growing economy that will hopefully be an economic superpower in the future, it isn’t that today. The size of the target market (TAM) by revenue needs to increase significantly to justify the valuations of the startup ecosystem in the country,” stated Kamath in one of his tweets.

He further tweeted, "While founders will be blamed, the venture capital (VC) ecosystem is equally to blame," adding, "The root cause of this is the overestimation of the size of Indian markets by founders and VCs."

"I think most VCs have miscalculated this and maybe oversold the India opportunity to their investors (LPs). In a small market like ours with limited mergers and acquisitions (M&A) opportunities, large exits within 7 years (the lifecycle of a fund within which founders are expected to give exits) are hard," he further added.

According to Kamath's, entrepreneurs will likely try to defend the tales they exaggerated to raise money; therefore misreporting will cause more corporate governance problems in the future than classic fraud in the future.

Why startups need corporate governance

In the startup ecosystem, we have seen several allegations of wrongdoing, financial irregularities, and inaccurate financial reporting over the last couple of years. Startups from Rahul Yadav’s Broker Network, BYJU's to health-tech startup Mojocare are on the radar. Earlier Bharatpe and Zilingo were also in the news for similar incidences.

Among stakeholders, corporate governance promotes credibility and confidence.

Startups are subject to a variety of risks, including operational, reputational, and financial threats. Investors, clients, and staff have more faith in a company that upholds moral standards, makes decisions openly, and takes responsibility for its deeds. By putting internal controls, risk management frameworks, and monitoring systems into place, corporate governance helps in the identification, evaluation, and mitigation of such risks.