Investors Demand Enhanced Due Diligence and Monitoring Following the Rahul Yadav Fiasco
- ByStartupStory | June 5, 2023
General partners and investors express concerns regarding governance lapses in Indian startups, emphasizing the need for robust due diligence practices and enhanced post-investment monitoring to facilitate the growth of portfolio companies with improved controls.
In the wake of multiple corporate governance lapses in Indian startups such as BharatPe, Zilingo, Trell, and GoMechanic, Info Edge has taken the step of initiating a forensic audit into 4B Networks, a proptech startup backed by Rahul Yadav. These actions highlight the need for increased scrutiny and vigilance in the startup ecosystem since the start of 2022.
The 16th edition of TiEcon Mumbai 2023, a prominent entrepreneurial conference held on June 2, was marked by extensive discussions on alleged governance lapses. Similar to the previous year, founders actively deliberated on the importance of value creation and generating cash instead of fixating solely on lofty valuations and rapid growth, considering the waning enthusiasm surrounding the funding surge of 2021. Additionally, there was a noticeable inclination towards exercising prudence in implementing more effective due diligence procedures.
Aakrit Vaish, a well-known angel investor and the co-founder/CEO of Haptik, highlighted that the surge in such lapses can be attributed to the mindless investments during the funding boom of 2021.
“Just like valuation correction, funding correction, this (governance lapses coming out) is also a correction. From last year to this year more such startups will come out and then eventually you will stop seeing this. This is all a function of the excess that is stabilising now,” Vaish told Moneycontrol on the sidelines of TiEcon Mumbai.
“In the desire to win an investment with competition from all around, investors overlooked certain basic facts that they should not have. In hopes of superior returns, sometimes also wilfully ignored certain things that they should have known, checked and acted against,” said Abhay Pandey, general partner, A91 Partners, while speaking to Moneycontrol’s Chandra Srikanth during a session at the conference.
Sameer Nath, chief investment officer and head, venture capital & private equity, 360 One Asset, concurred. He said in the last 18 months of frenzy, everyone was behind getting the term sheet out the fastest.”The race was on how fast you can get to signing and closing the deal. Those vanity metrics are out the door,” said Nath.
The venture capital firms in India have faced criticism for their lack of awareness and being caught off-guard when incidents of mishaps surface. “LPs (limited partners) do take these things very seriously because the GPs’ job here is to take the capital, monitor deployment and make sure the company progresses well,” said A91’s Pandey.
He added that investors cannot blame higher deal flow for not being thorough with their responsibilities towards diligent checks. “It is clear that cutting corners in due diligence is unacceptable because it will come back to bite you at some point. Fundamental checks around financial accounting, tax, and legal integrity are not that hard to do,” added 360 One Asset’s Nath.
He added that investors need to practise higher vigilance while making investments and ensure sufficient time and space to do proper diligence. “An equally important part of the job is post-investment monitoring because if you have the right governance after you come in, good things will follow,” he added.
Nevertheless, Nath acknowledged that these checks are generally effective in identifying mistakes and oversights, whereas deliberate frauds pose a greater challenge to detect. Vikram Gupta, the founder and managing partner of IvyCap, added that skill gaps, particularly among first-time entrepreneurs, largely contribute to issues arising in the aforementioned cases.
“If you look at India’s evolution, in the startup investing space, it is still a young country and many of these founders are still learning. For instance, when you’re coming to Series A, many don’t even know that they have to conduct board meetings,” Gupta said. He believes such founders can be trained, however, those guided by human behaviour are a tougher lot to deal with. “there are some that are guided by human behaviour, no matter how much you work with them and train them, they do not budge,” he added.
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