While
recently became one of the last few Nifty50 companies to hold an analyst meet for the first time in its history, , India’s first unicorn to get listed, proposed to undertake analyst earnings calls once a year rather than the conventional practice of once a quarter. To be sure, startups are not run-ofthe-mill businesses. They exist on the premise of doing things differently and, in the process, face their disproportionate share of challenges that may not result in profits from day one. Little wonder, their failure rate is also high.
In the struggle of getting it right, maintaining high standards of governance often doesn’t emerge as top priority. Venture capitalists or private equity representatives on the boards of these startups don’t necessarily become the torchbearer of good governance practices. Besides, startups often function in uncharted business areas that are yet to acquire regulatory visibility. Their fate often hinges on the regulatory stance adopted towards their business activities. The threat of regulatory clampdown has prompted India’s leading edtech startups — with their controversial business practices — to come together to adopt a self-regulatory common code of conduct.
Calls of regulating the digital education industry amid rising malpractices had drawn the attention of the education ministry. The malpractices associated with new-age startups range from unfair means of customer acquisition, poor regard for privacy and data protection, mis-selling, laying of debt traps for customers to poor employment policies and shoddy customer service. What may get listed companies in trouble, liable to penalties and immediate decline in valuation, tends to go unnoticed and unpunished for startups. Incidentally, ‘innovation’ is what gets valued in startups, while it’s ‘governance’ in case of large companies.
So, should the unicorns be regulated and their innovation quotient be threatened? Or should their stock market listing be the time when their value comes up for the test? If startups get governed early on, they may not necessarily grow to become the pioneering businesses they are expected. However, if they remain ungoverned for long, they may end up setting wrong industry precedents, hurting the trust of consumers, and prompting governments to clamp down harshly. China banned edtech companies from making profits and raising capital, effectively throwing the nascent industry under the bus. India has emerged to be home to over 80 unicorns, with more than half of them joining the club in 2021 alone.
With the first Startup India Innovation Week ending on Sunday, and when GoI displays its commitment to provide a more benign environment for startups to flourish, laws will also need to be framed and tweaked to regulate their business and fundraising practices. While the startup ecosystem would prefer self-regulation, what — and how much — to govern is the dilemma that GoI will have to face soon.
In the US, Securities and Exchange Commission (SEC) is gearing up for seeking more transparency from big private companies raising funds. The January 3 indictment of health tech startup Theranos founder Elizabeth Holmes in the US — found guilty of conspiring to defraud investors — has emerged as an extreme example of what can go wrong with a startup. Here in India, controversies involving startup founders are providing a glimpse of the not-so-great aspects of the startup ecosystem.
It is time to stress upon startups to consider governance as much of a contiguous priority as innovation. Encouraging self-regulation, holding aStartup India Governance Week, instituting ‘best governed startups awards’, and conducting governance sensitisation workshops for startup founders and mentors can be good first steps. Regulatory oversight can follow as the next logical step.
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