Startups are known for their motivation, innovation, and creativity, but they also need to establish a strong culture of governance, risk management, and control to ensure long-term success. By implementing effective guardrails in these areas, startups can enhance their credibility, accountability, transparency, and resilience in a dynamic and competitive environment. In this discussion, hosted by Sourav Majumdar, Editor of Business Today, industry experts Kalpesh Jain, MD and CFO, Multiples Equity, and Puneet Garkhel, Partner and Leader, Forensic Services, PwC India, shed light on the challenges and best practices surrounding governance in the startup ecosystem.
Assessing the State of Governance in Startups
Highlighting the prevalent issues of governance within startups, Kalpesh Jain, MD and CFO, Multiples Equity emphasized that while it’s not a systemic problem, the industry lacks a significant focus on governance processes and systems. Many startups prioritize growth over establishing robust governance practices, which leads to gaps and potential risks. He suggests that stakeholders, including shareholders and the board, should emphasize the importance of governance and implement effective processes and systems.
Key Areas for Startups to Focus
Commenting on this, Puneet Garkhel, Partner and Leader, Forensic Services, PwC India added that operational resilience, governance, and financial metrics should be key areas of focus for startups. He emphasized the need for a holistic view of the business, considering valuations and factors such as governance, integrity, and compliance. Startups should strive for a balance between growth and profitability while integrating various metrics to ensure sustainable success.
Balancing Entrepreneurial Spirit and Governance
Speaking about the trade-off between keeping a close eye on governance and allowing startups to work independently, Kalpesh explained that while the focus is on identifying entrepreneurs with a strong vision, there must also be a balance between entrepreneurial spirit and corporate governance. Prior to investment, Multiples Equity conducts thorough due diligence, evaluating aspects such as operations, compliance, and integrity to ensure the right balance is struck.
Attracting Top Talent to Drive Governance
The panel discusses the increasing trend of attracting top-level talent from established companies to drive governance within startups. Puneet confirmed that clients are advised to bring in experienced professionals, including CFOs and independent board members, to strengthen governance aspects. Startups are urged to build a diverse team with expertise across domains to enhance their governance practices.
Evolving Investor Outlook and Funding Considerations
Sourav raised the topic of the evolving investor outlook and the impact of funding challenges on startups. Commenting on this, Puneet explained that post-COVID, there has been a shift in how organizations are assessed, and valuations have taken a hit. However, he pointed out that India continues to attract significant investment, albeit with a cautious approach. While funds are being more selective, investments are still flowing into promising startups.
Pre-Investment Due Diligence and Red Flags
The importance of pre-investment due diligence is emphasized, with Kalpesh Jain discussing the specific areas that Multiples Equity considers. He highlighted the need for a strong business thesis, unit economics, and a clear path to profitability. Red flags during the diligence process can lead to further investigation or even the withdrawal of investment.
The Role of Forensic Services and ESG Risks
Puneet spoke about the role of forensic services in due diligence, covering financial, operational, and commercial aspects. He explained that ESG (Environmental, Social, and Governance) risks are also evaluated, emphasizing the importance of governance in the sustainability and evaluation of future organizations.
Data Privacy and Cybersecurity Risks
The panel acknowledged the significance of data privacy and cybersecurity risks, particularly in startups where data plays a crucial role. Puneet stressed on the importance of startups prioritizing data security to maintain a competitive advantage. Kalpesh explained that Multiples Equity conducts software audits and due diligence to address cybersecurity concerns during the investment process.
Conclusion
In conclusion, the panel agrees that there is a growing awareness and consciousness regarding governance in the startup ecosystem. Startups are increasingly focusing on profitability rather than just top-line growth. Emphasizing the significance of proper governance, the experts suggest that by delivering strong results, managing cash effectively, and demonstrating a clear path to profitability, startups can navigate the challenges and look forward to a promising future
