Kunal Bahl
(Technology Entrepreneur and Investor)

Startup governance has dominated headlines recently, captivating the attention of founders, investors, media, public markets, regulators, and stakeholders at large. This surge in interest is no coincidence. Startups are laying the groundwork for a new and dynamic India, poised to reclaim, with determination and confidence, its position as a global economic leader. So, given its pivotal role in shaping our collective future, “India’s startup sector must rest on a robust foundation of good corporate governance".

While startups thrive on innovation, disruption and rapid growth, this growth need not come at the expense of robust governance practices. In fact, a well- crafted corporate governance framework can guide startups through favourable and challenging phases.

There's a belief that governance concerns are pertinent only in the later stages of a startup's journey, and that all focus should be on growth in the initial phase. However, this notion overlooks that distractions and pressures will always exist, presenting seemingly valid reasons to delay the adoption of governance norms.

Hence, embedding the principles of good corporate governance from the outset is crucial. Over time, these principles become ingrained in an organisation's DNA, steering the startup and its stakeholders through various growth stages.

The challenges in implementing governance norms stem from two key factors: Lack of opportunity & experience. In the nascent stages, founders are consumed with establishing and stabilising the business. As the focus shifts to attracting investors and expanding the team, there's a need to earn investor trust by demonstrating growth. 

Lean teams and a dynamic work culture often lead to a lack of formal processes and documentation in the early years. This deficiency persists as the company grows, resulting in oversight gaps and misuse. Without structured governance, organisational growth and expansion become muddled. Limited experience compounds the issue, as founders may lack exposure to governance practices, further impeding adoption.

Lack of resources Startups allocate financial and managerial resources toward rapid growth, as valuations hinge on performance metrics rather than governance quality. Governance demands time, money and effort, including processes like regular audits and investor relations. Consequently, governance often takes a back seat amid the drive for growth.

Governance responsibilities lie primarily with founders, who are often overwhelmed with building the business, managing teams and navigating investor relationships. This responsibility must be shared among all stakeholders - founders, management, board members and investors. Early-stage investors and directors are crucial in promoting governance practices based on their experience.

While governance requirements may vary based on a startup's life cycle, core principles such as accountability, transparency, fairness and responsibility remain constant. CII's initiative to formulate a governance charter tailored to startups offers guidance across different growth stages - from inception to going public.

This governance framework for startups covers a spectrum of governance aspects, including board formation, internal controls, risk management, compliance, stakeholder engagement and financial management. Complemented by an online self-evaluation tool, this framework empowers startups to assess their governance performance and identify areas for improvement.

Good governance transcends regulatory compliance. It fosters ethical decision-making, reduces conflicts and promotes long-term strategic thinking. It enhances transparency, enabling startups and investors to collaborate with mutual trust based on predictable revenue and growth forecasts. At the earliest stages of a startup, governance can mean that investors are sent regular business updates with monthly financials.

As the startup scales up, effective governance encompasses risk management, succession planning, diversity, equity, inclusion, environmental sustainability and board functionality. It necessitates proactive planning and structured monitoring to prevent reactive measures.

While governance challenges aren't unique to India's startup ecosystem, the sector's youth - it's barely 15 years old - adds complexity to its coming-of-age issues. However, with startups poised for sustained growth, it's imperative to cultivate an ecosystem that rewards innovation and sustainable practices.

By embracing sound governance practices, startups can unlock tangible benefits - long-term value creation, stakeholder trust, improved access to finance and heightened survival prospects. This, in turn, will nurture a generation of startups equipped to lead India's economic transformation.

Note: IICA duly acknowledge the ownership/authorship of the article and publishing rights of Economic Times where the article was originally published.

(Views expressed in the article are of the author and do not represent IICA’s stand)