Governance frameworks for startup success
This article is authored by Brijesh Damodaran, founding and managing partner, Auxano Capital.
India is a land of entrepreneurs and with $4 billion raised in June-September '24 quarter, there is sufficient capital in India to support ideas and disruption in the ecosystem.
This capital, when raised from other people’s money (OPM) is a fiduciary capital. It’s the trust which has been placed on the founder promoters (FP) and has to be used judiciously.
Pursuing growth at all costs has/had diluted the governance process without sufficient oversight. This approach, though occasionally successful in rare cases, cannot be the approach. As a consequence, the ecosystem has seen a rise in governance issues.
One needs to understand that India had its early taste of startups in 2000’s and the acquisition of Flipkart by Walmart in 2018, was significant. This along with the popularity of the SharkTank - India edition only gave added impetus to the startup ecosystem. As interest started rising, fear of missing out (FOMO) was key, and in all this - governance took a back seat. Narrative was in the forefront. Data and numbers became an afterthought.
A strong governance framework is, therefore, crucial for the long-term success of an enterprise:
ensuring that businesses follow ethical practises,
maintain compliance, and
exercise financial discipline.
A focused approach that respects the capital invested and carefully managed expenditures--particularly in marketing and customer acquisition is essential.
Marketing spends need to be tracked on a real time basis, keeping in mind the allocated budget. If the price of a key word for e.g. has doubled in a month, one cannot continue spending in the earlier manner and needs to realign the marketing strategy to drive results.
There have been instances, where promoters have been reluctant to provide detailed financial information, focusing instead on high-level metrics.
Instances of court cases against the promoters are found when a detailed due diligence takes place. (And instances of angel and/or early-stage investors missing this important detail has been found later, which has at times, led to the tap of capital being closed). Founder disconnects and disputes have also led to enterprise closure and touch-me-not approach from the ecosystem (this is where founder agreements come into play).
Data with narrative is the key and as the early stage investors take a leap of faith and move forward with the promoters, it's important that the early backers are also kept in the loop of the business.
For investors, especially Alternative Investment Funds (AIFs), governance practices are an indicator of the management quality, approach and decision-making. As governance becomes a growing priority for investors, enterprises must implement structured frameworks that enhance transparency and accountability.
Corporate governance should not be viewed as a burden but as an integral part of institution-building. It is not just about following formal procedures but also embodying the spirit of accountability and openness.
By embracing governance, enterprises can strengthen their financial position, attract more investors, and gain access to new opportunities for growth. Governance must start at the top, with promoters leading by example, ensuring that the entire organisation prioritises it across all levels of operations. When the promoters and founders give attention to governance not only in form but also in spirit, that’s where the enterprise gets a thumbs up from the ecosystem, be it investors or peers. This has a bright side too--the valuation multiples also get kicked in.
Effective governance is not just good for startups but a necessity or “must-have”. It is key to earning investor trust, ensuring sustainable growth, and building a successful company in today’s competitive market.
As the Indian startup ecosystem continues to expand, adopting robust governance practises will be crucial in building a culture of responsibility and long-term success.
This article is authored by Brijesh Damodaran, founding and managing partner, Auxano Capital.