Leveraging corporate governance to strengthen India’s startup ecosystem

India’s startup ecosystem has witnessed remarkable growth in recent years, attracting investments from both domestic and international sources. To illustrate, India is the third-largest startup ecosystem in the world, with over 92,000 officially recognised entities.

Bolstered by India’s large consumption potential, the disruption caused by the emerging “India Stack,” and favourable policy shifts, the deal value of the Indian startup ecosystem was in the range of around $25 billion in 2022, as per the IVCA–Bain & Co. India Venture Capital Report 2023, which is a promising number in a year that saw muted activity worldwide.

As the startup landscape continues to evolve, it has become increasingly important to prioritise the development of good governance practices. Good governance plays a crucial role in ensuring transparency, accountability, and ethical conduct, contributing to the long-term sustainability and success of the industry. By embracing and implementing these principles of good governance, the startup ecosystem and private capital industry of India can further strengthen their position as a preferred investment destination. Moreover, the adoption of strong governance practices can keep the risk of poor returns in control and increase the likelihood of a startup’s success.

With the continuous inflow of funds into the Indian startup ecosystem, there is growing concern regarding the lack of adherence to corporate governance standards. Several incidents in the past few months, involving allegations of corporate governance violations against startups, have brought this issue to the forefront. This situation underscores the significance of establishing and implementing strong corporate governance practices to safeguard the rights and interests of all stakeholders involved.

According to the Ministry of Commerce and Industry, India’s startup ecosystem has experienced remarkable growth, expanding from 452 startups in 2016 to an impressive figure of over 92,000 in 2023. While considerable support has been extended to nurture innovation in early-stage companies, the recent deceleration in funding has led investors to reassess the governance practices and operational ethics of their portfolio firms.

According to the Start-Up Governance Playbook, published by the Indian Venture and Alternate Capital Association (IVCA) in collaboration with Deloitte, by implementing corporate governance strategies, companies can improve their financial performance, attract investors, and establish a robust reputation and brand value. The objective of governance is to establish a structured framework that promotes efficient management, aligns goals among stakeholders, and fosters accountability in decision-making processes. It is imperative for startup founders to establish transparent governance practices at an early stage to ensure the long-term success and stability of the company.

For first-time entrepreneurs, it is crucial to have a governance practice checklist, which should be implemented early on, even before raising their initial round of funding.

Several factors should be taken into account when measuring the effectiveness of these practices.

First comes financial transparency, followed by the founders’ agreement. Founders should prioritise clear and open communication about their financials, which builds trust and credibility with potential investors and facilitates effective decision-making.

Secondly, a founders’ agreement is essential. This agreement outlines the roles, responsibilities, and goals of each founder, ensuring clarity and alignment among the team. By establishing a solid agreement, founders can prevent future disputes and maintain a cohesive vision.

Next comes integrity and ethical conduct, which are vital for sustaining the long-term growth of the private equity industry. Funds and startups must prioritise ethical practices and compliance with all applicable laws and regulations. There is also a need for qualified advisory boards, comprising experienced professionals who can provide guidance, mentorship, and strategic insights.

Effective risk management is fundamental as well. Establishing robust risk management frameworks allows funds and startups to identify, assess, and mitigate risks associated with their investments. By prioritising risk management, potential pitfalls can be minimised, increasing the chances of success. Not only this but also to strengthen the startup ecosystem in India, collaboration among various stakeholders is essential. Funds, startups, industry associations, and regulatory bodies should work together to develop and promote industry best practices. Additionally, relevant KPIs can be defined and monitored to assess the overall startup's performance and make data-driven decisions at every step. These should be revisited and redefined every quarter based on the relevance of the indicator toward the overall business strategy.

It is important to understand that implementing good governance practices is vital for the growth and consolidation of India’s entrepreneurial ecosystem. Prioritising transparency, accountability, ethical conduct, and investor protection not only fosters trust, but also attracts increased capital and cultivates enduring relationships with investors. Moreover, embracing effective board governance, robust risk management, and collaboration enhances the industry's credibility and reputation. By adopting and leveraging these principles of good governance, India’s private capital sector can establish itself as a flourishing and preferred investment destination, propelling future growth and success.