Focus on governance biggest gain for India’s valuation-obsessed startup sector

In the last fiscal year, the startup sector faced several headwinds, especially on governance-related issues. FY2025 could see a turnaround if investors and founders bolster governance mechanisms

The temptation may be strong to describe FY2024 as an ‘annus horribilis’ for the Indian startup sector given the troubles faced by two of the biggest poster boys of the new-age business arena — Byju’s and Paytm — and, also, with not too many big-ticket fundraises being announced last fiscal year.

But, in its own way, the FY2024 has laid the foundation for the long-term sustainability and continued vibrancy of the Indian startup sector, which is already one of the biggest in the world in terms of the number of startups. The year has proved to be the best wake-up call for startup founders that a cavalier approach does not work when it comes to matters of governance and oversight, and that there could be a heavy price to pay for adopting a nonchalant approach on these issues.

‘Governance’ emerging as the buzzword in the Indian startup arena – with it even finding a prominent mention in a CII report released in March 2024, is the best thing to happen for a sector, where, until now, nothing except ‘fundraising’ and ‘valuations’ mattered. Increasing recognition that an ecosystem is only sustainable when it has sturdy systems and processes, and effective oversight mechanisms as its foundational pillars is good news for new-age businesses, going forward.

So far, the desire of startups to become unicorns and/or decacorns in double-quick time had been so great that the focus on building robust governance structures, which is a prerequisite for institution-building, was often considered a lesser priority than how fast a startup could hit pay dirt. The likely feeling was that spending more time on governance issues would leave startups with that much less time to devote to doing what is needed to be done for shoring up valuations to provide hefty exits to investors or founders themselves, at the earliest.

Although they may have come under the spotlight for the wrong reasons, it is not only Byju’s and Paytm that have governance problems. Governance is a weak link in the startup ecosystem, but the matter had been glossed over till the troubles at Byju’s and Paytm were hard to overlook.

In December 2021, for instance, the Education Ministry came up with an unprecedented advisory urging citizens to exercise caution while dealing with edtech entities. This action on the part of the ministry prompted some of the leading names of the edtech sphere — including Byju’s — to hastily come together to form the India Edtech Consortium (IEC) as a self-regulatory body. Nothing much has been heard from the IEC since the recent dispute between a group of investors and the Byju’s founder.

In FY2025, it is hoped that there will be no going back to the old ways for this growing sector. The investor community would have to take the lead in this connection as the actions they take on bolstering governance mechanisms at their investee entities would have the biggest impact in ensuring that startups have a strong core.

Without a doubt, India’s startups hold the potential to play a catalytic role in advancing the goal of a developed India. It would be unfortunate for India’s over 1.4 billion citizens (who make up almost 18 per cent of the global population) if local startups are unable to do justice to the faith that people have reposed in their ability to make a difference because of weak governance structures.

(Sumali Moitra is a current affairs commentator. X: @sumalimoitra.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.