- July 28, 2022
- Posted by: Ramkumar
- Category: Posts
Corporate Governance in Startups
This weekend, i was talking to a Venture capitalist and asked for his view on the current market sentiment. The VC responded that it follows the Y Combinator measure “𝐃𝐞𝐟𝐚𝐮𝐥𝐭 𝐀𝐥𝐢𝐯𝐞 𝐯. 𝐃𝐞𝐟𝐚𝐮𝐥𝐭 𝐃𝐞𝐚𝐝,” implying that it has stopped funding its portfolio companies. Further, it has advised its portfolio firms to cut costs and evaluate based on its current cash reserves, funding tied up, expenses, and revenues if the startup is on track to reach profitability before it runs out of money.
𝐌𝐲 𝐪𝐮𝐞𝐬𝐭𝐢𝐨𝐧 𝐭𝐨 𝐡𝐢𝐦 𝐰𝐚𝐬 why could he not predict this situation earlier? The #VC admitted that it was too late, and the main reason was the decline of 𝐂𝐨𝐫𝐩𝐨𝐫𝐚𝐭𝐞 𝐆𝐨𝐯𝐞𝐫𝐧𝐚𝐧𝐜𝐞. We know of abysmal standards of #corporategovernance; however, what proved costly this time was the excess cash that founders had access to from capital markets. Unfortunately, the founders invested this excess cash in unattractive projects, and the board (occupied mainly by VC firms) did not intervene.
Thus, founders continued to burn cash to chase growth, and with the abrupt stop in funding due to inflation and subsequent hike in interest rates, startups are in a quandary.
I am not saying that the startup ecosystem in India is not good; on the contrary, it is a boon giving rise to entrepreneurship. However, in many instances, the founders misuse the resources entrusted to them as easy access to VC funding becomes a quick way for founders to expand the scope of their control to build empires.