Corporate Governance in Startups

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 Yย Combinatorย measure “๐ƒ๐ž๐Ÿ๐š๐ฎ๐ฅ๐ญ ๐€๐ฅ๐ข๐ฏ๐ž ๐ฏ. ๐ƒ๐ž๐Ÿ๐š๐ฎ๐ฅ๐ญ ๐ƒ๐ž๐š๐,” 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.

๐Œ๐ฒ ๐ช๐ฎ๐ž๐ฌ๐ญ๐ข๐จ๐ง ๐ญ๐จ ๐ก๐ข๐ฆ ๐ฐ๐š๐ฌ why could he not predict this situation earlier? The #VCย admitted that it was too late, and the main reason was the decline of ๐‚๐จ๐ซ๐ฉ๐จ๐ซ๐š๐ญ๐ž ๐†๐จ๐ฏ๐ž๐ซ๐ง๐š๐ง๐œ๐ž. We know of abysmal standards ofย #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 startupย 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 fundingย becomes a quick way for founders to expand the scope of their control to build empires.

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