Almost two-thirds of 100 venture capital (VC) investors — 64 per cent — polled in an IBM study claim ‘unethical business conduct’ is a major reason for start-ups failing in India.
In response, entrepreneurs and industry experts argue that the issue is not so much to do with “unethical business conduct” but more about “poor corporate governance due to entrepreneurial inexperience,” underscoring the often fractious relationship between investors and founders in India’s vibrant but still nascent start-up sector.
The study titled ‘Entrepreneurial India: How start-ups redefine India’s economic growth’ was commissioned in the second half of 2016. It had about 1,300 Indian respondents, around 600 of whom are entrepreneurs and another 100 venture capital investors, apart from leaders in enterprises, government and academia.
The IBM report cited misreporting of financial and other data, misrepresentation of financial plans or achievements, and ignorance of regulatory requirements as factors of unethical business conduct. Over 3,000 start-ups have been funded in the past five years.
Private equity and VC funds have infused more than $22 billion of capital into India since 2006, according to start-ups analytics firm Tracxn.
“Thinking of that money as their own, as opposed to taking care of it because the capital is vested in a company or to build a certain technology, affects the organisation, and how people are treated,” said Nipun Mehrotra, Chief Digital Officer, IBM India and South Asia.
Tracxn estimates that over 212 start-ups shut down in 2016, a 50 per cent increase as compared to the previous year.
Senior entrepreneurs and India-based investors contested the charge of ‘unethical business conduct’, and believed founders require more mentoring.
Sameer Nigam, Founder of digital payments venture Phone Pe, which is a part of India’s most valuable start-up – Flipkart, said, “A lot of founders are engineers, who need mentorship and support in areas like accounting and finance”. Nigam is the founder of US-based start-up Mime360.
Meena Ganesh, Co-Founder of investment firm GrowthStory, which has backed companies like healthcare venture Portea and food portal FreshMenu said, “Lack of experience in founders may affect their judgement,” citing the difference between ‘booked revenue’ (based on orders) and ‘accrued revenue’ (based on business serviced). First-time businessmen find it hard to understand the difference in applying the right accounting minutiae.
Source: Economic Times
