Amidst the ongoing India investment story, private equity (PE) and venture capital (VC) investors hold a pivotal role in shaping the future of startups and their transition into established entities. As investors, their responsibility extends beyond financial gains to nurturing and steering these startups towards sustainable growth and becoming responsible corporate citizens.
While the pursuit of profit often takes center stage in the PE and VC realm, it is essential for these investors to prioritise and demonstrate better corporate governance practices.
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Private investors seek out promising opportunities, backing innovative ideas and disruptive ventures with the potential for substantial financial returns. However, in the relentless quest for wealth creation, the moral dimension of making money can sometimes be overshadowed. It is imperative that private equity and venture capital investors recognise the crucial role of governance plays in their investing process and in guiding their investee companies.
Private equity and venture capital funds typically operate within a finite life cycle of 7-10 years. During this relatively short period, fund managers must identify and invest in promising ventures, nurture their growth, and ultimately achieve substantial returns for investors. The fund managers’ financial success, often tied to profit sharing, hinges on their ability to deliver impressive returns within this timeframe. These time and financial pressures create a challenging environment where balancing profitability and ethical considerations becomes paramount.
These investors also hold considerable power and influence within the startup ecosystem. Their investments can propel fledgling enterprises to success or shatter their dreams. As such, investors bear a moral obligation to utilise their influence responsibly, going beyond financial considerations to prioritise sustainable growth, ethical practices, and societal well-being. Central to this responsibility is the recognition that governance is not a mere box-ticking exercise, but a fundamental pillar for building strong, resilient, and morally conscious organisations.
The Importance of Governance:
Effective governance entails the establishment of transparent decision-making processes, robust oversight mechanisms, and accountable leadership. It ensures that a company's actions align with its stated values and purpose. Good governance safeguards against abuses of power, fosters trust among stakeholders, and reduces the risk of unethical behaviour. By embedding governance as a key aspect of their investing process, private equity and venture capital investors can drive positive change and contribute to a more sustainable and ethical business landscape.
Investors should actively encourage investee companies to prioritise transparency and accountability. This involves advocating for comprehensive corporate governance frameworks, promoting the establishment of independent and diverse boards, and ensuring transparency in financial reporting. By fostering an environment of responsibility and accountability, unethical practices can be curbed. Furthermore, investors should support the implementation of robust internal controls, risk management systems, and compliance programs to prevent malfeasance and promote ethical behaviour throughout the organisation.
Balancing Profit and Purpose:
While financial returns remain a primary objective for investors, the pursuit of profit should not come at the expense of ethical considerations. Investors have the power to shape the values and culture of their investee companies, steering them toward a broader purpose that extends beyond profit maximisation.
Short-termism has often plagued the investment landscape, with investors focusing solely on immediate gains without considering the long-term implications. Private equity and venture capital investors must adopt a more enlightened approach, recognising that sustainable financial success (valuations, profits, etc) goes hand in hand with responsible business practices. By encouraging investee companies to prioritise long-term value creation, investors can foster an environment where ethical conduct, innovation, and societal impact converge.
The Path Forward:
While financial returns remain a primary objective, the pursuit of profit should not overshadow ethical considerations. PE and VC investors possess the power to shape the values and culture of their investee companies, steering them towards a broader purpose that goes beyond profit maximisation. To truly embody the morality of making money, private equity and venture capital investors must embrace governance as a core principle of their investing process. They should actively support capacity-building initiatives, providing guidance, mentorship, and resources to nurture a culture of governance excellence.
In the midst of the ongoing India investment story, it is crucial for private equity (PE) and venture capital (VC) investors to acknowledge that they cannot shirk their responsibility when it comes to corporate governance. As investors, their role extends far beyond providing financial support.
As startups grow and expand, they face new challenges and must adapt their practices to align with ethical and sustainable principles. Many of the startups founders are young, have not imagined or seen before the size of the entity that they have built in such a short time. Yet most of them behave and lead their business as they led it in its infancy. This is where the difference in expectations of their own personal behaviour, as well as corporate journey becomes critical, and visible in public domain.
Private investors and Board of Directors have the unique opportunity to nurture these leaders and companies, providing guidance and support as they navigate this transition.
They have a pivotal role in nurturing and guiding startups as they scale up, requiring a transition from traditional ways of doing business to behaving as responsible corporate citizens. This is where private investors, both on the cap table and as members of the board of directors, have a significant societal role to play.
The success of startups relies not only on financial performance but also on their ability to operate as responsible and ethical entities. This is where private investors can steer that the investment story continues to flourish, driven by a commitment to nurturing startups and guiding them towards becoming responsible corporate citizens.
—The author, Dr. Srinath Sridharan, is a Policy Researcher & Corporate Advisor. The views expressed are personal.
Read his previous articles here
(Edited by : C H Unnikrishnan)
First Published: Sept 1, 2023 7:11 AM IST
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