homeyoung turks NewsObsession with unicorns and chasing valuations the biggest challenge for startups, says expert
Obsession with unicorns and chasing valuations the biggest challenge for startups, says expert
The startup ecosystem has come a long way in creating wealth, jobs, and innovation. But the recent events have shown that it is not immune to the pitfalls of the old economy. The obsession with valuations, the lack of governance, and the information asymmetry are some of the challenges that need to be addressed. The startup playbook needs to include not just growth and innovation but also governance and transparency. The startup unicorns need to be accountable to their investors, customers, and society. The startup ecosystem needs to build trust and confidence, not just hype and FOMO.
The startup ecosystem has been the poster child of the new economy, attracting entrepreneurs, investors, and regulators alike. It has become an engine of innovation and disruption, with the promise of unlocking wealth, creating jobs, and transforming industries. But the recent events in the startup world have raised questions about its governance, transparency, and sustainability. The headlines are dominated by allegations of financial irregularities, valuation bubbles, and regulatory crackdowns.
Speaking to CNBC-TV18, Vineet Rai, Managing Partner at Aavishkaar Capital, pointed out that the obsession with creating unicorns and chasing valuations is the biggest challenge for the startup ecosystem. Entrepreneurship should not be seen as a shortcut to becoming a billionaire. The goal of a startup should be to solve a real problem, create value for customers, and build a sustainable business model. The pursuit of hyper-growth and sky-high valuations can lead to shortcuts, compromises, and lapses in governance.
"The startup ecosystem in India is very young. The ecosystem saw its first unicorn in 2015 and the general growth has taken place in the last seven to eight years. However, one of the biggest challenges that I have seen is the obsession with creating unicorns and the chase for valuation. It is as if entrepreneurship is a shortcut to becoming a billionaire. I think entrepreneurship is about creating something, building an institution and having the joy of building it and not a shortcut to being a billionaire. So till the time we continue to sell India as a destination for unicorns etc, you will continue to see this error of judgement from founders," Rai said.
Alok Mittal, Co-Founder & CEO at Indifi, also highlighted the need for startups to develop governance systems in an accelerated manner. The rapid growth in a short period of time has given startups very little time to develop governance systems that typically could be developed over a five- to seven-year period. The lack of governance can lead to legal, financial, and reputational risks. The startup ecosystem needs a playbook to develop governance processes that are agile, transparent, and effective, Mittal said.
The recent Enforcement Directorate (ED) raids on BYJUs, India's most valued startup, alleging foreign exchange violations by the company, have once again brought to the fore the issue of governance lapses in the startup universe. The allegations range from financial irregularities to a lack of transparency and information asymmetry. The fact that BYJU's has not released audited accounts since the year 2020-2021 is a cause for concern. The genuineness of the figures provided by the company is being cross-examined by banks.
BYJU's is not alone in facing allegations of governance lapses. The public boardroom battle at Bharat Pe, where founder Ashneer Grover's employment was terminated over alleged financial irregularities, and the sacking of Zilingo founder Ankiti Bose for alleged financial wrongdoings are just a few examples. The lack of transparency and information asymmetry seems to be a larger issue that needs to be addressed.
Corporate investigation firm Kroll, when it investigated frauds post-2021, found that investors were being led by FOMO (Fear Of Missing Out), and the casualty was due diligence. The year 2021 was the year of record funding into startups, and the rush to invest in unicorns and decacorns led to a lax attitude towards governance and transparency. The startup ecosystem needs to balance growth and governance, innovation and compliance, and transparency and confidentiality.
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