Growth shouldn’t be the only goal for India’s startups

By Mihir Sharma

Indians are justifiably proud of their nation’s startups. Funding has poured into the sector — increasing 15-fold since 2015, according to the government — and some of the work that these young firms are doing, particularly in areas such as space, is truly cutting-edge.

In theory, that should almost guarantee success. In India, a good idea with the right funding has every opportunity to scale up quickly, fueled by a subcontinent-sized market with a billion potential consumers.

Increasingly, however, scale also appears to be the sector’s Achilles heel. Some of the most prominent startups are struggling to build the governance structures they need to handle their rapid growth.

Over the last fortnight, two of India’s best-known founders were the subject of unflattering headlines. Byju Raveendran, a mathematics teacher who set up the controversial ed-tech firm Byju’s, told a group of journalists that his company — once valued at more than $20 billion — was now “worth zero.”

For years there have been complaints that the firm employed marketing methods that were overly aggressive and sometimes misleading in order to drive growth. Last year, several of its major investors departed. The Ministry of Corporate Affairs then launched a probe into the company. This week, Supreme Court invalidated a deal to pay off one creditor but not others, pushing the firm closer to insolvency.

Byju’s problems aren’t unique. Bengaluru-based Ola Electric Mobility Ltd. is being audited at the urging of the Ministry of Heavy Industries — in this case, for allegedly failing to live up to the service guarantees promised in the marketing of its S1 e-scooter.

Customers have been complaining for months about inadequate service; the company’s 39-year-old founder Bhavish Aggarwal made things worse by getting into a very public spat with an Indian comedian on the subject. Ola, which went public last year, has seen its share price fall 45 per cent since August.

Meanwhile, earlier this year, the Reserve Bank of India told the payments company Paytm to freeze its banking arm for violating transparency regulations during its swift expansion. Its share price dropped almost 50 per cent, though it has recovered some of that ground since, and the non-banking side of the business has now been allowed to add new customers.

All these companies sold themselves as virtually surefire bets, given India’s scale. Byju’s said it would revolutionize education in a country where tens of millions of students languish in poor schools. Ola offered a future where the vast majority of citizens who don’t yet have rides of their own would all go electric and “end the ICE age” of internal-combustion engines.

And, back in 2016 when Prime Minister Narendra Modi withdrew most of India’s cash from circulation overnight, Paytm famously promised that it would replace ATMs.

But securing a few hundred million customers, or subscribers, or riders isn’t the only thing companies need to do when they grow. The administrative and managerial backbone required to support larger enterprises and ensure high-quality corporate governance seems much harder to build in India.

This isn’t a predictable outcome. Most of India’s publicly traded companies are transparently run. While the country has long had a problem with insider control, the situation has been improving. And these firms have always performed well in international comparisons of, for example, how well minority shareholders’ rights are protected.

So why aren’t newer billion-dollar companies similar standouts in terms of governance? There’s no easy answer. Founders holding on longer than they should pose a problem everywhere, for instance.

Perhaps the very rapidity and scale of expansion that is possible in India is partly to blame. It is simply too tempting to build a vast user base before you fundamentally overhaul your processes.

How these companies are financed may also be an issue. Global investors are fascinated with India’s startup sector and its possibilities. But I am not sure that the 15-fold increase in funding since 2015 came with a commensurate increase in day-to-day attention to how these companies operate.

After all, it takes 18 hours to fly from Silicon Valley to Bengaluru. Will venture capitalists based in California really give as much support to, or conduct as much oversight of, firms in India as they would those next door?

This should be is a fixable problem. Corporate governance improved greatly after new regulations were introduced in 2013 that pushed companies to incorporate independent directors on their boards and protected whistleblowers. Some startups that had active boards — such as Paytm competitor BharatPe — managed to grow out of governance problems.

Traditional Indian firms might appear staid and unexciting compared to the new arrivals. But these swashbuckling startups might have something to learn from their boring older siblings.