Start-ups in ‘fraud’ bucket will face difficulty in raising money, says Sequoia MD

KEY HIGHLIGHTS:

• Willful frauds in startups should be investigated and taken strict action against
• Fintech, SaaS and Agriech emerge as the sectors with the strongest momentum
• Valuing companies that are inflated is becoming a massive problem for VCs in India

At the industry body Indian Venture and Alternate Capital Association’s (IVCA) conclave in Mumbai, Sequoia Capital India’s Rajan Anandan has said that companies that are in the fraud bucket will find it very difficult to raise money from institutional investors. 

“Unfortunately there have been a few situations of willful fraud, and we’ve taken action. That’s been quite challenging. The whole goal for us is to build world class enduring companies that go on for 20-30 years and to build world class companies, you need to have world class corporate governance,” Anandan, who is the MD at Sequoia, said. “When you see willful fraud you have to investigate and take action,” he added.

He also noted that it’s important to make sure that start-ups in the beginning of their journey know what good corporate governance is and puts in place the specific things that one needs to do. “We as a firm are focused on much earlier stages to make sure what are those sets of things that need to happen to have great corporate governance.  By the time you raise series C, you have to have an independent CFO, you should be doing external and internal audits, you need to have independent board of directors, etc.,” he said.

According to Trifecta Capital, the sectors that continue to see a lot of momentum are certain elements of fintech, SaaS and Agritech. “Agritech because it’s a really large market, contributes 27 per cent of GDP. It’s a really large market and powered for tech-based disruptions. In the four-year period, that is 2015-2019, we saw agritech GMV grow up 3-4X, but in the last 4 years we’ve seen that 10xing,” Lavanya Ashok, Partner, Trifecta Capital said.

She said that her company is starting to see very good unit economics in agritech. “Fintech continues to be strong. We dodged a lot of bullets especially on the valuation principle. Within fintech, embedded finance has started to see a lot of deal activity along with banking as a service. We’re seeing a lot of traction in SaaS and building in India for the world is turning out to be a great opportunity,” she added.

When larger funds get raised and portfolios balloon, Mohanjit Jolly, Partner, Iron Pillar, pointed out that it’s then that hiccups start. “That’s when the LPs (limited partner) get leverage. Leverage shifts from GPs (general partner) to LPs. Start-ups that are towards the second half of their fund cycle or at the tail end may not have a choice but to go down the path of exiting through secondary,” he said.

According to him, there’s a conversation going on about where does one value these companies that clearly are sitting slightly or massively inflated. “One of my pet peeves is I hate downside surprises. When I go to board meetings, I don’t want to see that. When there’s something that’s going sideways, I want the entrepreneur to reach out to the board member and give them a heads up. Trust governance between GPs and LPs is important. And LPs appreciate that,” he said.