Governance first: Top VCs focus on dos and don’ts for start-ups

Concerned about the growing cases of governance lapses in their portfolio companies, some of the top venture capital (VC) firms have begun putting in place clear systems to ensure such lapses do not take place in future. The VCs are putting in place clear dos and don’ts for portfolio companies and also keeping a close watch on whether they are being adhered to.

Top VC sources told Business Today that some clear ground rules are being ensured at portfolio firms, and founders are being sensitised on those.

“There are some clear don’t we are ensuring. For instance, no related party transactions are to be undertaken. Also, relatives should not be the appointed as CFO,” a top executive at one of the leading VCs said on condition of anonymity.

For background, while the BharatPe controversy around Ashneer Grover grabbed headlines last year, a slew of other startups like GoMechanic and Trell also turned controversial as questions around governance came to the fore. These, and other similar instances, have made some of the largest VCs wary of governance lapses at their firms.

The other aspect where VCs are putting emphasis on is internal audit. VCs are talking to internal auditors periodically to ensure things are on course and there are no red flags which are being seen. “We don’t want to interfere, but we do talk to the auditors periodically just to be sure,” a senior VC executive said.

VCs are also insisting on getting good quality independent directors on board. VCs say they have on-boarded senior independent directors who have served in large companies like ITC and Hindustan Unilever to ensure that the quality of boards is of high quality and the independent directors also ask relevant questions of the founders when required.

“There may also be inadvertent problems, but the key is to take corrective action at the earliest and not let the problems fester,” one of the VC executives quoted above, whose firm has had some instances of governance lapses in portfolio firms, said. “Remember, most of the founders do not want to get into trouble and are just keen to run their companies the right way. There may also be cases of inadvertent errors,” he said.

Recently, Sequoia, one of the largest VCs with several well-known companies in its portfolio, also had a roadshow where many investee firms met leading executives from investment banks and research firms with a view to understanding what the market expects from them as they move ahead on the road to initial public offers. The exercise, both Sequoia sources and several of the investee firms told Business Today, was very helpful since it also gave the firms a clear idea of the governance standards expected as firms move towards listing.

Firms like Meesho, OYO and CRED were among several other Sequoia investee companies which were present at that investor meet, interacting with market analysts.

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