On March 13, the Karnataka High Court is scheduled to hear a plea by Raveendran challenging the extraordinary general meeting (EGM) called by a group of investors on February 23 to oust him from ed-tech startup Byju’s, which was once India’s most valued startup. It is quite likely, though, that the legal fight may eventually reach the Supreme Court.

But much as it may matter to the parties involved in the Byju's dispute as to who among them finally emerges victor in the fight for control of the ed-tech company, that, by itself, may be much less important than the wider ramifications of this investor-founder face-off on India’s overall startup ecosystem, characterised by its seeming unicorn-obsession.

The shareholder activism that has been on display at Byju's may be just the beginning of the investor community starting to flex its muscles more at start-ups where they feel that their interests are not being adequately protected.

It is a signal from an increasingly assertive no-nonsense brooking investor fraternity that, going forward, they would not hesitate to pull the rug from under the feet of startup founders if there are apprehensions that investors are being given the short shrift at entities where they have pumped in huge amounts of money.

The biggest stakes in any non-boot-strapped startup are always that of the investors who have taken a bet on the company since it is they who stand to lose the most financially when things go badly.

It is also the investors who take the biggest hit from a reputational point of view when authorities and other stakeholders start asking questions about the governance mechanism and business practices of funded startups.

Even in the case of Byju's, for instance, it is the investors who would suffer most through the free fall in the valuation of the company, which once stood at a whopping US$22 billion, as an exit on their part also currently would entail incurring a mammoth loss.

Governance Takes Centre Stage

From the governance standpoint, what we are seeing at Byju's is an indication that investors, henceforth, may come down hard on such startup founders who seemingly adopt a cavalier approach when it comes to putting in place a strong governance mechanism, with this indifference on their part evident in terms of going slow in installing robust systems and processes.

Investors, moreover, through Byju’s, are sending out a warning that they are no longer prepared to carry the can for the seeming lapses of startup founders on aspects related to governance.

For startups, the Byju’s affair could translate into a wake-up call to get their act right on the governance issue as having to contend with a possible trust deficit from the investor fraternity could come in the way of their own future growth.

It could also lead to a change in the mentality of many startup founders, with institution-building becoming the core motivation for launching a business unlike now when the only thing that matters is fetching high valuations for their companies in double-quick time so that they can make a lucrative exit.

Once institution-building becomes the objective, steps would be taken by startup founders to put in place robust governance structures at their companies from the beginning itself and measures taken to strengthen these further as scale-up of the business took place.

It is routine in the Indian startup arena, for instance, to have full-time CFOs appointed only after a startup has reached a certain valuation and is thinking of an IPO to provide an exit opportunity to some of its original investors. The reasons for the time taken in appointing CFOs have never been suitably explained by concerned startups.

Unfortunately, the success of the Indian startup ecosystem – which is already one of the biggest worldwide with more than 100,000 recognised startups as of 2023 – has, thus far, largely been measured in terms of how effective founders have been in raising funds and how the fundraising prowess of new-age entrepreneurs has resulted in the country producing multiple unicorns.

There has been comparatively less focus on how the money raised has been utilised for creating long-term sustainable enterprises even though spectacular success in fundraising does not automatically translate into creating a remarkable business and that task is made doubly difficult when governance structures are feeble. 

Without a doubt, startups – through their innovative ideas and concepts – can play a pivotal role in India’s growth story and contribute significantly to improving the quality of life of the country’s 1.4 billion-plus citizens, who make up almost 18 per cent of the global population. It would, thus, be unfortunate if startups holding promise fall victim to the Icarus syndrome as the loss would not just be theirs but also of the entire country.

(The author is a current affairs commentator. Views expressed are personal)