Startups Need To Act Like Public Entities, Adopt Better Governance: McKinsey Partner

At a time when a number of cases of corporate governance lapses and financial frauds have come to light in the Indian startup ecosystem, senior partner at consulting firm McKinsey Vivek Pandit on Monday (July 3) reportedly said startups need to start acting like public entities much before they go for public listing.

Startups should implement better financial governance and include independent directors on their board, BQ Prime reported Pandit as saying on the sidelines of Startup20 Summit.

“Founders or investors aren’t valuing independence on the board. They’re just doing it because SEBI has mandated it. It is still a tick mark,” he added.

The statement comes at a time when a number of Indian startups – from GoMechanic to Mojocare and Zilingo to Broker Network – have been in the news for all the wrong reasons over the last year or so.

Pandit also expressed concern about the prevailing tendency to celebrate unicorn status of startups while disregarding the financial losses that occur when these companies go public.

He said startups are choosing to stay private for longer periods due to the influx of capital. As a result, he added that the valuations of the startups go high in the private market but often plummet once they go public.

It must be noted that while many big startups like Nykaa and Zomato saw bumper listings on stock exchanges in 2021, most of the new-age tech stocks wiped off billions of dollars of investor wealth in 2022. Despite some of these stocks recovering in 2023, many continue to trade below their peak valuations.

Commenting on the funding trend, Pandit said investors are increasingly writing larger checks, with payments made at rich multiples, typically between 20 and 22 times the revenue. “When you have a lot of capital with a lot of expectations, it creates pressure,” he said. “That pressure is now coming out in ways that we need to address,” he added.

He quipped that the startup world is often ‘rewarded for acting first, thinking second, and apologizing third.’

Amid the ongoing funding winter, there has been a lot of debate on the rich valuations that some of the unicorn startups got during the dream run of 2021. As per an Inc42 analysis of 74 unicorns, 55 of them incurred a cumulative operating loss of $5.9 Bn in FY22.

The corporate governance issue has received widespread attention. Former NITI Aayog CEO Amitabh Kant last month said that such cases can shake investors’ confidence in the Indian startup ecosystem and called for self-regulation. Meanwhile, Zerodha’s Nithin Kamath said venture capital firms are equally responsible for the corporate governance issues at startups.