Founders Vs VCs: The Race To Reset

It’s a position fraught with pressures at the best of times, but the last few weeks have made it all the more clear — founders often find themselves on shaky grounds, and in uncertain times, they can feel like puppets of the board or investors.

The OpenAI drama around fired-and-then-reinstated CEO Sam Altman shows how shaky it can be even for someone who’s billed as a once-in-a-generation founder. OpenAI’s boardroom struggle is an anomaly, since the board did not have any direct investor influence. So this exact situation is unlikely to happen in India for a long time.

Indeed, in the Indian startup ecosystem, there’s a curious ‘race’ between investors and founders to reach the reset button first.

VCs are looking to protect their investments by replacing founders in times of crisis, as we will see in detail below. On the other hand, founders are looking to exit without acrimony, before being asked to leave.

This struggle has already seen dozens of founders step away from their companies, and many more are likely to step down in the months to come. So today we are looking at this curious ‘race to reset’ between VCs and founders, but after these top stories from our newsroom:

• New Dynamics In EV Land: Investors in the EV space are looking beyond OEMs and focussing on segments such as batteries, EV infrastructure development and other areas. How will this change India’s EV landscape?
• Game Devs In The Spotlight: Real money gaming is dead and India’s game development startups are rising up to fill the gap. But long-term success requires more than just VC money; is India ready?
• Founders In Legal Tangles: Trouble grows for beleaguered founders Ashneer Grover and Rahul Yadav in their respective legal tussles. While BharatPe took Grover to court for social media posts, Yadav is currently out on bail after yet another court hearing.

New World Order

The fact that several startup founders have quit this year is no secret. We have covered these exits (forced in some cases by allegations of fraud) throughout the year, and we have also looked at how many of these founders are now looking at new innings with new ventures.

But while the announcements are often framed as the founders looking to pursue new opportunities, investors believe that it’s nearly always the case of the business outgrowing its leadership and needing new direction or a professional CEO outside of the founders.

Plus, in some cases, corporate governance lapses have necessitated fresh starts. “No founder or CEO should feel irreplaceable. Businesses grow and flourish even without original founders. It’s all about who’s right for the job, and by the way, that also applies to fund managers and partners at VC firms,” says a Delhi NCR-based early-stage investor.

Even established business leaders such as Vijay Shekhar Sharma also have to earn the confidence of shareholders to continue as CEOs from time to time, as seen last year.

“At the early stages a founder is critical. But after the startup reaches some maturity, the founder needs to be in the background and specialists need to take centrestage. Not all founders are happy hearing this from investors,” the investor added.

More often than not, founders have to be told by investors about the need for new leadership, which is not a great place to start with. Essentially, if investors are the first to reach for the ‘reset button’, it’s not a good sign for the business.

When Founders Bail Out

But as we have seen this year, founders often tend to reach for the reset button before they begin to feel the heat. This week, Dealshare’s Vineet Rao and Sankar Bora became the latest cofounders to step down.

The indications have been there throughout the year with more than two dozen founders having either quit or shown the door this year at more than a dozen startups, most of whom are going through tough times. Examples such as Zestmoney and Gomechanic stand out since they involved founders leaving en masse, leaving the company in a tough spot.

GoMechanic ended up as a distress sale, while Zestmoney is floundering with its acquisition prospects bleak.

But it’s unsurprising that there is an exodus of founders. Many of these entrepreneurs are more than happy to quit given the better funding prospects for early-stage startups and the higher growth prospects for startups with the right product-market fit for today’s post GenAI world.

Many founders are excited by building new products, scaling up new ideas and taking new models to the next level. But this excitement can wane as a startup reaches a certain level of growth. So founders look for the next new thing.

Sharechat’s Farid Ahsan and Bhanu Pratap Singh, who have bagged $3 Mn for General Autonomy, their new deeptech venture, something totally different from Sharechat.

In their case, Ahsan and Singh quit after the company’s problems surfaced, and in other cases, such as GoMechanic, founders have been removed from their positions but this was after they had confessed to misreporting numbers.

But it’s often cases such as Altman where investors or the board and founders are at loggerheads that grab the headlines. Or before Altman, Steve Jobs with Apple in 1985 and Jack Dorsey and Twitter in 2008. Similar high-profile dismissals are also expected in India in the next few years as companies mature.

When Things Turn Ugly

“As a founder, I sympathise with these entrepreneurs, but as an investor or fund manager, these were right decisions for these companies. And in some cases where investors and founders square off over leadership changes, it can get ugly,” says a Bengaluru-based managing partner at a global VC fund.

We don’t have to look too far for examples such as Zilingo or BharatPe or even BYJU’S where investors are reported to be unhappy with the current leadership. The problems came to a head and led to exits from key investors from the company’s board. In the case of BYJU’s there’s a new India CEO to turn the ship, but the problems keep growing for the edtech giant.

“Leadership changes are never easy. Even in the case of Flipkart, there were some corporate governance controversies around the founders Sachin Bansal and Binny Bansal before Walmart’s acquisition,” reminded another Bengaluru-based enterprise tech founder.

It was a tumultuous time for the company, and subsequently, Kalyan Krishnamurthy was named the CEO, while the two Bansals exited. Incidentally, Krishnamurthy was a managing director at Flipkart backer Tiger Global, before he was brought in. Flipkart is today one of the highest valued private Indian tech companies, and has spawned dozens of other startups through its talent pool.

The Silver Lining

The point is that churn comes every now and then — if not before a mega acquisition like Walmart, then due to the souring of the market. But founders quitting ventures to begin anew promotes continuity of innovation.

“Founders starting up again is great for the ecosystem. In the moment of the decision, these are painful decisions, but there is no malice. Repeat founders are great for the ecosystem and investors,” the Delhi-based investor quoted above told us.

Investors who replaced a founder as a CEO in one startup may turn around and back their next venture.

Even second-time entrepreneurs often turn to the investors they know when starting up again. And then the cycle will repeat till in some unfortunate cases, once again VCs and founders will find themselves in a race to reset.

Trend Spotlight: Ecommerce 🖤 Black Friday 

India’s ecommerce players have always been big on Diwali, and naturally so, given its prominence across the vast country, but this time around, there’s equal fervour for Black Friday, which had thus far largely been a shopping festival in the US.

The likes of Amazon, Flipkart, Nykaa, Myntra, and CRED have all decided to continue the sale season momentum from Diwali with major Black Friday and Cyber Monday discounts. And the scale of these sales has only grown larger with each passing year.

So is Black Friday now a permanent fixture on the Indian ecommerce calendar?

Sunday Roundup: Startup Funding, Tech Stocks And More

• Flat End To November: Funding activity remained cold with just $61 Mn raised by Indian startups this past week. Total funding for the year is unlikely to breach the $10 Bn mark at this pace
• Tracking Founder Pay: Our latest tracker for the Indian startup ecosystem has unearthed some great insights about founder salaries, now updated with quick commerce unicorn Zepto
• Mamaearth Shines: Parent company Honasa’s profits soared 94% to INR 29.4 Cr in Q2 FY24 leading to investor frenzy and a massive surge in its stock price

• Tesla’s Offer To India: Tesla is reportedly eyeing a $2 Bn investment in India for manufacturing, but it has a few tax-related conditions for the Indian government

That’s all for this week.

Note: We at Inc42 take our ethics very seriously. More information about it can be found here.