Corporate Governance Begins And Ends In The Founder’s Head: Sanjeev Bikhchandani

Info Edge just wrote off its investments in 4B Networks citing excessive cash burn. Do you think early investors should have a say in the way companies burn capital? Would you advocate strengthening the role of observers on boards of your portfolio companies?

We do have observers, board members, shareholder agreements, affirmative rights and various oversight and control measures for all our portfolio companies, as do all other institutional venture capital firms for their investments. These are fairly standard across the industry and are the norm. Having said that, once the investment is made, a lot depends on the founders and the management team. As investors, we are not in the company 24x7 and can only suggest things from the sidelines periodically.

What kind of initiatives is Info Edge considering/implementing to reduce corporate governance lapses across its portfolio companies?

Corporate governance begins and ends in the founder’s head. If a founder is fundamentally honest, everything else that is done for corporate governance will help—audits, independent directors, audit committees, internal auditors, affirmative voting rights, shareholder agreements, nominee directors, a CFO, etc. A dishonest founder will find a way around all these, as we have seen in the recent past. Therefore, selection of the right founders before making an investment and constant conversations about corporate governance afterwards are really important. At Info Edge we have always been careful around corporate governance.

Should secondaries be allowed at early stages for young start-up founders?

We are uncomfortable with founder secondaries because that does not lead to alignment of interest between founders and investors. When we raised venture capital from ICICI Venture, we were told a few things clearly. One of them was “You cannot get rich till we get rich”. What this meant was that we could not pay ourselves high salaries and sell any of our shares before it exited. The second thing ICICI said was “Just remember that it is no longer your company alone. It is also our company. You need to serve the interests of all shareholders.” Adherence to these two simple principles kept us honest, focussed and committed. It yielded a great outcome for all stakeholders.

Much like funding winters, push from investors on profitability comes only seasonally. Is this mentality here to stay?

At Info Edge, we have always valued capital efficiency and have emphasised the importance of revenue, cash flows and profit to our investee companies—we ourselves raised a little over Rs 7 crore and consumed only Rs 5 crore of that before becoming profitable. We have walked the talk. However, in an era of abundant capital, if your competitors are raising money, you may have no choice but to follow suit. A reset is taking place currently, and that may be good in the long run. Companies that raise too much money too easily tend to spend it sub-optimally. A little scarcity of capital leads to better capital allocation decisions.

In the recent cases such as GoMechanic or Zilingo, should the funders be held accountable for not spotting early signs of irregularities in corporate governance?

I cannot comment on individual companies because I am not inside them. In general, all credit for the success of a start- up should go to the management. Likewise, the primary responsibility for business failure and corporate governance lapses needs to rest with them. Investors are simply not inside the company—they rely on data and MIS’s that the management gives them. And investors trust the management, which is why they invested in the first place. Investors expect founders to tell them the truth—it is not an unreasonable expectation. Similarly, statutory audits are done only once a year, and they essentially are sample and dipstick checks. Every voucher is not backchecked.

How can funders and investors ensure that start-ups follow the principles of corporate governance to the letter?

Investors need to work with founders to sensitise them about the importance of good governance. And then, founders need to commit and adhere to the principles of corporate governance, which include true and fair accounting, transparent and early disclosure, avoidance of conflict of interest, an independent CFO, structures, people and processes that provide adequate oversight and controls, etc.

Shareholder agreements have clauses to protect investor nominee directors on boards of start-ups against non-business failures. Do you think this should be removed?

Around 90% of the risk capital in India comes from overseas. If we introduce any rules that are not consistent with global practices, we may end up with the unintended consequence of discouraging this overseas risk capital. The Indian start-up ecosystem needs all the capital it can get.