Improved governance can keep capital flowing into our startups

livemint.com:

India has racked up 108 ‘unicorns’—the third-most in the world, after the US and China. Private investment in the form of venture capital and private equity has been to the tune of $246 billion from 2018 to 2022. Over this period, Indian firms accounted for $1 out of every $4.40 of Asian venture capital.

The average investment size has almost quadrupled in the last decade, and revenue-multiple valuations have more than doubled. The price of good ideas has never been higher. But the gush has slowed.

According to Venture Intelligence, both the number of deals and amount invested fell by 60% and 79%, respectively, in the first half of this year. One reason for this is that many companies have not met expectations. Others have seen their valuations—often 25, 50 or even 100 times revenues—tumble after being exposed to public markets.

Many investors are therefore keeping their powder dry, and some are focused on ‘insider rounds’ to tide over potential down rounds. However, what I am hearing is that India remains a great growth story with world-class entrepreneurs, but the same cannot be said of governance at their companies. And that matters because about 95% of private alternative investment from 2018 to 2022 came from outside India.

Governance at startups needs to get better, or some foreign capital will go elsewhere; at the very least, risk premiums will rise. There are three critical (and related) governance issues to be tackled. These are particularly acute in relation to startups.

In each case, just naming the problem suggests a solution. Accountability and conflicts of interest: Entrepreneurs naturally want to make their companies appear attractive to would-be investors. However, there are instances of questionable