How start-ups can enhance governance for growth and ethical alignment

EY-IVCA Start-up Governance Navigator emphasizes the need for stronger corporate governance practices for start-up success and sustainability.

The Indian start-up ecosystem continues to scale new heights, with disruptive models and technologies creating new markets and enabling further innovation. Many start-ups that emerged less than a decade ago have now become national players and are listed on the largest stock exchanges. Several others have attained unicorn status over the last decade. In such a fast-moving atmosphere, it becomes imperative for start-ups and founding teams to become proactive and ensure that they do not stumble due to inadequate internal systems.

A strong foundation of ethics and compliance based on a scalable start-up governance model that can grow as the company’s operation progresses is the need of the hour. A unidirectional approach to success by tracking merely the financial metrics is no longer enough; keeping tabs on start-up governance best practices will help companies set themselves up for long-term success. Building an ethical start-up culture from the ground up will enable organizations to shape their outlook and draft policies that are in accordance with their vision for governance. This will not only reassure investors that they are invested in a company that values integrity and complies with the law but also help the company nip governance issues in the bud and keep fraud in check.

The EY report, “Start-up Governance Navigator”, presents actionable insights based on a study of several challenges that investors face while conducting their diligence of new investments and oversight over portfolio companies.  

Laying down a foundation of ethics

Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled such that it operates in a legally compliant, transparent, and ethical manner. Strong internal governance is not a cost center, but rather a long-term investment that pays dividends in the form of:

Chalking a blueprint for cultivating trust and honesty

Start-ups can build or strengthen their integrity and compliance framework by following an approach that lays equal emphasis on prevention, detection, and early response to emerging risks:

Importance of strong governance frameworks in the VC ecosystem

Effective governance for start-ups stands on three pillars - founder mindset, investor mindset and Board members.

Start-ups, often characterized by their innovative spirit and dynamic nature, are susceptible to a plethora of risks ranging from operational and financial challenges to reputational threats. In the volatile world of entrepreneurship, maintaining the trust of investors, clients, and employees is paramount.

Therefore, after formal due diligence, analysis and checking the capability of team, business model, PMF, valuation, need of funding and its deployment, etc., when investors finally trust a startup enough to invest, the founders must understand that it is their fiduciary responsibility to deploy the capital diligently and as agreed upon with investors.

Pivots happen all the time but a healthy ‘start-up founder-VC investor’ relationship, built on a foundation of efficient and timely reporting, self-installed checks, and internal reporting, i.e., implementing governance strategies for growth, can lead to not just exemplary corporate culture but also be a road to creating a successful business empire. A robust corporate governance framework plays a pivotal role in establishing and upholding ethical standards, transparent decision-making, and accountability. It can help start-ups balance growth with sustainability.