The Art of a Good Unicorn | Interview: ‘BYJUs is a telling example of how not to do things in a startup’

Have startups realized that a clean and well-run business translates to a good business?

Shriram: Unfortunately, this message has not been fully absorbed by all founders, boards, or startups at various stages of maturity. Corporate governance is a philosophy that founders must imbibe and adopt. As a way of doing business, it reflects the philosophical bent of the founders—whether in terms of integrity or dealings with stakeholders. As startups evolve from infancy to listing and beyond, they need to adopt different corporate governance practices.

There are four core tenets of corporate governance: simplicity, transparency, fairness, and wealth creation. Simplicity refers to clear thinking, a well-structured business model, and operational clarity. If a business is too complex, with multiple holdings and an unclear revenue model, that is worrisome—this trend is evident even in well-funded companies. Transparency relates to shareholders and stakeholders, including customers, vendors, and regulators. Fairness involves ethical dealings with these stakeholders. For instance, some fintech companies have been accused of violating regulatory norms. Finally, wealth creation should benefit all stakeholders—not just the founders. The mindset that founders should amass wealth at the cost of employees, investors, or other stakeholders is problematic. Wealth generation should also align with business sustainability; businesses shouldn't be built merely to enrich individuals while jeopardizing long-term viability. Many startup founders, including those from India's largest edtech company, have violated some of these principles.

What does the downfall of large startups like BYJU'S mean for founders?

Shriram: BYJU'S is a textbook example of how a large startup, despite raising millions in funding, can implode due to poor governance. The company grew too fast, too soon, and serves as a cautionary tale on how not to run a business. Its structure was overly complex, with numerous high-cost acquisitions at questionable valuations. It was unclear how the company made money or whether its unit economics were sustainable. The firm incorporated in Singapore, raised funds to acquire companies in the U.S., took on debt funding, and subsequently, investors accused it of siphoning off $533 million—money that remains unaccounted for.

In terms of transparency, board members were kept in the dark. When it came to fairness, the company engaged in misleading marketing, targeted low-income customers, and even took legal action against journalists and activists who voiced concerns. As for wealth creation, while the founders may have personally profited in the short term—moving to Dubai, for instance—employees were left unpaid, and investors lost substantial amounts. It is a sad and cautionary tale.

Are startups exploiting their status to evade accountability? Should regulations be stricter for funded startups that violate governance norms?

Shriram: Existing laws are already stringent enough to address such issues. There are both good and bad actors in the ecosystem. Just because one company failed does not mean the laws need drastic changes. The real issue is the enforcement of these laws. BYJU'S founders, for example, moved to Dubai, leveraging delays in the legal proceedings against them.

Have startups improved in handling related-party transactions and hiring family members for key roles?

Shriram: Initially, many startups relied on relatives for key roles because they possessed the necessary skills at lower costs or due to trust. This practice is not inherently bad. However, once startups raise external funding, it becomes critical to ensure an arms-length distance between founders and their relatives, clearly defining compensation structures and roles based on qualifications. Someone unqualified in finance, for example, should not be heading a finance department.

When analyzing startup failures, it is crucial to differentiate between business failure and corporate governance failure. Business failures occur due to external factors like aggressive competition, technological shifts, or macroeconomic disruptions such as the COVID-19 pandemic. These founders attempt to do the right things but are ultimately undone by market forces. Corporate governance failures, on the other hand, stem from deliberate mismanagement—violating the four tenets of governance despite having resources.

How has investor due diligence evolved in response to high-profile failures?

Shriram: There is certainly a slowdown in investments due to more rigorous due diligence. However, there remains a fear of missing out (FOMO). Investors struggle to balance thorough vetting with their desire to be part of the next big thing. Current investment trends include quick commerce and generative AI, where capital is flowing in without adequate scrutiny. Investors may suffer losses due to their eagerness to jump on the bandwagon. While some discerning investors walk away from such situations, many continue to prioritize speed over diligence.

What advice would you give to investors, considering the pressure to deploy capital quickly?

Shriram: Investors should focus on backing sustainable businesses. If the sole goal is quick returns or exits, they risk enabling unsustainable companies. While financial returns are important, long-term business viability should be a key consideration.

What are common red flags that indicate a startup is unsustainable? And what are the green flags?

Shriram: Red flags include negative public perception—such as Ola facing backlash over poor customer service. How a company addresses criticism matters: do they acknowledge issues and rectify them, or do they resort to aggressive denials? Another red flag is a lack of transparency, such as failing to release annual reports.

Green flags include a positive reputation among employees, both publicly and privately, as well as transparent financial reporting and strong compliance measures.

IPOs mark a major transition for startups. Are founders prepared for the scrutiny that comes with going public?

Shriram: Many founders mistakenly see an IPO as an endpoint rather than a beginning of heightened scrutiny. Some companies have gone public with misplaced confidence, only to see their stock prices plunge 60–70% on listing day. Going public introduces new investors and public disclosure requirements, making corporate governance even more critical.

What advice would you give to founders, particularly those with technical backgrounds who may lack corporate governance experience?

Shriram: Expertise and mentorship are readily available—founders should seek it out. Build companies with a long-term vision, not just for India, but for a global audience. Most importantly, think beyond personal success and ensure that your organization can thrive long after you step away.