Taming the unicorns: Attention to institution building is critical

Indians are justly proud that the country has emerged as the world’s third-largest ecosystem for startups with the number of unicorns growing exponentially. Between 2017-18 and 2022-23, the number of unicorns, or startups with a valuation of over $1 billion, went up by 66 per cent, with India now boasting 111 unicorns with a valuation of $349.67 billion. Apart from achieving rapid growth, the kind of interest many of these have received from global venture capitalists (VCs) and private-equity (PE) funds is remarkable in a country with a poor reputation for ease of doing business. The flip side has been the controversies and near-flameouts from several flagship startups — from Byju’s to One97 Communication to BharatPe, and most recently the Ola group — that offer cautionary tales for startups looking to build their companies into durable businesses.

The impulse to grow at a rapid pace and keep VCs and PEs engaged has often come at the cost of a focus on the basics: Stability, the establishment of the systems and processes, and vigilance on regulatory compliances. Both One97 Communication’s Paytm and the Ola group exemplify these weaknesses. Paytm Payments Bank, once one of India’s most flamboyant brands that established its dominance in the digital payment business by exploiting a first-mover advantage during the demonetisation of 2016, was barred this year by the Reserve Bank of India from accepting new deposits and topups in its accounts and wallets owing to “persistent non-compliances and continued material supervisory concerns in the banks”. Last week, the Ola group, also headed by a high-profile entrepreneur, faced a double whammy. Its cab aggregator business received a rap on the knuckles by the Central Consumer Protection Authority (CCPA) over its opaque grievance redress and refund practices. Ola Electric Mobility, the country’s largest e-two-wheeler company, also received a show cause notice for allegedly misleading consumers and unfair trade practices following over 10,000 complaints. The company, listed in August this year, also received a notice from the Automotive Research Association of India (ARAI) for failing to inform it of a reduction in the price of a popular e-scooter brand, which, in turn, would impact the subsidy it would get from the government.

Note that both companies have eroded shareholder value in a short term on account of lack of attention to rules and regulations, which points to weak internal managerial and administrative structures. Those without the discipline of the markets have slipped up even more. This is principally because a startup depends disproportionately on the founder’s vision. Though business nous is undoubtedly a big asset, it can also be a liability when founder enthusiasm outruns a startup’s capacities. In Housing.com, investors spotted the dangers early and sacked its founder; fintech BharatPe likewise survived after parting ways with the founders on account of alleged irregularities. But such checks and balances are rare. Byju’s, for instance, saw its breath-taking expansion overtake its financial capabilities, drawing it into questionable, sometimes intimidating, consumer practices. With the founder’s refusal to brook criticism or professionalise the board, the startup, once feted by the PE/VC world, finds itself entangled in debt and legal complexities, which have impacted the ed-tech universe. The lesson, then, is clear: As India’s unicorns race to become decacorns, they must absorb the less glamorous sobriety of institution-building too.