“It is not enough for investors alone to focus on creating a culture of good corporate governance. This must also come from founder. Investors can ask questions and ramp up diligence, but founders need to be committed to the end goal of ensuring that the company succeeds within the four corners of law. While most of our founders are absolutely committed to this, the unfortunate reality is that some have not been so. In those rare cases, we will act.”

These are the words of Shailendra Singh, the all-powerful managing director for India and Southeast Asia region of Sequoia Capital. The influential venture capital (VC) firm is credited with defining and shaping the Indian start-up sector. It got its right share of laurels when the start-up sector was shining. But, now that it is in a state of crisis following a growing list of start-ups that are in the news for corporate misgovernance and financial discrepancies, fingers are being pointed at Sequoia for pushing valuations over sound business models in the investee companies. And, Singh being a prime mover of the VC firm, his role has come into question. 

When the uproar about wrongdoings at BharatPe, where Sequoia was the largest shareholder with a 19.6% stake, grew louder last April, the US-based VC company stated in a blog post that it had “zero tolerance towards proven wrongdoing”. 

However, the recent cases of corporate governance lapses in its investee companies underline that some Sequoia-backed start-ups missed this memo. It also poses a question about the VC firm’s seriousness about discouraging start-ups from eyeballing vanity metrics at the cost of due diligence protocols, given the regularity with which discrepancies are showing up at its investee companies.

The latest in this long list of Sequoia-invested companies having governance issues is car servicing start-up GoMechanic. On January 19, 2023, its co-founder Amit Bhasin confessed about fudging numbers and admitted to “errors in judgement” whilst chasing “growth at all costs” on the networking platform LinkedIn. 

Questions abound about how Singh’s team did not catch these discrepancies given that several others in its stable were in similar situations over the past few years, going back to 2016 when the Enforcement Directorate raided the VC firm’s Bengaluru office. This was while the agency was probing its investee company, Chennai-based Vasan Healthcare, on charges of diverting funds to businesses associated with Congress member of Parliament Karti Chidambaram.

Soon, cracks started showing up in the relationship between Sequoia and then BharatPe’s CEO Ashneer Grover, after the VC did not commit to the fintech’s Series B funding round. Angry words were exchanged again, this time between Grover and Sequoia India’s MD Harshjit Sethi, who was on BharatPe’s board in 2020. Singh was reportedly in the know about this diatribe. 

The outspoken Grover took on Sequoia on social media platforms, giving much fodder to many founder-vs-funder debates. While Singh’s role was remarked about in the echelons of India’s start-up ecosystem, Grover quit BharatPe amidst this friction. He later released a tell-all book Doglapan, shooting daggers at Singh and his role in the imbroglio.

The heat kept rising for Singh as observers blamed Singh’s style of pushing start-ups for higher valuation. Another Sequoia-investee company Zetwerk was searched by income tax officials in 2022 for allegations of suspected tax evasion. Similarly, last March, the social ecommerce platform Trell came under the scanner when a forensic audit by EY discovered financial irregularities in the start-up.

Matters came to a head when Singapore-based fashion tech company Zilingo was caught in a tangle of non-business irregularities. Its 31-year-old co-founder and CEO Ankiti Bose was dismissed from the company in May 2022. While maintaining her innocence, the co-founder, like Grover, blamed Sequoia and its top management for things going wrong which led to public acrimony on the lines of founder-vs-funder debate.

There was no letting up about the questions about corporate governance guardrails, especially after Byju’s operations came into the spotlight. The edtech’s reluctance to file its 2020–21 financials for 18 months raised eyebrows in business and political circles, even as allegations of mis-selling and over-selling did the rounds.

These issues raise the ethics of corporate governance and the role both VCs and founders play in the growth of the nascent start-up sector. If there are founders on one side who claim that VCs push them towards unsustainable valuations, there are also investors who put the ball in the court of founders. There are reports that the government has taken note of the happenings in the start-up sector, especially about the corporate governance issue. These developments have put the focus on the dominant VC industry in India.

Click here to read Outlook Business magazine's March 2023 cover story