Founders Versus Funders

MINHAZ MERCHANT IS THE BIOGRAPHER OF RAJIV GANDHI AND ADITYA BIRLA AND AUTHOR OF THE NEW CLASH OF CIVILIZATIONS (RUPA, 2014). HE IS FOUNDER OF STERLING NEWSPAPERS, WHICH WAS ACQUIRED BY THE INDIAN EXPRESS GROUP

- Minhaz Merchant

A MID LAYOFFS and financial fraud, startups face not only a funding winter but the forthcoming Ides of March.

The discovery that GoMechanic – an auto services startup that has raised $62 million (Rs 510 crore) in venture capital and private equity funding since it was founded in 2016 and had a valuation of $350 million (Rs 2,900 crore) – cooked its books follows on the heels of several other startups accused of financial fraud, including Singapore-based fashion e-commerce tech firm Zilingo.

What do these cases mean for the future relationship between founders and funders? First and foremost, due diligence will sharpen. GoMechanic’s accounting malpractice was spotted only when Japan’s SoftBank Vision Fund vetted its balance sheet ahead of a fresh round of funding. It was set to lead a $75 million (Rs 640 crore) round. EY is now doing a forensic audit of GoMechanic’s books while the founders go on a forced leave of absence.

But financial fraud is not the only worry for both founders and funders of startups in India and globally where accounting frauds have spiked, especially in crypto firms like FTX. The other concern is the basic business model of startups.