I admire the buzz that startups are able to generate. The kind of scale they are able to achieve based on a unique idea is tremendous. It is nice to see young entrepreneurs with a gleam in their eyes, that inherent drive that keeps them alive through the arduous startup journey. Then come the investors, trying to make a buck, banking on these youthful founders. These investors serve as air under the wings to give flight to the bright ideas that incubate at some of the numerous startup hubs.

But what lies beneath the rose-tinted view that we as outsiders generally perceive? The reality is often that of cruel pressures, gruelling hours and often the ‘band-aid’ approach. Very often, founders have little or no experience in running a business. For a young person just out of college, the responsibility can be overwhelming, the pressure to perform is real. You have investors chasing you for targets, your employees demand answers and your customers are ever ready to dump you for the next person offering the same solution or service.

Traditionally (and rightly so), startups have been topline focused. How many funded startups give priority to organising their back-end operations? None. Both founders and investors are looking skywards, sometimes they tend to ignore what is happening right under their nose, most often ignoring governance at their organisation. And this can be devastating, as we have seen in our experience with fledgling startups. They ‘band-aid’ their internal operations, limping from one tranche of investment to the other. Remember that band-aid can only conceal the cut.

Ignoring governance can lead to potential failures. First and foremost, books of accounts of most startups are a mess and possibly the biggest nightmare for investors. They appoint “Big 4” accountants as statutory auditors, but does that resolve underlying issues? Pick on any random 10 startups with $10 million  funding and I guarantee that at least 8 of them will have murky accounting.

Secondly, these companies are likely to have very confused lines of reporting and responsibility. One of my clients had 7 co-founders and each one of them took some of the key spending decisions individually. Another of my clients had a typical issue where one co-founder suspected the other of misusing funds and guess what – these guys gave themselves a salary raise without consulting the investor group! Another company we saw had messed up inventory valuation, they did not know what they held in their stocks.

Thirdly, these companies have a hard time managing cash. Cash crunch comes quick and hits you hard. In one instance, the company collected GST and splurged it, without knowing that it has to be paid to the authorities within a stipulated time resulting in huge tax liability. Founders then scrambled for last minute funding and somehow manage to keep themselves afloat. How do you build in accountability and transparency in decision making? How do you ensure your compliances are in place?

The point is simple - bright ideas cannot thrive by burning cash alone. There needs to be accountability, governance and intelligent data available for the founders and investors to make sound business decisions. Transparency between investor group and founders is a must. Businesses survive on trust. Few companies realise the need for having adequate processes and systems that can help them scale up smoothly and indeed they do, while governance helps them lay a solid foundation to further structure their business on. Having basic scalable processes and internal control systems would help even small startups manage themselves efficiently. Clearly defined lines of responsibility, crisp MIS (Management Information System) reporting to investors and timely escalation of critical matters can go a long way in establishing smooth operations. 

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