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Character dheela hai

More and more startups seem to be suffering from what is politely called 'corporate governance failures'

Character dheela haiAnand Kumar

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Everyone who follows Indian business by now knows of the troubles caused by Byju. I know that the headlines say, "Byju's is in trouble", but from the point of view of customers, employees and those who have invested in it or lent to it, the trouble is caused by Byju's and not the other way around. As the startup gravy train derails, more and more people are noticing that in recent years, a larger proportion of startup failures are because of what might charitably be called 'corporate governance failures.' However, you and I both know what that euphemism means. The story of the crypto exchange FTX and its founder SBF and Theranos and Elizabeth Holmes is too well-known now, but there are many others on a smaller scale.

Just last week, there was this news that Softbank-funded 'unicorn' IRL, which was supposed to have become the greatest messaging platform in the world, has had to admit that 95 per cent of its claimed user base was fake. A US college funding startup named 'Frank' was acquired by JP Morgan Chase, who then discovered that out of the claimed 4 million registered users, 3.6 million were fake.

The funniest I can recall is this electric truck company Nikola - in which General Motors invested - which claimed that it had developed an amazing hydrogen-electric hybrid truck. They even released a video of their truck racing along a highway. Later they were forced to admit that the truck couldn't move by itself. When the video was shot, the truck was just rolling down a shallow hill, and the camera had been tilted to make it look like flat ground. All this came out after Nikola had IPO'ed and attained a market cap greater than that of Ford Motors at one point. If this happened in a movie, I would have said the plot is too unlikely, but it's real life. You can roll a fake truck downhill and become more valuable than a company that manufactures 1.7 crore vehicles a year and sells them for USD 160+ billion in revenue.

When money becomes too easy, those whose only interest is easy money enter an activity. This brings to mind something Paul Graham, co-founder of the fabulously successful startup accelerator Y Combinator wrote about the founders they select, "The earlier you pick startups, the more you're picking the founders. Later-stage investors get to try products and look at growth numbers. At the stage where YC invests, there is often neither a product nor any numbers. Others thought YC had some special insight into the future of technology. Mostly we had the same sort of insight Socrates claimed: we at least knew we knew nothing. What made YC successful was being able to pick good founders. We thought Airbnb was a bad idea. We funded it because we liked the founders. ... so we'd refuse to fund founders whose characters we had doubts about, even if we thought they'd be successful. Though we initially did this out of self-indulgence, it turned out to be very valuable to YC."

Instead of business models and revenue projections, why is a startup investor talking about 'character'? Isn't that a word more associated with a Salman Khan song than with businesses and investments? YC has seeded over 4,000 companies with a combined value of more than half a trillion dollars, so maybe there's something to what Paul Graham says.

In a very deep sense, all business and investment analysis is not about numbers but people. The real takeaway from all this is that ideas and business models matter far less; actual execution, business competence, and, yes, character matter much more. Investors and the media are far too obsessed with the validity of the various startups' business models. However, the reality is that no great business had a unique or unreplicable business model - what made a difference were the people. Sadly, the nature of the so-called startup ecosystem has now evolved in a direction that the incentives practically guarantee the wrong kind of people getting attracted to it.

Suggested read: It's all about the people


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