*Financial irregularities are easy to uncover if diligent auditors are put on the job and held accountable – Sequoia Capital: The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-commentary/view-financial-irregularities-are-easy-to-uncover-if-diligent-auditors-are-put-on-the-job-and-held-accountable/articleshow/90965473.cms

Synopsis

Financial irregularities are easy to uncover if diligent auditors are put on the job and held accountable, and if the directors on the board ask the right questions. Historically, most malpractices fester because someone with a radar to spot aberrations looks the other way.

Anjana Menon

Anjana Menon

Founder, Content Pixies, and co-author of What’s Your Story? The Essential Business Storytelling Handbook

US venture capital firm Sequoia Capital is on a roll – an eye-roll of bad news. Since the start of the year, four companies that it invested in have come under the scanner for alleged financial irregularities. Sequoia has attempted to snuff awkward questions in an April 17 blog by Team Sequoia India & Southeast Asia titled, ‘Corporate Governance: The Cornerstone of an Enduring Company’, saying early-stage investments are made when there is ‘hardly a business to diligence’ and ‘boards can only work with the information shared with them’. By saying so, one of the world’s most storied venture capital firms has called into question its judgement, checks and balances, and practices.

Three of Sequoia’s companies that are under the scanner are based in India. BharatPe, a digital payments firm, Trell, a social commerce platform, and Zetwerk, a contract-maker of goods. A fourth, Zilingo, helmed by Ankiti Bose till her suspension as CEO, is a Singapore-based fashion startup. The allegations against the founders of these startups revolve around irregularities ranging from misappropriation of funds, dodgy accounting practices, inflating sales to tax evasion.

Sequoia’s response to these embarrassing revelations has been to distance itself by saying ‘the board is not responsible to investigate on an ongoing basis unless something formally is brought up with them, which is often through a whistle-blower. Better corporate governance is a shared responsibility between founders, management and the board. And to get there the ecosystem needs to come together and commit to some changes.’

Truth is, this so-called ineffective ecosystem is typically heavily shaped by venture firms invested in startups. The likes of Sequoia hold the purse strings, levers and networks that can hold unscrupulous founders in check. Sequoia’s leaders are no newbies. They can hopefully tell best practices from bad ones. Due diligence of people, practices and the business model is part of their job.

For a good five decades, Sequoia has cherry-picked winners ranging from Apple to Zoom to Google. They have worked with big personalities such as Steve Jobs to create value for investors. They have helped founders scale companies guiding them on everything from compliance to marketplace connections. And, yet, Sequoia wants us to accept that somehow founder malfeasance is very hard to spot in the present day because the current ecosystem isn’t geared for this.

Financial irregularities are easy to uncover if diligent auditors are put on the job and held accountable, and if the directors on the board ask the right questions. Historically, most malpractices fester because someone with a radar to spot aberrations looks the other way. Cutting corners becomes easier when decision-makers underline higher returns over good governance and dismiss a dodgy corporate culture as a personality cult of high growth.

Startups are the audacity of one person’s idea, and we all know founders must be given some leeway. That said, when investing other people’s money, it is de rigueur that venture firms keep a sharp eye on founders and their actions. At any rate, they are expected to. To be fair, in the venture capital universe, despite the best judgements, only one in 10 bets pays off handsomely. In this ‘spray and pray’ approach, the leader board demands far greater scrutiny because there is so much riding on it.

In India, Sequoia previously grappled with investigators after the Enforcement Directorate (ED) summoned it as part of an alleged money-laundering case involving Vasan Eye Care, which they had invested in. That was in 2016. So, in 2022, when Sequoia says, ‘We think it’s time for us, as an ecosystem, to sign up for better governance,’ its investors have every right to treat the statement with scepticism – and, perhaps, even derision – because that time was upon them six years ago.

Put bluntly, Sequoia seemingly squandered an opportunity to set standards in corporate governance in several promising firms it invested in here. In doing so, its goals appear no loftier than that of its startup founders who seem to have put valuation above all else. A lame blog aiming to skirt questions raises even more.

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