How startups can become more ESG (employees, shareholders and government) ready

Even as listed companies are gearing up to comply with their environmental, social and governance (ESG) norms, India’s startup ecosystem is struggling to satisfy a different kind of ESG matrix — employees, shareholders and government. Right from the country’s most valuable startup to the (till-recently) largest listed startup, most of these high-flying unicorns are struggling to live up to the expectations of their stakeholders based on the ambitious growth projections they had set for themselves.

On the employee front, from retaining talent to laying off employees and allowing moonlighting, startups are going all out to ensure their survival. According to Crunchbase data, more than 25,000 startup workers in India have lost their jobs since the pandemic began, and more than 11,500 have been fired just this year.

Edtech companies such as Unacademy, Byju’s and Vedantu have topped this list of companies that laid off the most.

Ola, healthcare startup MFine and used-cars platform Cars24 are the others that have laid off employees.

Beleaguered startup BharatPe witnessed a slew of top-level exits soon after the co-founder’s resignation over concerns of financial irregularities. Startups have come to be among the biggest employment generators in the economy. According to GoI data shared in Parliament in July, 72,993 startups were registered in India since January 2016, generating about 7.68 lakh jobs. A slowdown in the startup world does not augur well for the employment landscape.

Shareholders have also not been happy with the startups of late, especially the performance of listed ones. At a delay of nearly 17 months, unlisted Byju’s, India’s most valuable startup, reported a disappointing FY2021 performance with a loss of Rs 4,588 crore that was nearly double the revenue earned of `2,428 crore and 20 times the loss made in the previous year.

For listed startups, the shareholders have been expressing their displeasure by exiting stocks. Zomato, which until recently was the most valuable listed startup, has had a steady exit of investors with its stock now trading below the initial public offering (IPO) price. Other listed startups such as Paytm, Policybazaar, CarTrade and Nykaa have also seen varying decline in their valuations on the bourses.

Rather, in what is being termed as the funding winter, there has been an overall steep decline in funding —partly due to global macroeconomic factors, tightening money supply and rupee depreciation, and partly due to underperformance of the existing listed startups. Pivoting business models, questionable business practices and dubious ways of revenue recognition have left investors both on the Street as well as off it wary of investing.

These practices, combined with deceleration in valuation, have led to the government stepping up its scrutiny of startups and their functioning. The governance quotient among startups has come under criticism. While GoI is committed to help and promote startups, it also has the role to regulate their conduct in case of malpractices.

There have been multiple raids on crypto startups on the back of allegations that crypto assets were being used as a money-laundering tool, opaqueness around their shareholdings and their failure to do a KYC check.

Last month, RBI rolled out a regulatory framework for governing digital lending that has adversely impacted the business plans of several

fintech startups. GoI has also warned edtech firms of enforcing stringent regulations if unfair trade practices, including misleading advertisements, are not stopped.

The wealth erosion by the loss-making listed startups has led the Securities and Exchange Board of India (Sebi) to seek transparency in startup valuations. Among other things, it is asking private equity (PE) and venture capital (VC) funds to disclose their valuation practices and any significant change in the valuation methodology.

To be sure, achieving success when dealing with one’s employees, shareholders and the government is always an uphill task — especially since startups in India have typically evolved in areas of business that have little or no regulatory oversight, are largely unorganized and employ gig workers. For a startup to be successful across these ESG parameters, it will require:

*Pursuing realistic growth targets instead of chasing tall, ambitious ones.

*Adopting frugality instead of cash burn.

* Bootstrapping instead of relying on external capital. uNo short-changing the employee or customer.

*Getting the governance right.

*Focusing on bottomline instead of an inflated topline through novel ways of revenue recognition.

Till then, expect most startups to be ESG-unready.

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