BharatPe & Trell’s recent controversy have been all over the news.
But are these one-off things or the opening of a pandora’s box?
Some say the investors failed to do adequate due diligence/ did not institute checks and balances or at times, even aware of how money is being used internally post funding.
Here is why I believe it’s the latter.
Diligence failures and lack of guardrails are going to become more common place going forward. There could a whole many more startups that have skeletons in their closet that will begin to unravel over the next 12 months.
But what really is the larger signals we may be missing?
For mid-stage funding across Asia, the time between rounds has significantly shrunk to under 14 months while valuations have grown 2.2x. In parallel, the size of the rounds across early and growth stage has grown considerably by ~3x.
1. This means that data available for a diligence is of less than 12 months of aging and often investors must place some confidence on the previous round’s diligence as an anchor to progress faster.
2. There is a lot of dry powder (undeployed capital) that has accumulated from the funding rounds held-back during Covid & the number of new funds that have come in. This means that there is an urgency to deploy capital quickly and incentivizes closing deals faster.
3. Most VCs have significantly raised their round sizes due to the larger sized funds which leads to an urgency to deploy more and more quickly.
But, these occurrences have their shortcomings.
Startups do not have adequate time to build their management teams and risk control apparatus in this growth spurt.
There is no incentive for better governance apart from becoming more investor friendly which is a qualitative measure than anything else.
Diligences are often one time exercises only and often not seen through to the corrective actions taken as the next investor jumps on board.
The ability to manage deployments at the startup once the funding is done is another big gap as the number of participating investors in a round has significantly increased.
All put together, we may have – unintentionally - created a small industry-wide monster that only shows up at night. Unless leaders decide to take it upon themselves to courageously start looking inward, it may end up being a dampener that is far worse than dry powder.
What do you think?