In his true-to-life account — Bad Blood: Secrets and Lies in a Silicon Valley Startup — of happenings in a Palo Alto startup, Wall Street Journal correspondent John Carreyrou brings out in graphic detail how an ambitious, if audacious, woman Elizabeth Holmes, takes the entire American startup ecosystem for a ride. A drop of blood taken by oneself with a fingerprick and smeared on a computer readable card was touted to result in 70 different results in record quick time thanks to the labs swinging into action and delivering reports pronto. Venture capitalist and angel investors gullibly bought the story. Its board of directors including redoubtable experts on the field and who is who of the political and financial world happily went along credulously with her story, so much so it became a unicorn. But if an enterprise remains a startup forever, it gives rise to suspicion and the bubble bursts. That is precisely what happened to Theranos the multi-billion-dollar startup founded by Elizabeth Holmes together with Sunny Balwani known for his glib bluff and buster. She is now cooling her heels in a prison having been sentenced to a 135 months term in addition to disgorging the ill-gotten wealth. The scheming duo had to pay a fine of $452 million to cap a string of punishments.
In India, our startups to be sure aren’t guilty of making such tall claims. If anything, our startups are modest in coming up mostly with apps for day-to-day convenience and use like delivering medicines and food at doorsteps at attractive prices and providing online tuitions for children of parents too busy to find time for their wards. But most of them share a common trait with Holmes of the infamous Theranos — getting accountants to give a mind-boggling valuation, obviously and presumably in return for mind-blowing fees. The accountants’ gushing leitmotif is invariably the same — futuristic product or service with immense potential in future immeasurable currently but worthy of unicorn status often i.e., a billion dollars.
Such incredible valuations procured for fees were bought by credulous venture capitalists who fell over themselves to pour in money into the Indian startups readily but the gravy train has slowed down and might stop unless the government wakes up to cleanse the system to throw out the chaff from grain. Our regulators have had a record of lax and poor oversight over unlisted companies including startups. Byju’s is a case in point — it is wracked by corporate governance lapses. The edtech start-up, which managed to raise around $6 billion from marquee investors such as Sequoia Capital, Tiger Global and Chan Zuckerberg Initiative, was valued at $22 billion in March 2022 but has been in the eye of the storm ever since. Deloitte, Haskins and Sells, the statutory auditors of the parent company, Think and Learn Private Limited, resigned last week stating that the company had not acted upon the modifications suggested in the audit report for FY21. They also said that the financial statements for FY22 had not been placed before the shareholders in the annual general meeting yet, well past the deadline of September 30, 2022. The auditors were therefore hamstrung in not being able to commence auditing the books for FY23. Something is rotten in the state of Denmark, to borrow Shakespeare.
The Indian startup scene is replete with charges of promoters lining up their pockets. Ashneer Grover of Bharatpe has had the mortification of being hounded out of the startup he founded on charges of siphoning off of funds including importing a Rs 1 crore dining table. Rahul Yadav of housing.com has had to resign, apologise and face charges of impropriety from his financiers. Self-aggrandisement through diversion of seed and venture capital seems to be the common thread running through the catalogue of accusations against most of the promoters of Indian startups.
If the absence of academic rigour enables anybody who is somebody to bag a PhD degree with a awe-inspiring honorific of Doctor Saheb, the rather easy definition of start up as given in the official website (https://www.startupindia.gov.in/content/sih/en/startup-scheme.html) of the GOI makes it an irresistible temptation for wannabe millionaires —innovative and scalable. Should work towards development or improvement of a product, process or service and/or have scalable business model with high potential for creation of wealth and employment. The other conditions to make the grade are equally unchallenging and commonplace — less than ten years of age, private company/partnership/LLP, less than Rs 100 crore turnover in each of these ten years. Apart from tax benefits, those making the grade have had access to limitless moolah.
The redoubtable NR Narayana Murthy, one of the founders of the iconic Infosys, said in a 2015 interview that there has not been a single invention from India in the last 60 years that became a household name globally, nor any idea that led to “earthshaking” invention to delight global citizens. Alas that is uncomfortably true even today.
Are we not guilty of encouraging mediocrity and loot by persisting with such an unchallenging definition of a startup? Startups ideally should have a patentable material to boast, or something that triggers fresh initiatives for the betterment of people. What we instead have is initiatives on the fintech firmament, and aggregator and delivery apps. The irony is that Elizabeth Holmes paid for her exaggerated diagnostic claims with a fingerprick but our startups are getting away with mediocrity at best and run-of-the-mill stuff at worst, in addition to mulcting investors including the public when the same startups sooner than later make IPOs at even more exaggerated valuations with the venture capitalists running piggyback on them. The buck ultimately stops with the bemused and harried public.
S Murlidharan is a freelance columnist and writes on economics, business, legal, and taxation issues
