Editorial: Sprightly startups’ inherent flaws

Is hustle good or bad? At times it is glorified and sometimes vilified. That depended on whether the hustler was a success or just another loser. Soham Parekh, an ambitious techie, managed to get hired by several Silicon Valley startups and reportedly worked with a few of them simultaneously without the knowledge of any of the employers. Basically, he was moonlighting for several companies as a full-time employee. In this saga the startup ecosystem stands exposed, warts and all. The ecosystem, as was its wont, tended to look down upon systems and processes and viewed them as a hindrance to “innovation and growth”. One would assume that in a digital world and with access to surveillance tools, it would be nearly impossible to game the background checks system. Or, so one believed.

The episode relating to an individual and the mega startup scandals share one thing in common – unlimited greed and get-rich-quick by hook or crook. Ethics be damned. When individual promoter’s greed enables institutional governance lapses, high-profile startup companies collapse like a house of cards. These companies are allegedly involved in perpetuating a range of activities from the seemingly innocuous lapses to downright illegal or criminal acts. To keep funders happy or attract new funding, startups resort to exaggeration of users or customers acquired to revenue earned. They all hope to fix it and return to accurate accounting and record-keeping. When the bubble bursts, the dream run ends and sometimes the company loses its position or simply dies.

Creative accounting seems like a minor lapse when compared to more serious offences like siphoning off of company funds, parking funds abroad, using shell companies, and indulging in dubious related-party transactions that startup promoters are being accused of. What is really worrying about these cases is the total failure of the company’s internal checks and balances mechanisms. On top of it, even the auditing companies, including the reputed Big Four, are unable to detect or fail to flag the flagrant violations and illegal conduct. At another level, the venture capitalists and other stakeholders, too, have to share the blame for inadequate or faulty due diligence, for being in a hurry to close deals and later becoming complacent along the way and swallowing the exaggerated versions served to them.

Two things about the startup ecosystem are deeply problematic and are inherent to the system itself. Firstly, the lore of overnight, spectacular success is what draws most to startups. More often than not, these are flights of fancy that have to be sustained through exaggerated claims, creative accounting and financial and management sleight of hand. This fake narrative is sustained by reckless cash burn and often the cash belongs to others. Moreover, among fly-by-night operators, there is always a temptation to put one’s hand in the till to embezzle and divert funds. Secondly, startups are known to have toxic work cultures and where promoters behave like uncrowned kings, autocratic and whimsical in the guise of being an eccentric maverick. So much so that no one dares to question them or call out the naked emperor until it is too late.