Corp Governance Focus Must For Building World-class Cos: Sequoia's Anandan

At a time when a few companies in which Sequoia has invested in, have come under the scanner for alleged financial irregularities, a top official at the venture capital firm said that there is a need to focus on corporate governance in Indian startups to build world-class companies. Sequoia Capital and Surge Managing Director Rajan Anandan said that one thing that has really come to light over the last 7 months is corporate governance and the Indian ecosystem is now entering a new phase.

“We've been very focussed on helping our founders understand what it takes to put in place the processes, the systems, the discipline to actually have a company that will evolve into a company that has world-class corporate governance,” said Anandan during a conversation with Anant Maheshwari, President, Microsoft India, at a startup event hosted by Microsoft.

He said China's digital economy has created 200 million jobs. The Indian digital economy is probably a decade or 15 years behind China, in terms of the number of internet users, innovation and the capital that is required.

“But there is no reason why we cannot create over 100 million new jobs, leveraging the digital economy, because China has already created 200 million jobs,” said Anandan.

He said there is a potential to create about 100 million jobs, which would not only be generated by large tech companies like Microsoft and others but also startups in areas such as food delivery, ride-hailing, energy storage and agritech.

“As a nation, we should continue to care about start-ups,” said Anandan. “We should continue to invest in innovation, and really unleash our extraordinary entrepreneurship talent to go out and innovate for India.”

Starting from 2015, India's startup ecosystem was focused more on e-commerce, then ride-hailing and later on edtech. But today, Anandan said this ecosystem is spread across almost every sector running from healthcare to financial services. “We are seeing extraordinary innovation.”

He said outside of the US, India is the only country in the world that has extraordinary amounts of innovation focused on the domestic market. “Because we have a country with 1.4 billion Indians that is digitizing faster than any other country has,” said Anandan.

This startup space has also recently been impacted by challenges across profitability, and cash flows. When asked by Microsoft’s Maheshwari about how he sees the next 12 to 18 months unfolding for the startup ecosystem in India, Anandan said that the environment has changed.

“Because, as you know, inflation is at an all-time high, the data yesterday was quite concerning, and interest rates are going up,” said Anandan. “So, we expect that the US government will pull back a lot of the $7 trillion that went into the economy. And as a result, you're seeing public tech stocks, if you look at public growth stocks outside of the FAANG (Facebook (now Meta), Amazon, Apple, Netflix, and Google), they've corrected north of 60 per cent. So, this is a very significant correction and that's driving a correction in private market valuations.”

Starting around the middle of 2020, Anandan said Sequoia saw a massive and exponential increase in public market tech valuations, which were driven largely by the fact that interest rates went to zero. The US government pumped over $7 trillion into the US economy and similar things happened globally. As a result, massive amounts of capital came into the startup ecosystems around the world, including the US, India, and even China. “In the year 2020, India had about $10 billion worth of funding for the full year. Last year, we had over $40 billion as you know, 4x growth year on year,” said Anandan.

The heady growth days of the second half of 2020 and 2021, was an era of growth at any cost for many companies. Now it is really about balanced growth.

“You still need to grow because as a startup, but you will have to do it very thoughtfully, with strong unit economics and with a path to profitability,” said Anandan. He was of the view that companies are much more realistic about what it takes to raise funding and valuation. They are also becoming more rigorous and focused on optimising their cost structure. “Over the next 24 months, we will see the underlying financial health of the startup ecosystem getting much better.”