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Surviving Financial crunch: The power of effective financial governance for startups

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By implementing strong financial and operational management systems, leveraging finances with a mix of equity and debt, segregating duties, and having a diverse board of financial and operational advisors, startups can navigate the financial challenges and ensure transparency, accountability, and scalability.

Start-ups have been thriving in India and are crucial to our economy. Venture capital and angel investor funding have opened new avenues for founders to fund their businesses, accelerate product development, and marketing at a fast pace. However, despite strong initial growth, we have witnessed phenomenally high valuations and funding, despite the fundamentals of the businesses, financial governance, and market prospects not being too strong. As ‘funding winters’ loom large, there is more caution now being exercised by all the stakeholders involved. Facing the heat more would be Edtech, Foodtech, Crypto, etc. 

Understanding financial challenges 

There are four major causes for financial challenges being faced by start-ups, especially those in the category of edtech, foodtech and crypto

Firstly, founders are typically good at technical skills but may lack the required skill set for running all aspects of the business, including effective financial management, operational efficiency, and talent management. 

Secondly, many known startups who have reported financial governance issues after strong rounds of funding have attributed this to a continuous focus on growth at any cost, further accentuated by ongoing pressure from VCs and investors. 

Thirdly, founders get carried away by comparative valuations, incurring heavy spends on the development of unnecessary features in their product, marketing without a focus on ROI. 

Lastly, moving the focus away from the fundamentals of running a business, financial and corporate governance and running a business with one fundamental basic ‘Earn profit for its stakeholder.’ 

Imbibing financial governance 

Financial governance is fundamental to a successful business and has to be kept at the forefront. While it is crucial to invest in development of new products, services marketing, etc., transparency and a positive profit and loss account should always take precedence. 

Here are some recommendations for effective financial governance to ensure a smooth running and successful scale-up of the business:

  1. Strong financial and operational management system

 An investment in a scalable automated management system is highly critical for the organization and gives transparency to all stakeholders, better control to the founder and accountability for the core team.

  1. Leverage in the financials

While fundraising for start-ups has been predominantly based on dilution of equity, it is equally important to understand the role of leverage in finances. Debt can be used for business expansion, and start-up entrepreneurs should evaluate it, especially considering equity has a relatively higher cost of capital.

  1. Segregation of duties

This is an area that is usually overlooked in a new set up. It is one of the fundamental checkpoints to be implemented for effective financial governance and ensuring transparency of operations.

  1. Financial and operational board of advisors

This board of advisors is different from the statutory board of directors. It is advisable to have a diverse advisor who has experience and understands the nuances of financial governance required for scale-up. They can act as a bouncing board to founders, access to industry experts and above all a strong ecosystem which can prove pivotal to enable creative breakthroughs.

Other factors to take into consideration

In addition to strong financial governance, there are other areas that are still table stakes for a successful startup. A unique solution specially powered by strong technology is key to surviving and thriving in today’s market. A strong leadership team along with the founder is extremely crucial, especially beyond the pre-seed and seed capital stages who are not just functional experts but also proponents of the core values of the company. 

Last but not least, the emotional quotient of the founders is highly critical, considering the business cycles and challenges that the startup founders face. Founders need to be strong emotionally to navigate the ship objectively as their company is like a child to them, and emotional investment can make objective thinking difficult. It takes a lot of courage and commitment to start the entrepreneurial journey, but even more gut and consistency to be successful at it. Despite a cautious funding approach, unique positioning will always find takers. I am a firm believer in the strength of value that start-ups bring to the economy and society, and effective financial governance is a key component to ensuring their success.

The article is written by Kshama Dhir, senior finance professional, Chartered Accountant, Executive Coach and Start up mentor

This article first appeared in IMAGES Group’s Phygital Magazine May-June 2023 Issue 

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