You have helped build Sequoia’s presence in India and Southeast Asia in the last 17 years. How would you describe your journey?
Building start-ups in any market is hard. Building start-ups in emerging markets is even harder. Over the last 17 years, Sequoia India and Southeast Asia has had the privilege of partnering with outstanding founders, helping hundreds of them to scale their businesses to [earn] hundreds of crores of revenues each and taking many companies public. It has been a challenging, but rewarding, journey for us as a team. We are deeply grateful to the founders who choose to partner with us and give us a chance to be a part of their journeys.
What have been the toughest challenges for you?
Amongst the many challenges, we have been disappointed with some of the governance challenges in some start-ups in the last one year. But we are fortunate that more than two dozen of our co-investors, in fact the entire VC community, joined us and supported us in doing the right thing—that is, taking decisive and strong action against wilful fraud when needed. This has been the key that dozens of our co-investors who were shareholders in our companies have all acted together. But we must not get lost in the narratives, because, economically, much less than 1% of the value of Sequoia India’s portfolio has been impacted by these issues.
As you say, the number of investee start-ups that have got embroiled in controversies and non-business failures is less than 1% of your portfolio, and there are also many other investors in these companies. Do you feel that you are being singled out?
This is absolutely right. We are deeply invested in India and Southeast Asia. We have close to 450 active companies in our portfolio. As a percentage of the fair market value of our portfolio, much less than 1% has been impacted.
We are fortunate to be the market leader. It is understandable that everyone would like to hold us to a higher bar. We already have very strong diligence processes and have conducted over 700 diligences including financial diligences by the Big 4, background checks and legal diligences in the last five years, and we are figuring out how to improve this further.
In the end, we have to pursue pragmatic governance, which is appropriate for the stage of start-ups. We will remain undeterred, as we have been in the past, and remain committed to backing the best founders and helping them build enduring companies.
Many believe that your rivals are maligning you, exaggerating your—Sequoia’s and yours personally—role in these non-business failures. Do you also get that feeling?
We are not here to win a popularity contest. We are here to help ethical and honest founders build world-class companies. We have to do the right thing even if it makes us unpopular temporarily. If we see something wrong, if a whistle-blower tells us something is amiss, we will investigate and hold people accountable. Our mission is to help our founders build legendary companies, and we will not be distracted from that mission. The very best founders will be drawn to us in the long term because we help them in building great companies while having a reputation for upholding governance.
How do you make board members and investors more accountable? Why are board members not able to detect fraud?
A non-executive board member’s role is to discuss business strategy and vote on key strategic decisions for the company but not to interfere in the overall operations of the company. Nominee directors on the board are not involved at a day-to-day, operational/management level. In addition to this, there are statutory and internal auditors that the company is required to appoint to oversee its financial governance. There is a reason why the law also sets out a clear distinction between a nominee director and a whole-time director. The obligations of someone who has visibility on the day-to-day affairs of the company as opposed to investor nominees who do not is designed to be different. If not, no one will take up board seats.
Shareholder agreements have clauses to protect investor nominee directors on boards of start-ups against all non-business failures. It is not unique to India, but do you think this should be removed to ensure better accountability?
The role of a nominee director is very different from that of a whole-time/executive director, which is to manage the day-to-day affairs of the company. The law is clear that investor nominees can still be held liable by a company in respect of acts of omission or commission which had occurred with their knowledge, attributable to board processes and with their consent or connivance or where they had not acted diligently. Those checks and balances are more than sufficient.
If such protection clauses are removed from the shareholders’ agreement, it will only dissuade investors from being on the board of a company and possibly result in less supervision and more fraud. Please bear in mind that the large majority of founders and companies operate with good corporate governance practices. If we change these well-established legal and business practices over a handful of errant companies, it will cause great harm to the ecosystem.
How much blame do you take as an investor when allegations of corporate governance come to the fore?
It is not enough for investors alone to focus on creating a culture of good corporate governance. This must also come from founder. Investors can ask questions and ramp up diligence, but founders need to be committed to the end goal of ensuring that the company succeeds within the four corners of law. While most of our founders are absolutely committed to this, the unfortunate reality is that some have not been so. In those rare cases, we will act.
There is a belief that the growth-at-all-costs approach of VCs pushes founders to cross the line.
It is sad that a growth mindset gets misinterpreted as cutting corners. These are very different things. Many of our founders have created enduring companies while still holding to world-class governance practices. We have never advised and will never advise founders to cut corners. We will remain committed to helping the best founders who want to build companies with integrity and a long-term mindset.
How does Sequoia’s global leadership view the India story?
There is a strong belief around the potential of the India start-up ecosystem. It is clear to everyone that there is an incredible technology-led transformation that India is witnessing. Indian business leaders are highly competent and resilient, and that is visible around the world as well. Indian technology prowess is rapidly growing with time. But emerging markets tend to have their own volatility and unique challenges along the way, so everyone needs to be patient and have a long-term view and a resilient mindset to deal with challenges and setbacks along the way.
There are questions being raised on the VC model overall. Do you think some things need to change?
VC is a business of “power law”. That is, a few companies generate a lot of the returns, and a 20% to 30% failure rate is acceptable. Overall, VC is one of the highest performing asset classes for limited partners globally. The top VC firms especially have a history of even greater outperformance due to the power law. But to question an entire asset class and business model for a handful of unfortunate occurrences, comprising less than 1% of the value of our portfolio, does not seem like the right conclusion. We have to remember that when frauds happen, it is the investors who are the first to take an economic hit.
Do you think Brand Sequoia has taken a beating in the light of the investee companies going bust?
No. We believe that Brand Sequoia has emerged stronger. The governance challenges have given us an opportunity to showcase our commitment to good governance. Plus, our track record speaks for itself. Sequoia India and Southeast Asia has by far the most number of unicorns, more than four dozen of them, over 30 companies with $100 million plus revenues and 10+ IPOs since the pandemic. We would like our brand to stand for upholding good governance: if it sends the message that we will not partner with errant founders, we are happy with it.
What is the VC–government interaction like on the issue of developing India into an accountable and successful start-up hub?
We are constantly engaging with policymakers across the board to strengthen the start-up ecosystem in India. We are aligned in the vision of making India one of the most successful start-up ecosystems in the world, and we believe that the government has played a commendable role in building and showcasing India’s start-up success. We will continue to engage with the right stakeholders on all issues of utmost importance for the sector.