The role of venture capital in managing startups

RECENT turmoil at venture capital-backed startups has rattled the ecosystem across South and South-east Asia, leaving founders in hot water with investors for reasons ranging from mismanagement of the business to bringing on reputational risks for the investors. In the first of this new column “Due Diligence”, we would like to share our thoughts on the role of VCs in managing and guiding portfolio companies, specifically in matters of enforcing corporate governance to avoid such painful scenarios.

In startups, which are small-scale and high-growth businesses, most investors understand that there is a delicate balance between performance and conformance. If we require founders to do a huge amount of reporting, it will take their time away from running the business and generating profits. Furthermore, reporting to investors is far less exciting and energising than developing a new revenue stream. However, as VCs, we are accountable to our limited partners, who invest their money into our fund. Over the years, we see that the most sustainable approach is for VCs to work as a close partner and advisor to founders, implement basic check-and-balance systems like a board of directors and a set of effective reserved matters, and be on an active lookout for telltale signs of trouble.

VCs lead sustained “due diligence” efforts

Before any VC invests in a start-up, they would carry out due diligence – which is known as the process of gathering and making sense of information from various sources, to verify that what founders are presenting is true and accurate.