Will continue to respond strongly to willful misconduct or fraud: Sequoia Capital

Bengaluru: As high-profile startups in its portfolio come under the scanner for alleged financial fraud and lack of corporate governance, Sequoia Capital India has for the first time broken its silence on the matter, saying it will continue to respond “strongly” to “wilful misconduct and fraud”.

Portfolio companies facing such accusations include fintech firm BharatPe, social commerce firm Trell, and Singapore-based business-to-business e-commerce company Zilingo.

In a blog post,
Sequoia Capital India said that it would continue to take “proactive steps” and drive further compliance across its portfolio companies by conducting governance training for founders and senior management, ensuring implementation of whistleblower policies, getting further independent board representation, and asking for more disclosures and rigorous adoption of internal audits and controls.

“Recently some portfolio founders have been under investigation for potential fraudulent practices or poor governance. These allegations are deeply disturbing. We have always strongly encouraged founders to play the long game,” the blog post read.

“It is easy to think of this issue (corporate governance) as ascribed to poor due diligence. But let’s remember that when investments are made at seed or early stage there is hardly a business to diligence. Even at a later stage investors can face negative surprises, post investment, if there is willful fraud and intent,” said Sequoia, adding “boards can only work with the information shared with them”.

“The board is not responsible to investigate on an ongoing basis unless something formally is brought up with them, which is often through a whistleblower. Better corporate governance is a shared responsibility between founders, management and the board,” added Sequoia.

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Sequoia said that while the startup ecosystem had delivered some big outcomes through initial public offerings (IPO) and exits, these companies should not just be valuable but also enduring. “…and that can only happen if the values are right and the governance is strong. We think it’s time for us, as an ecosystem, to sign up for better governance. ‘What’ has been achieved is now clear – we think it’s time to improve on the ‘how’, the blog post said.

Portfolio firms under scrutiny

Recently, the income tax department carried out searches at
Sequoia Capital-backed Zetwerk’s premises for suspected tax evasion. ET reported on March 21 that another B2B firm in the manufacturing segment, Infra.Market, backed by Accel and Tiger Global, among others,
had not disclosed Rs 224 crore of income, according to the income tax department.

In January, BharatPe’s cofounder Ashneer Grover became embroiled in a major controversy after the
leak of an expletive-laden audio clip, allegedly featuring him berating a Kotak Mahindra Bank employee. The matter escalated over the next two months, leading to the exit of Grover
and his wife Madhuri Jain, who was the head of controls at the firm. BharatPe was last valued at $2.8 billion and Sequoia holds 19.6% stake in the firm.

On March 12, ET was the first to report that
EY India was conducting a forensic audit at social commerce startup Trell. ET reported, citing sources,
on April 4 that Sequoia had called for the probe at Trell after receiving whistleblower complaints.

The investigation began after the company, which was last valued at $120 million, snagged a term sheet from Denmark’s Bestseller A/S for a new funding round at a valuation of around $750 million.

While the funding round was stalled, diligence conducted later found financial irregularities at the Bengaluru-based startup. According to sources, the EY probe had shown-related party transactions at the firm. ET reported on April 4 that Trell allegedly inflated revenue and gross merchandise value (GMV) numbers by 30-40% and relied on bots to boost its daily active user (DAU) and monthly active user (MAU) numbers, they said.

Earlier this month, Singapore-based
Zilingo suspended its Indian founder and chief executive Ankiti Bose after discrepancies were allegedly discovered in the company’s accounting during due diligence for a new funding round. Bose disputed these allegations and contested her suspension, saying that it was triggered by harassment complaints she raised against an investor in the company, ET had reported on April 12.

Soon after, Sequoia India managing director
Shailendra Singh stepped down from the board of Zilingo, Bloomberg reported.

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