Startups – new problems of governance and ethics

On March 14,2017, Chennai police arrested an Indian startup founder and CEO on charges of defrauding a supplier of Rs.17.2 million. The available information revealed that the startup had not paid one of its suppliers for its advertising services for over 1-1/2 years. When the startup announced plans to shut down (CEO called it “rebooting”), the supplier filed a “criminal complaint” against the founder CEO as well as co-founder with Chennai Police. The police was still on the look out for the co-founder who appeared to have gone underground.

The news of arrest fueled by electronic media news and blogs spread like wildfire in the startup ecosystem. Most of the opinion and claims based on half-truths, blamed the supplier for the overkill. It was believed that supplier used its political and police connections to escalate the dispute from “civil” to “criminal” in nature thereby resulting in the immediate arrest of the startup CEO. The doubts were also raised on the legality of the arrest process in view of the person arrested being CEO of a “limited liability” business. The supplier’s camp had pointed out the startup was well funded having raised its “C” round of $13.5 million only in May 2016. It was believed the startup had money but was not paying its dues – amounting to intention to cheat.

More than a hundred Indian startup CEOs across India, including the biggest startup poster boys and unicorns petitioned India’s Home Minister. They submitted a jointly signed statement pointing to the impact of such arrests and asking for fair and speedy trial. They specially talked about the dampening effect on the morale of majority of startups who anyway operated in a “not very conducive” business environment – almost bordering on being hostile. A website ( was setup where the well-wishers can show some love for the CEO.

Meanwhile, the arrested CEO had been twice denied bail while his co-founder is still missing. It appeared a long haul for the CEO as the law in India took its own sweet time to dispense justice, if at all. Meanwhile a few questions arise that we must find good answers to.

One, what was wrong with the startup actions if any? There was no documentary evidence suggesting the startup disputed payment because of any performance deficiency on part of supplier. The startup CEO had only three weeks before acknowledged availability of funds and his intention to use it in new avatar after current operations were shut down (referred to as “rebooting”). Were investor VCs aware of the problem (thru their periodic reviews) and advised the CEO on it? Do VCs have a role at all in guiding the investee on corporate governance or business ethics?

Two, was the police action beyond reproach? What guided them to register a “criminal case” where most of the times payment disputes fall under “civil law”. Was there undue influence on police to take such action?

Three, were supplier’s actions proper? Was it fair to use the contacts in government machinery (as alleged) to escalate the matter and get the CEO arrested? What can frustrated small suppliers do when payments are not made to them in time as agreed or are delayed forever? Does the lax justice delivery system in India justify supplier’s unconstitutional actions – like using local politician to mediate or indulge in laughable activity of sending across voodoo dolls (as alleged)?

Finally how can we create a better business environment within the startup ecosystem despite the business and legal environment that we know exists in India? Some suggestions have been made recently such as – a credit rating agency for startups, mandatory external supervisory boards for every startup (of certain size? Only the funded ones?) and more transparency and standardization in startup operations (employment conditions, shutting down ops, sexual harassment at workplace etc.)

If you have still not got it, the situation mentioned in this blog relates to Stayzilla and Jigsaw Advertising.