FOCUS-Sequoia India grapples with fallout from governance snafus

By Mr. Sriram and Aditya Kalra

MUMBAI, June 17 (Reuters)Sequoia Capital’s Indian partners, caught off guard earlier this year by governance scandals at its portfolio startups, assured investors at an April meeting in London that those “lowlights” were mostly behind them, according to three people familiar with the talks.

But two months later, Sequoia, a major venture capital player in India, is still grappling with claims from startups for breach of trust and a defamation lawsuit brought by a former general counsel, while the closing of ‘a $2.8 billion fund was delayed due to a governance issue.

Sequoia acknowledged that it faces governance challenges in India. Two sources familiar with the company’s thinking said it had already made specific changes to governance practices, after an unusually candid April 17 blog post by Sequoia that said it was reflecting on recent incidents and would impose stricter controls and requirements to the startups it funds.

The discontent persists nonetheless, including among many Indian startups not caught in the scandals but affected by them, underscoring the company’s public relations headache as it consolidates its position in the country.

The Silicon Valley company has invested $5.5 billion in India and since 2017 has closed more than 400 deals, far outpacing US rivals like Accel and Lightspeed, according to data from Venture Intelligence.

“As an entrepreneur, you raise funds from Sequoia because of their reputation for working closely with founders,” said the CEO of a Sequoia-backed startup, who declined to be named to avoid to damage relationships.

He was among a dozen startups funded and represented on Sequoia’s board who said the company failed to update them on governance-related issues that made headlines in India — and which feared that the incidents would affect them as well. They declined to be identified.

Sequoia did not respond to questions from Reuters for this story.

The first major sign of governance issues this year at Sequoia-funded startups came in January, when digital payments provider BharatPe launched an investigation that ultimately led to the firing of several employees and the discovery of vendor malpractice. .

Three months later, Singapore-based fashion startup Zilingo said it had suspended its 30-year-old CEO and co-founder Ankiti Bose, a former Sequoia analyst, on suspicion of financial irregularities. She was later fired in what Bose called a wrongful termination.

People familiar with the April meeting in London said Sequoia investors had not raised particular concerns or waning support for his work in India due to the incidents, but he still did. facing further fallout later.

In May, Sequoia wrote to some of its investors that it was delaying $2.8 billion in new funds for India and Southeast Asia due to ongoing governance issues at an Indian holding company. , according to two sources and an email seen by Reuters.

The company had no comment at the time, although it announced this week that the fund had successfully closed.

And this month, Sandeep Kapoor, Sequoia’s in-house general counsel in India for nearly nine years until 2019, included the company in a libel suit against media companies that reported on a leak. June 2 Sequoia email address.

Kapoor’s company, Algo Legal, said in a press release that the email, sent to Sequoia’s portfolio companies, made baseless references to “concerning details” about the company and harmed its interests. .

The law firm said in its court filing that Sequoia was its largest billing client, but the US venture capital firm ended its engagement with it in January.

Kapoor declined to comment while the case was before a judge. Sequoia, at the first hearing in the case last week, asked for time to respond to the allegations. The case is scheduled to be heard on June 18.

India’s startup sector had a banner year in 2021 with $35 billion in funding, according to Venture Intelligence, but the boom has since died down and governance issues are now emerging at a number of startups..

“It’s unfortunate for Sequoia…but the problem was systemic,” said Anirudh Damani, managing partner of India’s Artha Venture Fund.

According to sources familiar with Sequoia’s thinking, the company believes it did its due diligence during the startup boom, but is now stepping up its efforts on startup governance training, whistleblower policies, audits, and controls, as well as communications with portfolio companies. .

Under tighter controls, Sequoia wants to ensure that its well-funded companies have a “very strong CFO” and that startups complete financial audits on time, one of the sources said.

Another source familiar with the matter said Sequoia representatives affirmed their commitment to investing in India and corporate governance during a meeting earlier this month with Indian Finance Minister Nirmala Sitharaman.

The minister’s office tweeted a photo of the meeting attendees at the time, but did not respond to a request for comment.

(Reporting by Mr. Sriram in Mumbai and Aditya Kalra in New Delhi; Editing by Mike Collett-White and Edmund Klamann)

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Helen D. Jessen