sequoia capital: BharatePe, Trell, Zilingo investor Sequoia Capital says will respond strongly to wilful misconduct, fraud

Bengaluru: Sequoia Capital will respond ‘strongly’ against ‘wilful misconduct and fraud’, the venture capital fund said, after several of its high-profile startups like BharatPe, social commerce firm Trell and Singapore-based business-to-business (B2B) e-commerce firm Zilingo have come under the scanner for alleged lapses in corporate governance and financial irregularities.

Silicon Valley’s storied VC firm, famed for being an early backer of tech giants like Google, Apple and WhatsApp,
said in a blog post on Sunday that it would take ‘proactive steps’ and drive further compliance across its portfolio firms.

Sequoia said it would conduct governance training for founders as well as senior management and ensure the implementation of whistleblower policies.

It further said it would get independent board representation and seek 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,” it said. Sequoia, which is in the midst of closing its largest India and South East Asia fund at $2.8 billion, said that the startup ecosystem needs guardrails so that a few errant founders don’t create setbacks for all.

“We want to build companies that endure, and that can only happen if governance is strong,” it said.

The fund made clear that 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,” it said.

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 wilful fraud and intent,” it added.

While the startup ecosystem had delivered some big outcomes through initial public offerings (IPOs) and exits and through the several unicorns and decacorns created over the last few years, Sequoia said these companies should not only 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’,” it said in the blog post.

In January, New Delhi-based merchant-focussed fintech firm, BharatPe’s cofounder
Ashneer Grover was embroiled in a major controversy after an expletive-laden audio clip featuring him and a Kotak Mahindra Bank employee was leaked.

The matter escalated over the next two months, leading to the exit of Grover and wife
Madhuri Jain, who was the head of controls at the firm.

BharatPe was last valued at $2.8 billion. Sequoia holds a 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.

On April 4, ET reported citing sources, that Sequoia had called for a 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, a diligence conducted later found financial irregularities at the Bengaluru-based startup.

According to sources, the EY probe showed related-party transactions in the firm.

Trell was allegedly inflating revenue and gross merchandise value (GMV) numbers by 30-40% and relied on bots to boost its DAU (daily active users) and MAU (monthly active users) numbers, the probe found.

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

Soon after, Sequoia India managing director Shailendra Singh
stepped down from the board of the Singapore-based company, newswire Bloomberg reported.

In March, the Income-Tax (I-T) department
carried out searches at Sequoia Capital-backed Zetwerk, a B2B marketplace for manufacturing items, for suspected tax evasion.

Separately,
ET reported on March 21 that another B2B firm in the manufacturing segment, Infra.Market, which is backed by Accel and Tiger Global, among others, had not disclosed Rs 224 crore of income as per the I-T department.