• VC firm Sequoia Capital India has spoken out about fraud allegations at multiple startups it’s backed.
• The firm said it was difficult to conduct due diligence on early-stage businesses.
• On April 14, Sequoia-backed e-commerce startup Zilingo suspended its CEO amid a financial probe.

Sequoia Capital India, a major investor in Southeast Asian startups, has said due diligence on early-stage startups is tough as four of its portfolio companies face fraud or misconduct allegations.

In a blogpost not attributed to a particular author, the firm said: “Recently some portfolio founders have been under investigation for potential fraudulent practices or poor governance. These allegations are deeply disturbing.”

The post added: “It is easy to think of this issue 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 later stage investors can face negative surprises, post investment, if there is willful fraud and intent.”

Sequoia didn’t name check any firms, but one of these negative surprises has been Zilingo, a Singapore-based fashion e-commerce startup first backed by Sequoia in 2015 and estimated to be worth $970 million. Zilingo earlier this month suspended its cofounder and CEO Ankiti Bose amid a financial probe into its accounting practices. A lawyer acting for Bose called her suspension “unfair” in a statement to Bloomberg.

Sequoia and another backer, Temasek, raised their concerns with Zilingo’s board. Sequoia’s Shailendra Singh subsequently resigned as director of Zilingo’s board, Bloomberg reported.

Three other Sequoia-backed startups are also under scrutiny.

In mid-March, Indian news media reported that EY India was investigating social e-commerce platform Trell for alleged financial irregularities. The same month, Zetwerk Manufacturing was reportedly raided by Indian tax officials over alleged tax evasion concerns. Also in March, financial platform BharatPe’s cofounder Ashneer Grover was accused of misappropriating funds by the firm and quit as CEO. 

Sequoia in its post called for better “guardrails” for the startup ecosystem, such as agreeing new rules around corporate governance, and said startup “boards can only work with the information shared with them” to uncover wrongdoing.

Sequoia’s post highlights the risks of investing in early-stage startups, where venture capital firms plow cash into unproven companies, often trusting in a founder’s vision more than the solidity of their business model.  The firm wrote that a startup’s board “is not responsible to investigate on an ongoing basis” for potential bad behavior unless it’s explicitly flagged up.

But some regional investors shot back at suggestions that the wider ecosystem was at fault.

“Sequoia India, caught with their pants down with 4 portfolio companies. Decides to blames the ‘eco-system,'” wrote Sam Gibb, managing partner of Singapore-based fintech investor Resolution Ventures, on Twitter. He said that bigger investors encourage a “growth-at-all-costs” mentality at startups, leading founders to step “over gray lines” to hit metrics.

“The interests of career VCs (where a bulk of remuneration is fixed) diverge from founders as status is more important to them than building lasting economic value,” he wrote.

Sequoia could not be reached over the phone for further comment.