Is Unethical Culture Behind India’s Startup Boom?

Inc42 Investigation Points to Systemic Failures in the Country’s Startup Ecosystem

June 5, 2025

India’s unicorns are celebrated, and its startup scene is often seen as the future. But behind the fast-paced success stories, there’s a worrying pattern that can’t be overlooked. A private investigation shows that much of this shiny success has been built on unstable ground.

An investigation by the media platform Inc42 points to repeated failures in corporate governance, financial honesty and ethical behaviour. The problem isn’t limited to one sector or a few individuals. It reveals a culture where chasing fast growth matters more than telling the truth.

In just the first few months of 2025, several well-known startups have come under the scanner for serious issues—like inflating their income, faking user numbers, moving money through questionable routes and poor management behind the scenes, according to Inc42. There have been too many warning signs to treat them as random mistakes.

In one case, a major auditing firm signed off the annual financial report but flagged major concerns: weak internal checks, confusion over how income was counted and even signs that assets might have gone missing. This happened while the startup’s finance team was being reshuffled—a clear signal that all was not well.

Another once-celebrated startup ran into trouble when its long-time auditor refused to approve its financials, pointing to income being recorded before the money was actually received. The company had to change the way it reported earnings, which then revealed big losses. The situation has now turned into a global legal mess, with over $500 million said to have been moved to a questionable investment fund overseas.

In yet another case, the company was found to have made up fake vendors and sales figures, along with false data about its customers and stock. And in one more example, the founders were accused of diverting government-backed loan money to people close to them.

How do these problems go unnoticed for so long? A big reason is that the usual checks don’t always work the way they’re supposed to. Even top auditing firms have missed or failed to report major issues. Sometimes they only look at what the company shows them. Other times, there’s a bigger problem—they’re paid by the same companies they’re supposed to audit. In a competitive market, keeping the client happy can matter more than asking tough questions.

And when trouble finally surfaces, it’s often the finance team or chief financial officer who takes the blame. But few believe these financial decisions are made without the knowledge of top leadership or the board.

Investors also played a part. In 2021, when funding was flowing easily, startup founders made big promises, and investors didn’t look too closely, according to Inc42. Good governance was pushed aside in favour of flashy growth. Startups, especially those preparing to go public, faced pressure—either from investors or from the founders’ own ambitions—to present strong numbers, whether real or not.

For early-stage startups, the risks are even greater. With no funds for thorough audits and limited in-house accounting expertise, many operate in a grey zone—sometimes unintentionally, but often unchecked. There’s also little appetite to invest in governance when survival is the priority.

So where does the buck stop?

Regulators like ICAI, which oversees the conduct of chartered accountants, and FRRB, which reviews financial reporting standards, are waking up. But enforcement still lags, and the backlog of cases is long. Meanwhile, SEBI, which regulates India’s securities markets, and RBI, which oversees banking and financial stability, are increasing scrutiny, but whether that will lead to proactive deterrence or just more post-mortems remains to be seen.

Investors are also starting to be more careful. Some venture capital firms now ask for independent audits, regular updates to the board and detailed financial checks. They’re also paying closer attention to warning signs—like when a founder avoids sharing data or rushes to close a deal. But the approach isn’t the same everywhere. Some investors still support well-known founders, even after repeated failures, choosing fame over facts.

This isn’t an India-only problem, but India’s startup ecosystem—now the third-largest in the world—cannot afford such indulgences. At stake is the country’s credibility as an investment destination.

The heart of the problem is a culture that prioritises optics over operations, scale over substance and short-term wins over long-term trust. Not every startup is corrupt. But when shortcuts become normalised and whistleblowers are ignored, the system rewards the wrong kind of entrepreneurship.

It seems, for too long, startups were encouraged to fake it till they made it—a culture shaped jointly by founders, investors, auditors and regulators, whether knowingly or not. But as one scandal follows another, it’s become clear: faking it does more damage than good.

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