It may get worse before it gets better for Indian start-ups

Apart from the Stayzilla shutdown, events in the first three months of 2017 underline that what started as a correction in late 2015 is starting to veer dangerously close to a crisis


The arrest of Chennai-based budget stays aggregator Stayzilla co-founder Yogendra Vasupal comes in the wake of Stayzilla, backed by front-line venture capital firms Matrix Partners India and Nexus Venture Partners, recently shuttering its operations in a bid to pivot to a more viable business model.
The arrest of Chennai-based budget stays aggregator Stayzilla co-founder Yogendra Vasupal comes in the wake of Stayzilla, backed by front-line venture capital firms Matrix Partners India and Nexus Venture Partners, recently shuttering its operations in a bid to pivot to a more viable business model.

By most accounts, Yogendra Vasupal, co-founder and chief executive officer of Chennai-based budget stays aggregator Stayzilla, is a decent human being and the least likely of people in India’s bustling start-up market to cheat anybody.

Yet, on Tuesday, Vasupal was arrested by local authorities in Chennai on charges of defrauding one of the company’s vendors, an advertising agency called Jigsaw Advertising. The arrest comes in the wake of Stayzilla, backed by front-line venture capital firms Matrix Partners India and Nexus Venture Partners, recently shuttering its operations in a bid to pivot to a more viable business model.

The details around Vasupal’s arrest remain murky but, in a rare show of solidarity, entrepreneurs and investors from across the start-up ecosystem rallied behind Vasupal, seeking his release from what they consider wrongful confinement by the authorities.

That isn’t the only ugly incident that made headlines this week. On 12 March, Sandeep Aggarwal, a founder of Delhi-based e-commerce marketplace ShopClues, took to social network Facebook to rage against his co-founders Radhika Aggarwal and Sanjay Sethi for allegedly pushing him out of the company. The Facebook post has since been removed. Sandeep Aggarwal, a former Wall Street analyst, founded ShopClues in 2011 with Radhika Aggarwal, also his wife, and Sethi, and was its CEO till he was arrested in July 2013 by the US Federal Bureau of Investigation on insider trading charges. Aggarwal immediately stepped down as CEO and subsequently pleaded guilty to the charges.

It isn’t difficult to understand why Aggarwal is keen to get back in the game with ShopClues. In his absence, Radhika Aggarwal and Sethi have grown the company’s valuation to more than $1 billion and attracted a host of well- known investors including New York-based hedge fund Tiger Global Management and Singapore’s sovereign wealth fund GIC Pte. Ltd. It is also the only e-commerce unicorn (start-ups valued by investors privately at $1 billion or more) from India that hasn’t yet shown any outward signs of being in trouble. A squabble between its founders at this juncture would only be harmful to the company.

The two disparate incidents are manifestations of the immense stress that India’s start-up market has been under for well over a year. The market, as is now well-documented, slipped into a downturn in the final quarter of 2015. There is next to no later-stage capital available because of the withdrawal of non-traditional start-up investors such as hedge funds and strategic corporate investors. Valuations have plummeted from their dizzying heights back in 2014 and early 2015. The absence of later-stage capital has compelled traditional start-up investors, venture capital firms, to turn cautious on deploying fresh capital. There have been more than a few fire sales of start-ups that ran out of cash in the past year, and job cuts are now fairly commonplace in the ecosystem.

What’s worrying though is that the market is still some way off from a recovery. The general consensus, at least within the venture capital community, is that it’s going to get a lot worse before it gets better. That could just be an inordinately pessimistic view or not. Apart from the Stayzilla shutdown, other events over the first three months of this year underline that what started as a correction in the later part of 2015 is now starting to veer dangerously close to a crisis.

In February, Snapdeal, the e-commerce marketplace owned by Delhi-based Jasper Infotech Pvt. Ltd, became the first of India’s technology unicorns to implode. In an email to employees, which leaked out to the press, Snapdeal founders Kunal Bahl and Rohit Bansal admitted that their e-commerce company had fallen off the wagon. Job cuts were announced and in a somewhat empty gesture, Bahl and Bansal also said they would be taking a 100% cut in salaries in the greater interest of the company. Empty because last year the two had earned about Rs40 crore (a little over $6 million) each via salaries and stock sales. The company has burnt through most of the nearly $2 billion it raised from investors over the years.

As things stand now, according to multiple media reports, Snapdeal is trying to find a buyer for its payments platform Freecharge, which it bought for a reported $400 million in 2015. It is also in talks with SoftBank Group Corp. for a fresh round of funding—Mint had reported in January that discussions were on for a fresh round but at a valuation of $3-4 billion compared to the $6.5 billion it touched the last time it raised capital. There’s also talk of Snapdeal exploring a merger with Alibaba-backed online payments platform Paytm’s e-commerce business.

While the Snapdeal implosion sends out the message that even a unicorn backed by the most powerful of investors isn’t immune to a downturn, its state of affairs are seen as having fewer consequences for the market compared to its Bengaluru-based rival Flipkart. Early in January, Flipkart, the flag-bearer of the current start-up wave, officially became an investor-run company. Tiger Global Management, its largest investor and shareholder, shipped in one of its managing directors, Kalyan Krishnamurthy, to replace the company’s co-founder Binny Bansal as CEO. Binny Bansal, incidentally, had replaced co-founder Sachin Bansal as CEO in January last year. As of today, Flipkart retains its status as India’s most valuable start-up, despite multiple valuation markdowns by several minority shareholders. But it continues to struggle to raise fresh capital at the reported $15 billion valuation it commanded when it last got funded. That was nearly 20 months ago.

Mint reported last month that the company was in talks with several investors including Tencent Holdings Ltd, eBay Inc. and Microsoft Corp. to raise $1.5 billion. It needs the fresh capital desperately to retain its place in the market against the might of Seattle-based e-tailer Amazon. And, it has to raise the money at a decent valuation. At stake is nearly $3.5 billion in investor money that the company has burnt through. Tiger Global alone accounts for about $1 billion. Some may argue that Flipkart is too big to fail. But if it does implode, the after-effects could well be devastating.

Stayzilla, Snapdeal and Flipkart are all examples of start-ups where investors have clearly decided that it’s time to take the hardest of decisions to stem the further erosion of the value of their investments. And, these are the good ones. It’s an inevitable part of the cycle in the high-stakes venture capital business in the interest of creating a healthier start-up market when the cycle turns. It would be nice, of course, to get there without any more entrepreneurs landing themselves in jail.

Snigdha Sengupta is a consulting writer with Mint. She contributes stories on venture capital and private equity.

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