As start-ups flounder, investors take over control from founders

Bengaluru: India’s most valuable start-up, Flipkart, has changed its chief executive officer (CEO) twice. Rival Snapdeal is up for sale, against the wishes of its founders, after rejecting at least two funding offers.

Cab aggregator Ola shut some ancillary businesses its CEO fancied. Paytm cut spending on e-commerce operations after lower-than-expected growth heavy advertising and cashbacks.

There have been many similar cases at large start-ups since early 2016.

Who is driving these changes?

It’s the boards—mostly investors—that are increasingly asserting themselves at India’s largest start-ups.

Many entrepreneurs lost their way in the funding boom of 2015, when enthusiastic investors pushed them to deliver sales at any cost. Once it became clear that they had overestimated the size of India’s Internet market, the same investors started shutting the funding tap.

It’s no coincidence that the two investors driving changes are the ones who have most at stake: Tiger Global Management and SoftBank Group Corp.

Lee Fixel, Tiger Global’s managing director and the funder-in-chief of Indian Internet start-ups, first brought back Tiger employee Kalyan Krishnamurthy to Flipkart last June to run the company’s sales operations and installed him as CEO in place of Flipkart co-founder Binny Bansal in January.

SoftBank is playing a leading role in arranging the sale of Snapdeal to Flipkart, Mint reported on 2 May. Last month, Snapdeal co-founders Kunal Bahl and Rohit Bansal admitted the company’s fate is out of their hands.

Tiger and SoftBank, which have together invested more than $4 billion in India, have seen their bets falter—SoftBank’s a lot more than Tiger’s—and are scrambling to make the most of what they can.

“India is an evolving ecosystem and a unique market where local and global players all have a chance at winning— this calls for different skills at different times,” said Sandeep Murthy, partner at Lightbox Ventures, a venture capital firm.

“If you look at the Flipkart situation, this was not a contentious decision. Binny did not come out against Tiger. In the Valley, you see CEOs and founders getting replaced by companies very often. You see changes in senior management and new directors coming in. What you’re seeing is the maturing of the Indian start-up ecosystem,” added Murthy.

Flipkart and Snapdeal represent extreme cases of investors on board taking control. At start-ups such as Ola and Paytm, while the founders no longer enjoy a no-questions-asked status from investors, they still run the companies.

At these companies, push-back from investors represent a normal relationship between a board and the management.

Some investors said VCs should not run companies.

“I don’t think most VCs are in the business of running companies; they’re in the business of investing,” said Ash Lilani, managing partner and co-founder at Saama Capital, a VC firm.

“The reason I invest in a company is because I believe the entrepreneur is someone who has a great idea, who has a differentiating business model, has a strong understanding of the domain, who I believe can hire a good team, and build a great company. If I go into a company thinking that I have to run it someday then I’m not investing in the right entrepreneur,” said Lilani, a Paytm board member.

“With some big start-ups raising large amounts of capital, there’s a lot more at stake clearly. And companies are taking longer to get to profitability, given the competitive scenario. So, questions being asked (by board members) is always a good thing,” said Tarun Davda, managing director at Matrix Partners India, which is one of the largest investors in Ola.