Company Outsider: The Gensol-BluSmart fiasco shows the dangers of reckless diversification

A close look at the recent travails of Gensol Engineering, which faced a rating downgrade amid charges of falsifying its financial statements, and the collateral damage to Blu-Smart Mobility, a company with whom it has unexplained ties, shows the consequences of such diworsification.

The Blu-Smart business is smart and opportunistic. Set up in 2019 by Anmol Singh Jaggi, Punit Goyal and Puneet Singh Jaggi, it was a pioneer with its all-electric fleet offering an alternative to Uber and Ola. The company’s founders had just the credentials investors seek.

Generous funding followed from the likes of BP Ventures and Mayfield India Fund. And less than a year ago, Zurich-based climate finance firm ResponsAbility Investments and ReNew founder Sumant Sinha added more ammo with a $24 million funding round.

Also read: Gensol fast-charged Blu-Smart. But their ties are a governance puzzle

Ignored in all this was Jaggi’s association with Gensol, then a 12-year-old startup which was in the business of building solar farms and leasing out electric cars. You could argue there were some similarities between the two businesses, even some real synergies, since BluSmart leased its cars from Gensol.

But these are of the kind that large Indian multi-business conglomerates boasted about in the 1990s till management guru C.K. Prahalad went on an educational trip through India Inc. preaching the virtues of core competence and strategic intent. Some realized the folly of their unfocussed growth. Most, however, pooh-poohed the idea. One well-known promoter, when asked about the core competence of his group, replied: our core competence is making money. Many, as it turned out, didn’t make any. The likes of Videocon, Unitech and Lanco lost all of theirs in chasing myriad businesses.

You would have thought this would be enough to convince newcomers that given the complexities of a new business, sticking to the knitting was prudent.

But come the new startup era, dilettante entrepreneurship was back, liberally funded by private capital. Ola went from ride-hailing to financial services to fleet management to food delivery and finally to electric vehicle manufacturing.

Paytm pioneered India’s digital payments business, which is now worth ₹265 trillion. Then, it wanted to be a bank. Byju’s unsustainable cash burn was a result of multiple expansions gone wrong. In 2021 alone, it acquired Singapore-based Great Learning for $600 million and US-based Epic for $500 million, along with Tynker for $200 million. That same year, it put down $100 million for GeoGebra. It also shelled out a billion dollars for Aakash Educational Services.

Shouldn’t its investors like General Atlantic, Prosus and Peak XV have been telling the founder Byju Raveendran to go easy on the buying spree and focus on building out the original business?

And that brings us to the nub of the issue.

Most shareholders would baulk at the thought of an EV company they invested in using some of the funds to set up entertainment complexes on the side. Not private equity, which seems to cheer on its investees as they dabble in assorted businesses like a billionaire’s bored 19-year-old.

Besides loss of focus, such diversifications have other consequences too.

Also read: A 68% fall in Gensol stock prompts creditors to seize 7% promoter pledged shares

One study published in the Journal of Business Ethics suggested that unrelated diversification provides an opportunity for financial innovation within the firm’s internal capital market, which can result in fraudulent reporting. The study concluded that while unrelated diversification focuses the energies of managers within the firm on financial manipulation, related diversification focuses them on productive purposes.

It is quite possible that Gensol will eventually be cleared of all charges. But the fact is, in trying to run two demanding businesses, Anmol Jaggi, who is chairman of Gensol and Blu-Smart, may have taken his eyes off the ball. The result is the current mess with Gensol facing a slew of corporate governance charges while Blu-Smart’s future is up in the air. It is a sad outcome for two companies that had a lot going for them, and which could have delivered real value.

The Gensol-BluSmart saga is yet another cautionary tale of entrepreneurs in India spreading themselves too thin. Dilettante entrepreneurship doesn't just risk capital; it squanders opportunities to build truly transformative businesses. The discipline to say No to seductive diversions and stick to a focused domain might be the most valuable skill entrepreneurs can cultivate. As Peter Lynch would remind us, real wins come from mastering your turf, not piling on more.