Another woman founder alleges Mahesh Murthy of misconduct


Pooja Chauhan, Vayuz cofounder has shared the above screenshot mentioning :

“I wished Mahesh Murthy Merry Christmas n a new year I got a response something like that. Unfortunately my LinkedIn app allows me to add only one picture but I want to know from my fellow entrepreneurs and investors do we deserve this ? So next time when you talk to investors you should mentally prepare yourself.”

From the comments on her LinkedIn post, it seems Mahesh has already apologised for this incident.
In the past, another woman founder alleged Mahesh Murthy of misconduct (to which Mahesh clarified).

Woman Founder Alleges Mahesh Murthy Of Misconduct

Recently at a panel discussion in UnPluggd, we had a women panel which discussed if women want to be called founders or women founders. While a lot of women are already upset for not getting the equal perception or treatment, there are may be many more things which are not going right.

Mahesh Murthy is a known VC in the startup ecosystem and recently a friend of a Mumbai-based woman founder has come out and written openly of “What Mahesh offers especially to girls for getting their startup funded”.

In her post, she first clearly blamed media of not taking up the story saying that “Mahesh has many media contacts and he pays them cheques”

The below pictures will give you an idea of what has happened.


5-min Note : We have reached out to Mahesh for comments. By no means, we are judging anything here (infact it’s plain reporting).

Update : Mahesh has clarified the entire issue

[source]

Has The Opportunity For Indian Internet Startups Been Terribly Wrongly Estimated?

I was at a conference the other day, speaking on a panel with VCs and angels, when we were asked a question: With the softening of valuations and the famous Flipkart markdown, is there still a large internet opportunity in India?

My friend and co-panelist from a large VC fund jumped up and trotted out the now-standard schtick: that the combined market cap of Chinese internet firms is half a trillion dollars and as of now the combined market cap of all Indian internet firms is just around $30 billion – so yes, there is loads of room to grow. Maybe 10x or 15x or more.

But I believe there’s something terribly wrong with this logic, and the sooner we realise this, the better off we all will be.

Because you really can’t compare the internet opportunity in China and in India.

The Chinese market is a walled garden of sorts, open mostly only to Chinese businesses – after all, Google, Facebook and Twitter haven’t been allowed to freely operate in China. So Baidu ended up being the Google of China, RenRen is the Facebook of China and Weibo is the Twitter of China. And even Amazon has faced a huge uphill task there.

The Chinese have built their businesses without much global competition – that half-trillion dollar market cap came much easier, after much government protection. Sure Alibaba beat eBay – but that is one exception. There are significant regulatory, political and language barriers for non-Chinese internet firms to win in China.

It’s the same in Russia. Yandex is the Google of Russia and vKontakte is the Facebook of Russia.

While, in India, the regulatory barriers are almost non-existent, our internet is still mostly in English and our politicians aren’t able to control digital media companies like the Chinese and Russians can do in their countries.

The result of our openness? 

The Facebook of India is Facebook, the Google of India is Google, and the Twitter of India is Twitter.

And it’s just as likely that that Amazon – not Flipkart, will be the Amazon of India; that Uber – not Ola, will be the Uber of India; and that Tinder – not TrulyMadly will be the Tinder of India. And so on.

This has a few implications. First –  if you want to see the size of the Indian internet economy, you MUST include chunks of Google, Facebook, Twitter and others in it – because these are India’s leading internet companies.

There are several ways to do it-  one is to look at global revenues and market caps of these companies and attribute the Indian market cap to the share of Indian revenue in the global pie. I tried that, but came up across a big issue-  not knowing the Indian revenues of many of these firms, because it’s not separately called out.

I tried it a second way – to attribute the India-linked market cap to the Indian share of the firm’s global users – and that data was a little more accessible. I took all data from public sources like press releases, or estimates from SimilarWeb and the like. Wherever available, I took user or customer numbers  (in regular font below) and where not available, I’ve taken traffic numbers (in italics below). And instead of private company valuations which would count Uber and such – I’ve taken more conservative public company valuations. Oh, and further, all mistakes are mine alone.

Here’s what I came up with.

indian-internet-startups

The top 10 global internet companies have a combined market cap of over $1.3 trillion. But one can attribute up to $150 billion to Indian users. 

Yes, of course, there is a large caveat here. First that, as said before, the Indian share of global revenues will give a more accurate picture. And our share of revenues will certainly be less than our share of traffic or users. So you can discount this number by 25%, 50% or even 75% to adjust for that – but the final number is still significant. Though I do think market caps are not just a function of revenues – user base is also a prime consideration – after all that’s where the growth will come from.

Now if you add the $30 billion or so of market cap of our local unicorns to this $150 billion, we’ll end up with around $180 billion of market cap for our current Internet economy.

Then, adjust for the fact that China has 720 million internet users and India has exactly half, 360 million users. $520 billion of Chinese market cap per head across 720 million users is $722 per user. Our number turns out to $180 billion of market cap across 360 million users – or $500 per user.

So the real difference between the Chinese internet potential and Indian internet potential is not 10x or 15x – but perhaps closer to 40% or 1.4x. Or you can be pessimistic and call it 2x if you like. But 10x it isn’t.

What are the takeaways here?

First that there just isn’t as much headroom for growth in the broad internet economy for startups in India as you’ve been told there is. The $180 billion may grow over a few years to $300 billion – but $200 billion to $250 billion of that will accrue to non-Indian firms. Leaving $50 to $100 billion for Indian startups. Please adjust your expectations accordingly.

So a more apt way of looking at the Indian potential is to see us like the 51st state of the US. Or like a United Kingdom. Large market for global companies – not necessarily a large market for local firms.

So I’d say much of the growth assumed for our current unicorns is probably vastly over-estimated. Especially if the Indian unicorn has global competition in its way.

Second, the nature of Internet businesses is largely a winner-take-all in any niche. If you see the market share that Google ended up with in search, Gmail in email, Facebook in social networking, Twitter in microblogging, YouTube in video etc – they’re all well above 80%. So if you take on a niche –  you either end up the leader with 80% of it, or  a distant number 2 with 8% of it or a non-player with 0.8% of it. This is where the chips largely tend to fall – though there are a few exceptions.

So your likely playbook if you take on a global internet company are (a) to be bought by the global player or (b) to end up eventually as the 8% play.

So what’s going to happen to Flipkart now that Amazon and Alibaba have declined to buy it? Or to Ola now that Uber has declined to buy it? It may not be the nicest of news, I believe.

Which leads to the third take-away. If you want to build a large Internet business in India – then do it out of the way of the globals. Build something where the globals aren’t. From my own portfolio, I’d suggest that RedBus, CarWale, MyDentist, Chumbak and others have picked the right areas. Other firms like InMobi, Naukri and PayTM are on paths outside the globals’ footprints too. This is a good place to be, over the long term – unless you’re sure you can sell out to a global like Baazee did to eBay. I personally believe this is extremely risky – as the global firm may just turn around and say “nope, I’ll build it myself” as many are increasingly doing so.

In other words – try not to be the X of India. Try to be the yourself of the world. This is easier said than done, both because we have a long entrepreneurial history in India of building copy-paste businesses, from independence till now. And second, because most investors in Indian internet firms work for US or other firms who wrongly believe they can simply fund and build the “X of India” – and have some comfort in funding copy-pastes rather than backing originals. But I do see signs of this groupthink slowly giving way to backing original companies.

And the fourth takeaway is for these firms to go global too. Naukri has expanded to West Asia. Chumbak is in Japan. InMobi is all over. And we’ll do better to expand to 2nd and 3rd world countries than taking on the first world. Because the nature of our markets and products is typically more suited to those economies than to winning in the US.

This is how you get long-term traction – do to local firms in those countries what the globals are doing to us. Sure, we might not get the market caps the US firms get right away. But it will come to us, eventually.

Is this piece a downer on the start-up excitement in India? I hope not. Our unicorns can and must happen – but should happen in original areas. Alibaba didn’t copy anybody – it started in China and rules the world, Skype didn’t copy anybody – it started in Estonia and rules the world. And that should be our inspiration. Can we build great, global internet companies out of India? Yes, for sure we can. But perhaps not in the way we’re doing so currently.

Anyway, thought I’d pen this piece and see if it might trigger a few thoughts of your own – I’d love to hear those too!

Do comment here and share at will. And happy new financial year!

Mahesh Murthy
Mahesh Murthy

[Mahesh Murthy is a venture capitalist, marketer and entrepreneur. He tweets @maheshmurthy .

The article originally appeared here.]

Is Venture Capital Killing Startups?

[Editorial Notes : Venture investing is math and read up this interesting piece by Mahesh Murthy on how investors can potentially steer companies in certain direction, depending on the fund lifecycle.]

Just the other day, I had the somewhat unpleasant job of presiding over the shutdown of one of our investee companies. Not that it was a first – I’ve ‘lost’ a dozen or so companies in the last 15 years of investing, out of 50-odd companies that time and money has gone into, and I’m reliably informed it’s a good ratio.

At the same time, the returns from the ones that survived and made it big have made us, I’m told again, among the best-returning funds in the country. Which made me wonder whether we were good in any way – or just the one-eyed in the land of the blind. But more on that later.

Take it!!
Take it!!

As always, we’d documented the demises to our investors in our funds – the Limited Partners or LPs.

One common reason was “too early for the market”. And the next most common was “couldn’t raise the next round because the market turned”. Anecdotally, other causes were odd ones like “promoters didn’t get along” and we also had a couple we categorised as “governance issues” – officialspeak for “we caught them with their hands in the till”.

Nowhere among the reasons was that us VCs were to blame. While there certainly is much blame to go around our lot – one investor I know asked a friend’s company to morph into a copy of a US startup and then blamed the entrepreneur when it imploded – I’m sure I could write a long piece just on how misguidance by investors has killed many a startup – but the bigger issue is simply this:

That the VC fund structure simply isn’t good for startups – especially in emerging economies like India.

Here’s why.

Most VC funds around the world follow the US model in their tenure – they’re 8+2 or less often, 10+2 – which means they have 8 or 10 years to identify companies, deploy funds, nurture teams, take them to exit and then return money to their LPs, with a potential extension of 2 years for the entire process.

Here’s how the sausage factory works: if I raised money today – I’d have 3 or 4 years to find the couple of dozen startups to put the money in – and after that I’d have between 5 and 8 years to guide, help grow and exit all of those companies.

You can see the problem right away, can’t you? No Indian firm of any stature has had any real IPO exit within 5 to 8 years of starting up. Even our new economy giants MakeMyTrip and Naukri took more than 10 years, while JustDial took more than 16 years to exit on the market. Look at the big stocks on the BSE – and make a list of those that had a meaningful IPO within 8 years of starting up. Your list will be an empty one. All the giants – whether it’s a TCS or Infosys in India, or a Google in the US, took much longer than 8 years to exit.

The fact is – it simply takes longer than 5 or 8 years to grow a company to a meaningful size and big public exit in India – and in most other parts of the world too.

So if you’re a fund that comes in at the start of a business and does all the hard work of finding the opportunity and promoters, helping them build their team and business, guiding them through thick and thin, and then growing them past their rivals to profitability and leadership – then you simply can’t get the benefit of staying till the end. Because you have to return the money to your LPs before you’ve made any big money really. And you will almost certainly lose out on all the appreciation that should be rightfully yours.

So how do funds cope?

They do so with a few patently damaging behaviours – at least from the startup’s point of view.

One, as they get closer to the 5th year of investment in you, they start trying to morph you into something that they can sell to someone else. This might mean asking you to invest in things you don’t need – like a costly and meaningless TV campaign, or a complete change of focus, or even an ill-advised merger with another portfolio company.

The second option is the nudge out. At the 6 and 7 year mark they will put you on the block – and sell you to anyone who pays what they consider a decent price – regardless of the fact that you could reach escape velocity by yourself in a few more years and deliver a lot more in returns while retaining control – if only the investors had the ability to stay longer.

And the third, even more nefariously, is the circle jerk. A bunch of funds of roughly the same size all look at their portfolios around year 5 – see a bunch of unexitable businesses – and then proceed to give each others’ companies an up-round (A gives a 3x up-round to B’s investee, B gives a 3x to C’s company, and C in turn returns the favour to A’s investee.)

Net result? The LPs of A, B and C each think they’re doing very well indeed – but the startups and their founders are now left with new masters, a higher and even more indefensible valuation – and disaster is merely postponed and potentially amplified for the poor folks being led by investors in this dance.

The fourth choice is, of course that if none of these happen, the rug is pulled out from under the company and they say, sorry dude, this one didn’t make it, off to the dead pool you go.

VCs may follow a 8-year rhythm – but businesses certainly don’t.

I’ve run businesses myself – and I know it takes more than 10 years to hit that critical size and stability. Sometimes 15. Sometimes even more. Ironically, if I’d taken VC funding for my own startup – I’d have been worse off today, with a huge artificial pressure to exit. I’m glad nobody was nudging me out at year 6. In return, I try not to do the same with my startups, but I confess I don’t always succeed.

What’s the way out?

First, break the US model. Like most imported processes, it’s not right for the rest of the world. In fact, I’m not sure it’s right for the US either. Dump the 8 and 10 year fund structures. There are a few evergreen or 20-year plus fund structures around. Embrace that.

Some types of LPs, like pension funds, want quick returns every 8 years and hence will want to be in 8-year funds – perhaps they could be advised that early-stage, where the best returns are, shouldn’t be their cup of tea – or perhaps they could learn to be more patient if they want the super-huge returns.

Some other LPs – family offices, endowments, foundations and the like should gravitate more to the early stage – but their large bite sizes get in the way. They may have billions to invest and apparent logic may decide that each investment should be $100 million or more – but that’s too large for early-stage funds.

It’s unwieldy, yes – because they have more money to deploy than most early-stage funds can manage – but long-term early-stage funds are the right match for their tenure and temperament. They should figure that a teeny bit more work on their part – to write smaller cheques – will help them participate at the steepest part of the growth curve of new businesses.

Second, look to build real businesses that grow over the long term. Come with a Berkshire Hathaway mentality – not a Gordon Gecko built-to-flipkart mindset. Also, why exit just because the company does? In firm after firm, their values have risen much more after an IPO – so why not stay in and capture the gains for your LPs years after the company goes public? A longer tenure allows you to do that.

Third, even with all this, look to make the companies grow faster – not by putting unreachable milestones or unnecessary funding in front of them – but by helping them fill out their teams much earlier with good people.

No good CXO tends to join a startup till its third year and second round of funding. So most startups waste a few years dawdling and gather speed only after year 3. So why not get a bunch of these folks working for the fund as a SWAT team of CXOs, and you could deploy them across your startups from day 1? Wouldn’t that give you better-equipped companies at take-off?

I’ve been running funds and investing in India for 15 years now – and think we need to re-invent the way VC funding is done. The current way is broken.

These are three key changes that I can think of. What can you add to this list?

There’s one thing I’m certain about – that this isn’t the era of a few large giant family-owned businesses that have been around for many decades. This is an era when many smaller first-generation mini-giants can be created. Faster than before, yes. But not in 5 or 8 years.

All we need to do though, is not choke the windpipes of startups at year 5 or 6. A longer term can help ride out up and down markets, can make next round funding even more viable – and also gets rid of the “too early to the market” problem. While bringing higher returns that more than make up for the longer term of the investment.

Sure there will still be some startups with problems. Whether it’s teams that can’t get along or over-greedy promoters. And perhaps some of those do need to be put to rest early, before too much money is spent on them.

For all the rest, though, what we need is patient capital, not impatient capital.

[Mahesh Murthy is a venture capitalist and marketer. He tweets @MaheshMurthy. Reproduced from his LinkedIn post].

Also see : Go Die MotherF***** : The changing relationship between investors and entrepreneurs.

How Nasscom Product Conclave Became The Bellandur Lake of Indian Startup Ecosystem

Belandur Lake : Nice And Frothy
Belandur Lake : Nice And Frothy

I remember attending the first Nasscom Product Conclave in 2007.

It was a small intimate affair that brought together folks from product companies who openly shared their learnings and experiences with one another. The organizers themselves were founders of product companies as were all the speakers.

As a founder of a fledgling product company myself, I found the experience akin to taking an invigorating walk on the Bellandur lakeside – a convivial gathering of peers aided by a bracing draft of transparent learnings and fresh insights.

I remember attending the Nasscom Product Conclave in 2012.

It was to put it mildly, a mindless frenzy – a grotesquely over-the-top carnival celebrating every possible excess abounding in the Indian startup ecosystem.

I was struck by how far the event had strayed from its founding ideals – what was once an idyllic lake was now polluted beyond recognition.

As the ninth edition of the Nasscom Product Conclave kicked off in Bangalore, I couldn’t help noticing how its degradation mirrors that of the Bellandur lake. A fomenting miasma that is only 5% water and 95% sewage and pollutants…the toxic foam runoff a silent but eloquent reminder of how far the event has fallen.

A Product Conclave that couldn’t care less about products

As far as I can tell, Nasscom Product Conclave was originally conceived to serve as a platform for showcasing Indian product companies.

In 2012, I was offered an opportunity to launch my product at the event. Despite the rich price tag for entering the event, I decided to take up this opportunity as it seemed like a great platform to announce a product and get some media visibility and nuanced feedback from experts. However the actual experience was a disaster.

Rather than showcasing the product launches in the main hall, I was shepherded into a small dark room in an obscure corner of the hotel where the only other folks in attendance were my fellow founder saps who were launching their own products! There were a couple of other unaffiliated audience members but I suspect there were here primarily to catch up on a few winks away from the hustle and bustle of the main hall.

What was in the main hall?

That was where Mahesh Murthy held court about how one can hack travel and see the world on a shoestring budget.

Which of course, was precisely what one would hope to learn in a conclave about tech products!

This was all the more tragic because Mahesh is an incredible raconteur but more than that, he has a wealth of knowledge on products and management that would have been far more valuable to this audience.

This pandering to frivolous and sexy topics over substantial but unsexy product aspects is a common occurrence across NPC editions.

Sessions that are tailored to sponsors and acolytes rather than a startup audience

This year, the choice of sessions and speakers is even more bizarre.

For instance, there is one from a representative of the Estonian government (unsurprisingly a sponsor).

But the one that takes the cake is one that features the redoubtable Alok Kejriwal and his gang of gurus pontificating about the art of living/winning!

While I would find it mind-boggling, I won’t be surprised if the folks at Nasscom claim that such sessions are an attempt to provide a “syncretic, holistic” perspective towards life in general. In which case, why maintain the pretence that this event is about products at all?

Of circle-jerking and perpetuating the old boys club

The other thing that I notice about NPC is that it has now become the epitome of an old boys clubs, exclusionist and discriminatory. Where participation is determined by not what you know but who you know.

Successive episodes of NPC largely feature the same set of speakers speaking about the same set of things usually about topics that have little to do with products per se.

This sense of circle-jerking permeates through the overall event and with things like invite-only dinners that only the privileged few can attend.

The faint stench of cronyism

While the product startups largely get the short shrift within the event, thankfully there is one part where accomplished startups are called out and recognized.

This is in the form of the “Emerge 10” award that is conferred during the course of the NPC.

This year’s winners are covered here:

hottest-indian-startup

While the entire process of selecting these companies is rather opaque, that is not a major sin in itself and is par for the course as far as startup awards go in India.

What is irksome is that there are some glaring conflicts of interest that carry the faint stench of cronyism.

For instance, two of the ten companies selected this year are the portfolio companies of one of the VCs sponsoring the event.

Even more glaring is that three of these companies are ones in which the chairman of the Nasscom Product Council has a vested interest.

The first is a company which is part of the accelerator this gentleman was previously a part of.

The second is one in which he is an advisor.

And the third is one in which he is an investor! While the press note completely glosses over these affiliations for the first two companies, for the third one, it is mentioned in passing. This particular company is just a year old and one that very few in the ecosystem have heard of and it is moot if this company has done anything that merits a “India’s hottest startup” tag.

The dashing of hopes and the destroyer of dreams

In my opinion, the biggest way in which Nasscom has been remiss with respect to the event is that it has abrogated its responsibility as the flagbearer for the Indian software product community. From being a body that lobbied selflessly for the small but ambitious product fraternity, it has degenerated into a figleaf self-serving entity whose presence is only felt in conferences and junkets that prey on unsuspecting newbie entrepreneurs.

Much like Bellandur Lake, the rot is deep and true.

“Stylistic punctiliousness must not get precedence over what needs to be expressed with unvarnished honesty”

[Guest article by Sumanth Raghavendra. Reproduced from his blogpost. Views expressed are his personal. Image credit]

Go Die MotherF***** : The changing relationship between investors and entrepreneurs.

[Mahesh Murthy brings an interesting perspective on the recent Housing/Sequoia saga]

Some of you may get the allusion in the headline. For others, here’s the story, far as I can piece it together.

Housing Founder, Rahul Yadav Vs. Sequoia
Housing Founder, Rahul Yadav Vs. Sequoia
Sequoia is a well-known venture capital fund, and this happened at one of their Indian offices. (Disclosure, I have no connections with any of the parties in this story – but I’m a venture capitalist too, so my take on this issue could well be prone to bias.)
Among the many companies this VC fund had looked at was a start-up fresh out of IIT Bombay, working on the real estate business, called Housing. A partner at Sequoia India, Shailendra Singh, met the founder, Rahul Yadav, talked about the business, and I’m not sure if promises were made to fund it or not, but eventually, the VC firm declined the opportunity.
Housing then went on to get funded by other VC firms – in fact, it raised about $110 m – that’s almost Rs. 700 crore rupees – quite rich for any start-up out of India, especially one started straight out of college. Over a year since, Housing has hired over a thousand people, and while it doesn’t yet have much revenues to talk of – company filings suggest it made around $300,000 last year and lost $8 m while doing so, it’s still early days. (The Indian equivalents are Rs. 1.9 cr in revenues and Rs. 48 crores in losses, per statutory filings.)
Shift to Sequoia and a year later. The VC fund decides it needs to hire analysts, and interviews about a hundred candidates who are interested. Shailendra, by his own admission, interviews a dozen of them. It so happens that two of the candidates work at Housing. One of them gets a job offer from Sequoia, and accepts.
You’d think this was par for the course, but wait.
Housing’s founder, presumably on finding that he’s lost somebody to the fund that turned his plan down, writes an angry mail to Shailendra Singh, accusing him of “unethical and inhuman” practices, and adds that this is one more in a long line of such deeds allegedly done by Sequoia to other start-ups. Rahul Yadav further threatens “If you don’t stop messing around with me, I’ll vacate the best of your firm”.
You’d think this was just a venting-out mail from a slightly upset founder who is probably half the age of the investor he’s writing to, but it doesn’t stop here. Someone, possibly from Housing, then leaks a copy of this mail on to Quora, the social network where hordes of Indian entrepreneurs hang out. The intention was perhaps to throw dirt on Sequoia in public.
And then hell breaks loose. Cyberspace starts heating up with the story. Sequoia is asked for a reaction. It demurs at first, and then Shailendra posts his response on Quora, explaining what happened, and basically saying, look, such things happen, we’ve all got to grow up and work together to make entrepreneurship big in India, and wish you all the best Housing, and let’s end the story here.
But Rahul doesn’t want it to, he replies back on Quora saying basically that he for one doesn’t wish Sequoia all the best, and in fact he signs off with the words that are the title of this piece.
Sequoia is silent now but the pundits weigh in. I’m on the Board of TiE Mumbai – and discussion in our group is quite animated along the lines: what has entrepreneurship come to, this has gone too far, and such.
One voice adds that perhaps Housing is angry because Sequoia eventually funded a rival of sorts, Grabhouse, and their traffic is now as large as Housing’s.
Yet another view is that when you give Rs. 700 crores to a 22-year old, you’re irresponsibly creating master-of-the-universe type arrogance. Where are the investors in Housing (Sequoia isn’t one) and why aren’t they stepping up to the plate?
A fourth says don’t worry he’s never going to get funded again.
Amidst all this, I see a large, expensive ad campaign from Housing, which I don’t care for very much, around the idea of launching their new symbol – yes, an entire campaign to launch a logo for a start-up – which is basically the “^” sign, along with the phrase “Look up”. (adds NextBigWhat : The Housing logo apparently has been inspired from an app).
I then tweet something to the effect that Housing spent Rs. 50 crores ($8m) telling us ‘^’ meant “looking up”, and now 50 seconds clarifying it actually means “up yours”. I’m referring of course to Sequoia. I’m not taking sides, just curious about the turn of events.
This gets re-tweeted a bit. Then Housing’s funder, Rahul writes to me saying “Awesome tweet”.
Which gets me thinking.
Sure the relationship between investors and investee has come a long way. A decade ago, one wouldn’t have imagined entrepreneurs slagging off investors even in private. And now I see a founder who is not just temporarily upset with someone rejecting him and still hiring away one of his employees – but proceeding to deliberately drag this investor’s name through the mud.
One view in my head says, sure, things were unbalanced ten years ago, but this has swung the pendulum way over to the other side. This was uncalled for.
But the other says, hey, we live in a transparent world. Founders are judged for every peccadillo in public – the same firm Housing has had every sort of question asked about it online, from relationships that founders are in with employees, to why there is no work-life balance at the firm, to what really happened when three of that company died in a car accident a few weeks ago. The same founder has had a ton of crap thrown at him online from other folks.
Why shouldn’t us investors be prepared for the same back at us? After all, if we claim it’s a partnership we’re in with founders, shouldn’t we be ready to face as much flak as they do?
I am roundly castigated online and off for an unpopular stance I have on India’s e-commerce darling, Flipkart. The jury’s out on that, but I continue to hold my view. There’s more unsavoury stuff about me online which is simply untrue. I used to try deal with it, but have just learnt to ignore it and go on with my life. I find that, with time, the truth sticks and the lies tend to go away.
But perhaps I’m the fortunate one. I’m 49, and I use the online medium as much as any twenty-something. But many of my fellow investors don’t. This is a crazy new universe for them, where spinmeisters don’t work any more, and where a “No comment” to a journalist doesn’t make a story go away.
I know that if more investors did come out in the open and had the cojones and ability to talk freely – which I doubt, as many of them are branches of US funds and may need to get clearance from the mothership to say things in public – there would be as much or more dirty linen about founders.
I have had cases where founders stole money, or bribed customers. It was a tough call on what to do in these cases – what’s the balance between governance and disclosure on the one hand, and the person’s privacy on the other? Our response was to let them go quietly, take a write-off on our books, and tell our investors, our Limited Partners.
Sure it hurt our numbers, and I know other investors have continued with entrepreneurs in similar circumstances, placing their investments over ethics – but we sleep better as a result.
Airing this in public wouldn’t have helped much – it would have destroyed the entrepreneurs, perhaps unfairly so. Social media is not the fairest judge, jury and executioner, as both Rahul Yadav and Shailendra Singh are discovering.
The middle path we found was to make no noise in public, but to tell the truth when an interested party called us for a reference check. Maybe that’s one way to keep karmic balance. Maybe there are other ways too.
While I do think the idea of deliberately proceeding to defame an investor isn’t quite right, I’m happy at one outcome from this entire imbroglio. We investors now know that there’s social media to keep us on our toes.
Now I have no idea if Sequoia did whatever is alleged to other start-ups – but I do know that some of our lot have unfairly treated entrepreneurs. Among my brethren are folks who have made firm commitments to founders and then reneged on them, some who have had their firms fund their spouses’ companies, and some who have even asked every question they wanted to during an investment pitch and then used it while they funded a rival.
This should stop, and perhaps more outings on social media will drive us all to behave better.
It’s going to be rough times for a bit, but there’s going to be a new equilibrium.
One where we all behave better – for fear of being outed. One where the collective conscious gets to know more about each party in the ecosystem, and is able to take better decisions as a result.
There may even be a rating service – a la Trip Advisor – that lets investees rate investors and vice versa. (Now don’t steal that idea. Actually, go ahead and steal it.)
There will be the odd four-letter word here or there, but if you listen to hip hop you know they’re now in language more for punctuation than for effect. And maybe it’s a silly and old-fashioned to expect decorum online. So I won’t.
And what of the “Go die” bit? Well, I wouldn’t wish death on any one – but if any of us – investor or entrepreneur plays fast and loose, there’s this new wired society that will kill us professionally just as certainly.
And that’s a good thing.
(Mahesh Murthy is a venture capitalist and marketer. He tweets @MaheshMurthy. Reproduced from his LinkedIn post).

Of Flipkart, Myntra and the ‘Unbearable Lightness of Being’ Mahesh Murthy

[Edit Notes: One of the well argued and well written pieces we came across on the Flipkart- Myntra deal. In this post, Sumanth talks about why investor Mahesh Murthy’s ‘topi investor’ theory is completely off the mark.]

MaheshMurthy
MaheshMurthy

The recent announcement of Flipkart acquiring Myntra was greeted with a range of reactions and emotions within the Indian startup ecosystem – exultation from employees to guarded optimism from competitors to hallelujahs from industry observers.

In the midst of all there was one shrill voice that stood out starkly for its vitriol.  This voice belonged to Mahesh Murthy – part-time marketer, part-time investor and full-time resident gadfly.

Mahesh felt that this deal was much ado about nothing – just a case of “topi investors” (his favorite term of endearment for investors who don’t share his worldview) rearranging the chairs on the deck of the Titanic by merging two doomed entities in a meaningless transaction.

Short of shouting out his view from the rooftop, Mahesh peddled his view on every possible channel. He tweeted about it, posted it on Facebook and also appeared on TV. To top it, he wrote about it at length in Quartz, an online business news publication – qz.com/212775 – where it apparently became the most-read article ever. If all of this wasn’t enough, this was subsequently picked by mainstream publications as well – CNBC,   Business Standard et al.

Predictably no one from Flipkart or Myntra found it worthwhile to dignify this invective with a response. Now, I am in no way connected to Flipkart, short of being an occasional customer on their website. But even to my casual observer eyes, Mahesh’s arguments were  at best, misinformed and at worst,malicious half-truths. I have enumerated his points below with a brief retort – read ahead and judge for yourself if Mahesh has a case.

CLAIM 1:  Flipkart buying Myntra is just another episode of a long-running saga of acquiring other “wobbly” e-com companies that are funded by common investors

Mahesh quotes the instances of Flipkart previously acquiring companies like Chakpak and LetsBuy – struggling e-com companies with common investors – to present a case that the Myntra acquisition follows the same pattern.

Firstly, while it is true that  companies like Chakpak were distressed entities and their acquisitions could possibly have been engineered by common investors, there is hardly anything nefarious in this. The fact of the matter is that closing companies in India is a byzantine and thankless job – it takes years and requires folks to jump through countless procedural hoops to provide a burial for a failed company. One way to short-circuit this process is to merge the distressed entity into another company as a slump sale acquisition for a token consideration thus avoiding the bureaucratic hassles. This is a common practice that is followed by many investors and not restricted to “topi investors”. Don’t believe me? Ask Mahesh himself – in his own portfolio, a failed company, LifeBlob was acquired by Printo, another company backed by Mahesh.

So does the Myntra acquisition fall in the same category of distressed slump sales?

ABSOLUTELY NOT.

Unlike the previously-mentioned startups, Myntra was hardly a failed/failing company and Flipkart buying it was far from being affording it a burial. On the contrary, buying Mytra was an act of “buying strength”.

Here are the facts:

FACT 1 : Flipkart needs Myntra to compete in the fashion/apparel vertical

Hitherto,  none of Flipkart’s acquisitions have been strategic in any sense. However Myntra is different.

How so?

It is a well-known fact that fashion/apparel is the biggest e-com vertical – this is true all over the world and is true of India too where it is estimated to be a Rs. 17,000 crore market. It is also the fastest-growing category growing at over 100% year-on-year. So any company staking a claim to be the leader of e-commerce in India needs to win this category. Now, Flipkart has had a presence in this segment for the last year or so but despite investing a ton of effort and money into this, it is far from being the market leader. As things stand, this is largely a two-horse race between Myntra and Jabong who were hitherto running neck-to-neck with around 30% market share each. However after assimilating Myntra, Flipkart is now the market leader with a long lead – the combined entity now has reportedly 50% of the market to itself.

There is another reason why Myntra can be invaluable to Flipkart – while a lot of people are talking about the economies of scale that the combined entity will have, given the fact that the operations of the two entities are continuing in an independent fashion, these scale economies will be limited in the short term. However the fact that Flipkart caters primarily to the VFM segment while Myntra owns the premium category implies that there will be enormous “economies of scale” that will accrue to them. Between the two brands, the combined entity will cover all segments of the apparel category with each entity playing to its strength and even in the niches where there is an overlap, it affords them a wonderful one-two opportunity to capture a customer.

FACT 2: Myntra is a company with strong fundamentals and far from being a distressed one

Assessing the health of a company like Myntra requires evaluating two parameters – growth and cash.

So was Myntra growing?

Myntra was growing like a weed – ROC filings indicate that Myntra grew over 300% to Rs. 263cr in revenue in 2012-13 and based on the quarterly reports, was scheduled to close 2013-14 at nearly Rs. 900cr repeating the 300% growth.  All other important metrics – number of registered customers, GMV, number of daily shipments, average basket size, number of sellers in marketplace and number of brands – have all shown equally robust growth over the last three years.

Was Myntra in danger of running out of cash?

According to reports, Myntra was already profitable on a transaction basis with positive contribution margins (which accounts not only for the gross margin but also the cost of delivery, returns and other expenses related to order fulfillment). Obviously, it wasn’t profitable overall as it was investing in growth but the fact that its unit-economics are positive gives Myntra enormous strategic leverage.

Also it might be worthwhile to recognize that Myntra has plenty of dry powder in its arsenal as it had raised $50 million in new funding just a few months back.

So if things were so good for Myntra, why did they choose to get acquired by Flipkart at this stage?

There are two reasons that are fairly obvious . Firstly, combining forces puts them in a much stronger position to compete with Jabong, Snapdeal/ebay and Amazon than if they were to attempt it individually. Secondly, as business scales, Myntra can benefit from Flipkart’s legacy investments in technology, processes and infrastructure directly or at a minimum by learning best practices.

Beyond these, I believe that there are two other reasons why a merger made sense for Myntra (NB: I am speculating here).

Firstly, despite its recent fund-raise, there was a good chance that this wouldn’t have been Myntra’s  last round of funding and they would need to raise another round sooner or later to fuel growth and fully capture the growing market. Merging with Flipkart would mean that it frees up the Myntra management from the onerous tasks of setting out to raise yet another round and allow them to focus completely on running the business.  It was reported that Myntra took six months to close their latest round of financing which implies that getting funding wasn’t a shoo-in and required considerable time and effort. But now post the acquisition, the onus for further fund-raising for the combined entity would probably fall on the Flipkart founders, who all said and done, are past masters in raising funds – a oft-overlooked trait that top-quality CEOs possess. Flipkart has already announced that they will invest $100 million to grow Myntra – a figure that should take them to $1 billion GMV.

Secondly, now that Myntra is part of Flipkart, they get the undivided attention of their common investors like Tiger Global. Tiger Global is the leading e-commerce investor globally and has a finger in pretty much every major international e-commerce company – from JD.com in China to market leaders in Argentina, Africa, Brazil and Russia. They also back the hottest apparel e-commerce companies world-wide – from Vancl in China to NetShoes in Brazil. Given the relative positions of Flipkart and Myntra in Tiger’s portfolio, arguably Flipkart would have received preferential treatment in terms of access to these global leaders but now Myntra has the privilege of being on top of the totem.

Speaking of common investors, let’s move on to Mahesh’s second claim:

CLAIM 2: Common investors who own the bulk of the company were the ones who engineered this deal

Mahesh’s claim is that “investors owned more than 80% of each firm” and the merger was essentially a “Great Indian Roll-up” made by the investors to protect their narrow self-interest.

Now, there is a neat bit of sophistry at play here where Mahesh outlines this argument.

He starts off by talking about common investors and segues into making a point about investors owning the bulk of the company. The catch is this – while the investors in total might indeed own the majority of the company, not all the investors are common which means that the common investors are far from owning 80% of each company and there are several major investors who are not common and hold significant stakes. The non-common investors include names like IDG, Kalaari Capital, Azim Premji Investments, Dragoneer, Morgan Stanley and Naspers. These are reputed, high-quality investors who by no stretch of imagination fall under the “topi investor” category that Mahesh is so fond of bandying about.

So, while there might have been some common investors who might have encouraged the deal, it would nevertheless require the approval of the non-common investors and perforce would have gone through the mandatory due-diligence process to establish that all aspects of the deal were equitable. Also, it is worth keeping in mind that each and every one of the institutional investors would have a right to block the sale as part of their initial investment terms, both jointly as well as individually, so it is highly unlikely that this was a clandestine roll-up exercise cooked up by the common investors.

CLAIM 3:  The founders’  holding was “down to low single-digit shareholdings” which implies that they had no “entrepreneurial passion to hack it “ and had little say in the merger

I wonder if Mahesh Murthy knows how much stake Jack Ma owns in Alibaba?

Answer: 8.9%

How much does Aaron Levie own in Box?

Answer: 4.1%

Single-digit holdings…yet, these are some of the passionate founders that you will find on the planet.

The point is that if Mahesh believes that the passion that a founder has for his startup is directly proportional to his percentage holding in the company, then it makes for a sad commentary on Mahesh’s own worldview on founders and investments. If anything, Mahesh should know better as in his own portfolio company, Redbus, the founders each had single-digit holdings themselves but were yet lauded for their perseverance and tenacity in nurturing their startup from incubation to exit.

Also, Mahesh ought to have known better than talk about holdings in percentage rather than absolute terms. Given the size of Flipkart, even a 10% holding would translate in several hundreds of millions of dollars.

Beyond this, the Flipkart and Myntra investors have a reputation for being entrepreneur-friendly and not forcing their point of view on the founders that they back. Both Sachin Bansal and Mukesh Bansal have gone on record to state that the managements of the two companies were the ones who actively initiated the dialogue and took it to closure and that the common investors actually recused themselves from the negotiations to avoid conflicts-of-interest.

CLAIM 4: “Flipkart is on a timeline – it will likely run out of cash in a couple of years”

So, let’s examine Mahesh’s past statements on Flipkart:

2011: “This is just a bubble and that isn’t going to last much longer. My guess? Another six to 12 months” http://archive.tehelka.com/story_main50.asp?filename=Ws020811OPINION.asp

2012: Flipkart’s best option is to have a quick overseas IPO, cash out the investors, and then prepare for a long hard grind fighting Amazon and others on the ground.The longer it doesn’t do so, the riskier it gets for Flipkart.http://www.quora.com/Amazon/How-do-you-expect-Flipkart-to-fare-against-Amazon-in-India

2013: “Flipkart comes a little more from the iBanker/ topi school of “let’s do spreadsheets on India vs China vs US, continue to lose money forever, and hope like hell someone buys it some day, because it may never actually be a real business “ link/

So we can say at least one thing for sure about Mahesh Murthy – he has been extremely consistent with his views on Flipkart in the last few years – predicting that the company will run out of cash in a year or two each and every year! Of course the fact that he has been making the same prediction every year and in the same period, far from closing down, Flipkart has been going from strength to strength and the goalposts are ever-changing implies that Mahesh’s skepticism is unfounded.

And just to reinforce this point – in addition to the $340 million that they raised last year, Flipkart just announced another fund-raise this week for a further $200+ million (a round that could go up all the way to $500 million reportedly), so they have a deep warchest that will keep them in the game for much much longer than “a couple of years”. Also, it might be relevant to point out that the latest investor is DST Capital lead by the formidable Yuri Milner, one of the most reputed VCs in the world and hardly someone that Mahesh Murthy can classify as a “topi investor”!

CLAIM 5: “After raising almost $600 million, it’s still losing cash”

This is an oft-repeated argument of Mahesh’s – Flipkart is a bad way to build a business and proof of this is the fact that it is not profitable.

The frightening aspect of this line of reasoning is that it is purportedly from one of India’s finest investors who ought to have known better.

If your market is large and growing, profitability is not the holy grail it is made out to be!

Why? Because it means that you are optimizing on the wrong business metric. When there is as much head-room as this, you ought to focus on growth rather than on profitability. Of course, this is something that has been well documented around discussions pertaining to Amazon and other global e-commerce companies.

Also, keep in mind that India’s largest brick and mortart retail chain, Reliance Retail, a progeny of “the patron saint of profitability” has seen seven continuous years of losses before it turned a marginal profit last year.

Mahesh should also remember that even Redbus was a loss-making company almost throughout its entire life as a company and could only return a meaningful profit in the last year of its independent existence – it was not entirely a coincidence that the company was sold off almost immediately implying that the headroom for growth was fast-shrinking.

So this blind devotion to profitability is quite misplaced.

Let’s examine the other point that Mahesh loves making – that Flipkart is not a real business as it is built on a deep-discounting model funded by VC money that is doomed to failure.

There are three ways to parse this:

Firstly, let’s assume that Mahesh is right and that Flipkart is selling products below its cost price subsidizing the difference with VC funding. Now as long as the gross margins are positive, Flipkart will be fine even if the contribution margins are negative. The latter will be amortized away over time and scale as processes become more efficient and order sizes increase. Is this the case with Flipkart? That certainly seems to be the case.

Secondly, deep discounting is a bigger issue in an inventory-lead model rather than in a marketplace model where Flipkart is serving as a platform that charges the merchants a fixed or percentage fee for selling their goods. On top of this, the merchants also are customers of Flipkart for services such as the payment gateway and delivery which are professional services for Flipkart and are bound to have positive margins.

Finally, margins are highest in the apparels sector which as previously stated is the most important category for Flipkart and the imperative for the Myntra acquisition. Unlike books or electronics that afford 2 to 10% margins, apparel offers 15 to 50% margins. With the acquisition of Myntra and by virtue of being the company best positioned to capture the apparels market, the bottomline is therefore going to be automatically boosted.

CLAIM 6: “The Amazon of India is not Flipkart—it’s Amazon”

Mahesh points to the dominant positions of Google, Facebook and Twitter in India to extrapolate that Flipkart will lose to Amazon.

There are two problems with this theory.

Firstly, given the Indian government’s position of disallowing FDI in multi-brand retail, a position reiterated by the recently-elected central government, Amazon’s strategic options are perforce limited.

Secondly, e-commerce is not a winner-takes-all market. Unlike pure-play internet services and apps, there are hardly any network effects at play and there is no way that Amazon can “kill Flipkart”.

Is it conceivable that Amazon will one day go on to become the market leader in India by displacing Flipkart? Sure, that is definitely a possibility but that hardly means that Flipkart cannot become a behemoth that will have a meaningful position in the Indian ecommerce space. So, it doesn’t really matter if Flipkart is not the Amazon of India. Being the Flipkart of India is a pretty good darn place to be in and as a home-grown company stewarded by young, enterprising Indians, it deserves our full support  and backing!

As far as Mahesh Murthy goes, many people wonder why Mahesh has so much animosity towards Flipkart. There is a well-traveled story that Mahesh wanted to invest in Flipkart many years ago but was turned down by the founders because of the low-ball valuation and onerous terms offered.

While this story might well be apocryphal, there is no doubt that Mahesh feels strongly against Flipkart and feels that this is not the “right way to build a business”. In which case, I would humbly suggest that the best way for Mahesh to make his point is not through spewing venom on Flipkart and its investors but rather by beating Flipkart in the market.

After all, Mahesh is not some casual observer – he is an investor with multiple e-commerce investments and the best way for Mahesh to prove his point that there is a better way to build an e-commerce companies is by stewarding Fetise, Donebynone or one of his other e-commerce portfolio companies to a position of market leadership by competing against and defeating Flipkart.

Until then, I am afraid his missives come across as spiteful barbs from a spurned lover!

DISCLAIMERS: 

I have met Mahesh a couple of times many years back and had pitched my previous startup to him. Mahesh wasn’t too keen on investing but then given the $1 million post-money valuation and terms such as 2X liquidation preference, I probably wouldn’t have taken an investment from him in any case. I must confess that I found Mahesh to be a humble, diligent and approachable investor unlike several others of his ilk.

I don’t know the founders of Flipkart or Myntra – I have seen Sachin Bansal talk at events and feel that whether Flipkart becomes the Amazon of India or not, there is a good chance that Sachin will become the Jeff Bezos of India! He seemed to have the same drive and sense of destiny. I only hope that his acquisition of Myntra will improve his sartorial sense – the Flipkart-branded felt jacket does not have quite the same impact as a black turtleneck and jeans!

[About the Author: Sumanth is the founder & CEO of Deck. This post was reproduced from Sumanth’s blog. Image credit:PlashLabs]