cover story | WHAT’S WRONG! cover story | WHAT’S WRONG!

Zomato showed $250 million in start-up.

revenues and enormous losses for a $12 VCs typically buy out angels
billion market cap—a 50X multiple on and give them 5X to 10X exits.

VULTURE CAPITAL
sales and an infinite multiple on profits— But not every investee can be sold

FROM
while Nykaa showed $20 million in profit to a VC, so angels may make this
on $300 million in revenues for a $13 big profit in two out of 10 investees,

TOVICTIM CAPITAL
billion market cap, a sky-high multiple of
40X on revenues and 650X on profits.
All of this while the Indian market
typically supports a multiple of sales
of between 1X and 5X and a multiple of
profits between 10X and 25X.
which gets them overall, perhaps, 10%
to 20% annualised returns in the
long term. This ratio and return
is common all the way up the
investing pyramid.
VCs also have the same

How Indian start-up founders On a sobering note, post the crash, these
multiples have come down to aggressive,
mismatch with the start-
ups’ time horizon. They need to

turned the tables on shrewd

but not insane, levels of 5X, 7X and 9X. return money to their investors—the
This is more affordable, one would think. limited partners—in eight years. They

Indian venture capitalists

But investors who lost their shirts on these
stocks earlier do not trust them now and
are not ready to come back into them.
>>Mahesh Murthy But it is not just the ego of the founders
that led to this situation. It was also the
high prices they forced all investors to
too cannot wait till the end and look to
put the dunce cap on late-stage VCs,
who typically manage $400 million to $1
billion or more.
This topi happens at valuations of $100
million to $1 billion, the latter magical

D
o this.
First, make a list of
I n d i a’s b e s t - k n o w n
start-up names: from
Zilingo, BharatPe and
GoMechanic to Trell,
ShareChat, CRED and even Zomato, Nykaa
and Paytm.
Then, go talk to investors and make
This is not from a shortage of money.
There is some $10 billion or more of dry
powder available, but VCs are not signing
cheques in a hurry.
This is a warning sign that the India
story is being re-examined. While the
story itself is almost too big to fail, this
recent trend is something that is sure to
hold things back for a few years. In the
pay who had come in the layers of the
pyramid before.
The Pyramid Scheme
What you see is the dunce cap—or topi—
practice in the start-up business. Here is
how it works.
At the bottom of the investing pyramid
are the minnow angel investors who might
put in anything from $15,000 to $150,000
to get into a start-up. They might invest
number being the “unicorn status” all
founders, business papers and, now,
politicians like to crow about.
But remember, the unicorn or soonicorn
is still likely losing money at this stage.
Its valuation is not justified at any
fundamental level.
It is all minnows selling to salmon, and
salmon selling to sharks—pardon the new
metaphor—because each needs to show Rs 1,782.60
an up-round. Nov. 23, 2021

a separate list of India’s start-ups that
somehow screwed them over.
Both lists will have many of the same
names. Here is the untold story why.
I have been a venture capitalist
investing in Ind ia
since 1999. I
have seen our
long run, it might make things better for
all of us.
From Pop to Fizzle
What do the charts on the right have in
common?
They all show terrible performance in
the market. These stocks are down 50%
to 80% from their recent highs. The
via syndicates like the Mumbai Angels or
the Indian Angel Network, which collate
money and put in the first $1 million or
so at a valuation of around $5 million to
$10 million. This 10% to 25% dilution is
typical at every round.
Not many realise that a company
typically takes 20 years to hit an exit-able
size. Angels and others cannot wait for 20
A Whale of a Problem
The sharks have to sell to whales for Rs 623.50
Feb. 20, 2023
similar reasons. They do not have the
patience to wait till the IPO either.
There have mostly been two whales in
India: the baby whale Sequoia and the
blue whale Softbank. These folks have Rs 137.35
been writing cheques of $200 million and Aug. 9, 2021

industry go from
being welcomed
to being reviled as
vulture capitalists.
But founders have figured
out that they now hold the
cards. They have been giving VCs
terrible returns and now, for a first,
the VCs are slowly backing off.
You may have read that the capital
invested in India is down 40% this year
from $40 billion to around $25 billion.
eagle-eyed may have discerned that these
are some of India’s most feted start-ups to
go public: Paytm, Zomato and Nykaa in
that order.
One common reason blamed is the ego
of the founders to take their companies
public at unjustifiable valuations. Paytm
had some $120 million in revenues and
losses when it went public at a market
cap of almost $20 billion: a multiple of
over 150X of revenues and infinite times
of profits.
years to get their money back. So, they
try to sell their stake to someone else as
soon as they can. As a result, valuations
for essentially loss-making companies
start ballooning.
Up the slopes of the pyramid from
angels are early-stage VC funds which
have $50 million to $350 million under
management. (Disclosure: I have run
a couple of such funds.) They put in $5
million to $20 million at a valuation
of $20 million to $100 million in each
upwards for valuations in the multiple
billions of dollars. Most unicorns have Rs 54.40
come from their stables. Feb. 20. 2023
But whales need a topi victim too. Once
whales come in at these stratospheric
prices, the next topi is on you, the retail
investor, in an IPO. Which is why these Rs 393.05
Nov. 10, 2021
unprofitable companies we talked about
come at insane IPO valuations.
These IPOs crash and burn, quite Rs 142.45
Feb. 20, 2023
rightfully so. They will take many
years, if ever, to come back to even their

40 March 2023 / / March 2023 41

 cover story | WHAT’S WRONG!
listing valuations. Let alone grow from
there. This is bad news not just for retail
investors but also for the whales. Many
of them are locked in and cannot sell
their stake for at least a year, while the
companies continue to show huge losses.
Softbank and Sequioa have recently
taken massive write-downs from their
work in India. Softbank declared a $27
billion loss on its first $100 billon fund.
This. Really. Hurts.
While whales are hurting, they stop
picking up deals from the sharks. The
sharks, once happy to keep feeding
upwards, are now in a fix.
Now because sharks cannot give topi to
someone above them, they stop getting
topi-ed by someone below them. The
salmon are in a fix. Eventually minnows
are, as well.
Suddenly founders are being asked
uncomfortable questions. Now they are
expected to make revenues, and, in some
cases, even real profits. This is not what
they are used to do at all.
And the pyramid begins to crumble.
The Founders’ Flounders
The founders are not innocent bystanders.
In the spirit of behti Ganga mein haath dho
lete hain, they also partake in the journey.
They figure that they will not lose out
when everyone is reeling it in.
The sharks have Founders take money out. Some do it
to sell to whales ... legally, and some not so illegally. In my
opinion, in either case, taking oodles of
They do not have money out from your company while it
the patience to wait is unprofitable is deeply unethical to the
till the IPO ... But investors who funded you.
whales need a topi Some who did it illegally are well-
known: one lady ran a popular fashion
victim too. Once portal and took Sequoia’s money. She got
whales come in at her firm to pay her lawyer some Rs 70
these stratospheric crore as fees and—it is rumoured—got a
prices, the next topi lot of that amount directly back to herself
as her cut. She also got her firm to pay
is on you, the retail Rs 10 crore a year to a public relations
investor, in an IPO. agency to have her profile appear as a
Which is why the glamorous CEO type, jetting in business
unprofitable class from one fashion show to another.
All this happened while her start-up
start-ups come failed to earn even Rs 10 crore of gross
at insane IPO income on farcically inflated revenues of
valuations Rs 300 crore while it was valued at over
42 March 2023 /
Rs 8,000 crore.
Men are not far behind either. There is
the gent who got thrown out of BharatPe
and wrote a book saying that the world
is double-faced. His reasoning? Sure,
he defrauded the company by having
his wife’s human resource firm collect
three months’ salary as fee for every
single employee the firm hired, even
though none were hired through her
firm—all this while the company racked
up Rs 6,000 crore a year in losses. His
complaint is that it is hypocritical to
call only him a thief when others in the
ecosystem are small-time thieves as well.
This is doglapan, we are told.
There are more examples. Trell is one.
GoMechanic is another: its founders
apparently “forgot” that they were
actually making just a small fraction of
the revenues they claimed and apologised
for the tiny mistake in a LinkedIn post,
while firing 70% of their employees and
retaining themeselves at full salaries.
Another golden boy, ShareChat has
taken Rs 14,000 crore from Google and
other investors and currently earns Rs 29
crore a month while losing Rs 250 crore a
month. This is slightly tragic for an eight-
year-old company.
The founders of these firms probably
know where they are qualified to go next.
To be judges of start-ups on Shark Tank’s
next edition, one supposes.
Those Who Can’t Do It Become
Angels
It is unusual that we celebrate such
founders. TV show Shark Tank features
as judges mostly folks who have never
managed to turn a profit in their
companies and are living off investors
or daddy’s money. Shaadi.com, Mauj,
Lenskart, Sugar Cosmetics, CarDekho
and Mamaearth are loss-making
companies. Their founders—who are
start-up judges—are apparently the
heroes our entrepreneurs should emulate.
But Shark Tank is not the only place
where our loss-making, but rich, founders
go. They also take their investors’ money
and put it in other companies, not in the
investors’ names, but as their own.
Among India’s top angels are Kunal
cover story | WHAT’S WRONG!
Bahl and Rohit Bansal of Snapdeal, who
burnt through $1.8 billion of VC money
to show nothing for it. But somehow, they
have loads of money to put in start-ups
under their own names. There is also
Ramakant Sharma from Livspace, who
burnt through $400 million with—you
guessed it—nothing in the way of profits.
There is Kunal Shah from CRED, which
raised $800 million from investors to
produce funny ads and lose $150 million
of it last year. Anupam Mittal is from loss-
making Shaadi.com and Mauj. Peyush
Bansal is from Lenskart, which raised $1
billion to also make celebrity-laden ads
while losing money.
Another prominent angel, Hemant
Gupta, took Rs 900 crore in Yulu to make
revenues of Rs 3 crore a month but has
taken money out to put in other start-ups.
Not to be left behind, Varun and Ghazal
Alagh from Mamaearth are doing the
same and rising up the tables of angel
investors who, as entrepreneurs, cannot
make money in their own companies but
can take money out and squirrel it away
elsewhere.
If business is defined as making a profit
from a commercial enterprise, none of
these judges of business is perhaps really
doing business. If some of the participants
on Shark Tank seem like flaky scammers,
do not blame them. See their inspiration.
Who Loses? VCs Do. Founders
Do as Well
The world has smelt a fish. The
Hindenburg disclosures on Adani opened
eyes of Western investors to what any
good Indian chartered accountant and
businessman knows: how to cook the
books, fake the revenues and bump up
the market cap while taking money out
sideways.
Every tactic the American short-
seller talked about is well-known to our
businessmen, whether it is over-invoicing
to sell goods from one’s private company
to one’s public company and pocketing
the difference; hiding losses off the books
in companies owned by one’s friends; or,
even having benami companies owned
by oneself come in to pump up the stock
price and then using the inflated stock
price to raise loans from banks to pay for Founders take
the over-invoiced goods. money out. Some
There are few large companies in India
which have not used at least one or more
do it legally, and
of these schemes. This is the art of doing some not so
business in India that you will not learn illegally. In my
inside IIM, Ahmedabad, but can pick up opinion, in either
outside the campus.
Sadly, all this has now become widely
case, taking
known globally. “Governance issue” is oodles of money
just another way of saying “shameless out from your
theft”. First the world saw governance company while it
issues in China and moved to India.
Now, it is seeing the same in India. It is
is unprofitable is
wondering where to move to next. deeply unethical to
The whales in the investing world are the investors who
also learning this about Indian founders. funded you
A few whales have moved out of India
and are redirecting their stash to other
countries where they believe the laws and
governance are
sounder.
When the Food
Chain Broke
When things crashed, the
biggest funds slowed down
their investing. Tiger Global
left India. Softbank washed
its hands after wringing them.
Sequoia moved its head office out.
More of these funds also brought
in investigative firms like Kroll
to find the “governance issues/
theft” in firms before they put
any money in.
One point of view is that this
is terrible for the ecosystem.
Money is not flowing any more.
A founder I met a few days ago
was desperately looking for
cash flow for operations as
his signed-and-sealed VC
funding had vanished
into thin air. Byju’s is
facing similar issues
at a larger scale. If
there is no topi buyer
at the top, every level
below slows the flow of
deals.
My view is that it might
be a good thing. Financial
detectives like Kroll are
/ March 2023 43
 cover story | WHAT’S WRONG!
auditing more deals. Consulting
companies—once paid for selling start-
ups to VCs—now believe that they can
earn fees for un-selling start-ups to VCs
as well. At the top end, the Securities
and Exchange Board of India is
waking up to take recognition of
shady practices that are well known
but only now brought to light.
I have run a couple of early-stage
VC funds. We were small and low on
the totem pole. We personally got into
operations of our investees to see if we
could help them. Often, we found things
we did not like.
One founder insisted on leasing
computers, instead of buying them, and
One lady ran a renting more office space than needed. He
said that it was for “business flexibility”.
popular fashion Till we discovered the computers and
portal and took office were being leased from his wife,
Sequoia’s money. and they were bleeding the company and
She got her firm our money dry. We sacked him the same
day. It meant that we had to take over
to pay her lawyer the firm ourselves and work really hard
some Rs 70 crore to manage it till we could find a buyer—
as fees and—it is and we still booked a 75% loss on it.
rumoured—got a Another investee had expensive people
on its payroll. We went to its offices and
lot of that amount asked to meet these CXOs. It turned out
directly back to that they were the founder’s mother and
herself as her wife and had never ever turned up at
cut. She also got work. We shut it at a 100% loss.
A third was bribing senior people
her firm to pay at its distributor to grow revenues by
Rs 10 crore a year fraudulently billing poor people. We got
to a public relations out of that right way, amazingly, at a
agency to have her profit actually.
We called our limited partners in each
profile appear as case and told them that we screwed
a glamorous CEO up and these investees were “non-
type compliant”. The
44 March 2023 /
limited partners backed us each time.
We have heard of extraordinary
malfeasance at other funded firms and
wondered if we were hopelessly obsolete
in our beliefs and if it would have been
better to keep quiet and just sell those
firms to someone up the line.
We eventually settled on the point that
our beliefs would lead us to make less
money than other stars in the ecosystem—
but that was okay.
It’s not all Bad
In all fairness, though, there still are
honest founders out there. When I talk
to them, they wonder what the new boys
have done right to get unicorn status
while they are still at cockroach status.
All I can says is “soldier on”. Some leave
the country to find a better ecosystem
elsewhere. And some do, too. This is a loss
for India, for sure. Some stay on and hope
for change.
Overall, this crash-and-burn-and-
rebuild-better is a necessity for us.
Too much money has come to us too
easily. Too much “misgovernance” has
happened. This hurt is necessary. This
pain is healthy.
It may encourage better behaviour from
all parties—from founders, investors,
investment bankers to consultancies or
even the retail investing public—over
time.
There are many victims now. But
hopefully, there will be fewer in the
future.
The author is a marketer, entrepreneur
and investor who has managed
Seedfund 1 and Seedfund 2.
The views are personal