Byju's ED Raid, Ola Electric's Charger Fiasco & Swiggy Handpicked Closure: Here Is The One Thing That Could Have Led To All This It's not the first time that late-stage startups that pioneered a startup revolution-of-sorts in the country have been marred by an array of controversies and regulatory and financial troubles
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Edtech unicorn Byju's has been engulfed with one problem after another, the latest being the search and seizure operations conducted at three premises in Bengaluru by the Enforcement Directorate under Foreign Exchange Management Act (FEMA) with regards to money laundering. The searches reportedly revealed that the edtech startup had received foreign direct investment of around INR 28,000 Cr between 2011 to 2023 and remitted INR 9,754 Cr to various foreign jurisdictions during the same period.
Ola Electric too has come under the scanner of the ministry of heavy industries for overpricing and the firm will reportedly reimburse INR 130 crore to customers, who bought EV chargers. In the past too, the firm has been in the middle of some allegations, fire accidents being one.
In another latest news, foodtech giant Swiggy has closed down Handpicked, its premium grocery delivery service, just six months after rolling out a pilot for users in Bengaluru. The startup also shut down its meat marketplace vertical in January and asked 380 employees to leave as part of a company-wide restructuring activity. Not only Swiggy, but many late-stage startups have also been cutting costs and shutting down non-viable verticals.
What's causing these troubles
One common factor or cause that binds these three incidents – Byju's, Ola Electric, and Swiggy – could be the urge to grow big and fast, say experts. Often, in their endeavors to do so, many startups fall into the trap of controversies, regulatory non-compliance, financial losses and other troubles.
While many early and growth companies, as a result of funding winter and overall ups and downs of the last three years, have started focusing on unit economics and cash break-even for longer sustainability, late-stage companies still seem to be chasing growth-at-all-costs and paying the price later.
They especially seek to capitalize on every opportunity due to market changes without due analysis and fall flat when things go back to normal. For instance, the pandemic led to a sudden growth spurt for Byju's. But post the pandemic, the company has found itself in the middle of one problem or controversy after another. In fact, between September 2020 to June 2022, India's edtech sector produced six unicorns, including Unacademy, UpGrad, Eruditus, Vedantu, Lead School, and PhysicsWallah and most of them have been resorting to layoffs to tackle the post-pandemic setback.
Another classic example of rushing in, to cash in on an opportunity, is the November 2016 demonetization. The announcement and changes thereafter triggered exponential growth in Paytm's business. However, a few years later the fintech giant saw itself in the midst of financial losses, RBI audits, IPO debacle and more.
Why slow and steady wins the race
Sridhar Vembu, co-founder and CEO of Zoho Corporation has often spoken about how building a company is a 25-to-30-year project and that companies like Honda, Sony, Canon, and Toyota didn't overnight become multinationals.
The era of startups spurred by hundreds of millions of cheap dollars from VCs has culturally destroyed nascent ventures by driving them to hire too many people at once and overgrow. There's only a certain rate at which you can grow," said Sridhar Vembu, in an earlier interview.
"Raising money is not the issue. It's inflated valuations and raising much more than you can handle. If somebody gives a company $100 million for a 10% stake, it's not easy to spend that money wisely. You end up spending it wastefully, and those habits get ingrained in the culture. So, when money becomes tougher -and eventually it does- you don't have the cultural habits of how to be frugal," he told us.
Success is what every business is aiming for. However, startups should chase it slowly and through ethical means, say startup experts. Explaining why companies should prioritize compliance and transparency in all aspects of their business to minimize potential losses or regulatory issues when launching new initiatives or expanding operations, Aditya Arora, CEO, FAAD Network said, "Compliance and transparency are critical components of a successful business. The recent investigation by ED serves as a reminder to unicorn startups and established companies alike that they must adhere to regulations and be open about their backend operations. While creating wealth is an important goal, it must be achieved through clear and ethical means."
What investors feel
Frauds at GoMechanic, BharatPe and Zilingo particularly shook up the startup industry and investors feel that they have also paid the price of growth-at-all-costs of portfolio companies. In fact, Sequoia Capital which has backed all these startups has called them willful frauds.
What we are seeing in India in the last 12-15 months are a few situations of willful frauds. When you see willful fraud you have to take action to investigate it. Companies that are in the fraud bucket will find it very difficult to raise money from institutional investors," said Rajan Anandan, managing director, Sequoia Capital at IVCA Conclave 2023.
Startup success has become a game of chasing investors' attention, even if that sometimes means an exaggerated projection of numbers. While early-stage startups have to convince the investors about their business model by demonstrating certain traction, late-stage companies have to showcase solid revenue growth and profitability in terms of numbers.
"Some entrepreneurs may misrepresent these numbers to show their companies in the best possible light operationally and financially. A typical example of this is consumer startups showcasing their Gross Merchandise Value (GMV), which is, in fact, the value of goods transacting on the marketplace, as their earned revenues," said Aparna Pittie, Principal, Artha Venture Fund, in an earlier interview.
Investors today feel that companies that prioritize ethics, demonstrate a commitment to responsible business practices and may be better positioned for long-term success. They are wary of founders who fake numbers for fundraising. "Founders shall avoid manipulating data just for raising funds which is now becoming a big red flag in the VC space. A corporate governance framework helps keep transparency and ensure that decisions are taken in the interest of stakeholders, customers and the organization as a whole. Founders shall on a quarterly basis have update calls with investors and take feedback from strategic investors in the startup to validate if things are going in the right direction," said Pranay Mathur, Partner and CEO, Real Time Angel Fund.
As mentioned above, if there is one common factor that has led to most controversies, layoffs, regulatory non-compliance issues and financial losses in the startup world so far, it would be 'chasing success too soon leaving ethics behind'. As they say, entrepreneurship is a marathon and not a sprint.