With culture at stake in unicorn land, spotlight on founder-VC equation

The BharatPe saga raises questions about the impact of outsized investor shareholding in young enterprises

The going is never meant to be easy in a startup.

Incumbents create roadblocks, regulators dilly dally on sorting out the rulebook and employees leave at the drop of a hat for fatter paychecks. Creditors don’t touch them with a bargepole and suppliers are suspicious of a sudden drop or spike in orders.

Amid all this, it’s the venture capital (VC) investors who repose faith in the ability of startups to make it big.

But BharatPe founder Ashneer Gro­ver’s resignation, last week, struck at the heart of this relationship. The letter of resignation had a set of damning allegations: That investor-founder relationship had become one of master-slave in India and that VCs are far removed from the blood and sweat of building a business.

Grover later said in media interviews that his mistake was to dilute too much shareholding in the company, which allowed the VCs to steal control.

The episode has reignited the debate about the outsized role of VC investors in startups. An analysis of data on shareholding in India’s top 20 most valued unicorns shows that the average founders’ stake is 17.06 per cent and the median is 12.55 per cent. And, founders in several unicorn startups such as Swiggy, Delhivery, Oyo, Digit and Unacademy have single digit shareholding in the companies.

“At the end of the day, it is all about money. Of course, founders and VCs have disagreements and they sort things out most of the time like good business partners, but when push comes to shove, it is the party with the most votes on the board that comes out winning,” says a founder of a SaaS (software as a service) startup with around $50 million in funding who earlier worked for a SaaS unicorn now valued at several billion dollars.

“For this reason, many startups in the US have started employing a dual class structure of shareholding so that founders have more say (voting rights) even if their stakes are diluted,” he adds.

However, not all founders are sold on this method of retaining control.

Marriage and nepotism

Take Asish Mohapatra, co-founder and CEO of B2B e-commerce start-up OfBusiness, which is valued upwards of $5 billion and has raised around $1 billion in funding in the last one year.

He says, “I have never thought of stake dilution from the perspective of control – although the founders and promoters jointly own around 32 per cent of the company at present.” He equates the founder-investor relationship like the one between a married couple: “It is healthy only if both are equal partners.”

The issue is not just about who gets to one-up the other on the board.

A former top executive of a unicorn in the hospitality tech sector says, “If the founder’s stake is very low, he just beco­mes a glorified emp­loyee. The biggest in­vestor can suddenly come and change the entire roadmap of a product. Over­night, employees would get fired and top executives moved to a different segment.” He says he could not bear the “mayhem” in the company beyond a year. “It was becoming unsustainable. Although the business was expanding fast in terms of geographies and verticals, the fundamentals were wrecked. And it all percolated down to us: if you did not reply to a WhatsApp message promptly late at night or even on a holiday, you would be taken to task.”

Industry insiders say while many fou­n­ders perish in such a culture of chaos, the ones that survive develop their own idiosyncratic mechanisms of coping. For instance, an executive at a fintech unicorn points to the phenomenon of hiring candidates who are close to the founders and their lackeys in the top brass.

Then why stay?

If it is such a difficult place to work, why is the IIT-IIM-educated executive still there?

“I came here for fast growth. The package is way better as compared to my previous job in a management consulting firm and there are higher appraisals,” says the fintech executive. “And if one gets lucky, there is a handsome amount of money to be made from employee stock options when there’s a secondary share sale or an IPO.”

Is such a company culture where top executives are not in the game for the long term sustainable? Most founders, VCs and executives say this is the way of the startup world — like it or not.

But there are outliers, too.

Nithin Kamath, founder and CEO of online stockbroking platform Zerodha, says: “We do not participate in the excesses of the market. Take our engineering team for an example — there has been zero attrition over the past two or three years despite high salaries being thrown around. The same 35-odd people have stuck with us.”

Zerodha is also an outlier in the sense that it is a unicorn that is not backed by VC funding. “The presence of external investors means that they expect an exit at a high multiple of valuation at some point,” he says. Interestingly, Zerodha does not set any business targets such as revenues and customer additions for its employees. Last year, it also devised a policy so that employees do not talk shop after office hours and on holidays.

Of course, something like this is not feasible in the vast majority of young startups battling for life and unicorns that are in a desperate search of growth.

But Mohapatra of OfBusiness says that most cultural issues can be mitigated in the early days if good processes are put in place. Industry participants believe that the volume and speed of funding in the last year-and-a-half have created some of these problems.

“The startup ecosystem has to realise that money is an enabler for building a good business — but capital alone has never solved anyone’s problems,” says Siddarth Pai, managing partner of VC firm 3one4 Capital. “Over capitalisation has its own set of issues. Institutional investors do not seek to run the business they fund; they seek to maintain oversight of their investment and add value where possible.” Pai is of the view that the consequ­e­n­ces of failure differ bet­ween a founder and VC. “A founder whose startup fails may get a second chance, but a VC with a blown-out fund won’t be able to raise capital again.”