Mar 14, 2015

The changing relationship between investors and entrepreneurs


The changing relationship between investors and entrepreneurs


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

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”.

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.



Repost of Authors Post
Author- Mahesh Murthy is a venture capitalist and marketer. He tweets @MaheshMurthy

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