“In times of crisis and dilemma, mentors can be great teachers for founders, but no one can claim to be a great mentor. It’s a relationship you need to build over time,” – Mohandas Pai, cofounder and chairman, Aarin Capital

The former Infosys CFO has a unique point of view when it comes to Indian entrepreneurs and founders, as someone who has seen the startup ecosystem grow and flourish from the very early days.

About mentorship, Pai believes it’s a core responsibility of those who have seen the ecosystem come up from scratch. “We are seeing so many first-time founders and they often think being a founder is about being a cowboy. But that style doesn’t work and that’s when they feel the need for a mentor,” Pai said ahead of India’s national Teachers’ Day.

As the CFO of Infosys from 1994 to 2006, Pai brought a ton of experience to the tech industry when he became an active angel investor and then founded Aarin Capital. In his opinion, the Infosys experience is a critical asset for him in his role as mentor for the founders he has backed.

Besides Aarin Capital, Pai also launched Exfinity Ventures and has been a key advisor for 3one4 Capital as well as Ideaspring Capital. Over the years, the Padma Shri awardee has been a key investor in startups such as edtech giant BYJU’S, Shiprocket-owned Wigzo, Pocket Aces, Licious, Faircent, among others.

However, often founders believe that investors are overstepping the line when it comes to mentoring and guidance. How does Pai bring in the balance in his approach?

“It’s an organic relationship and as someone who invests in the early stage — the first cheque — I have to be available when the founders need me. Of course, I have to emphasise that I cannot take the decision for a founder, but we can explain the possibilities and potential implications of the decision,” he added.

While clarifying that VCs don’t run companies, Pai says that often founders don’t have the right approach. They believe that investors will take the company away from them if there is a wrong decision or some issues.

“Founders are very reluctant these days because such is the market. They have to remember that even if the market bounces back, the money may not be around, but mentors will be,” Pai, a founding partner at Aarin Capital added.

Pai stressed on the fact that investors across stages have to add value to their relationship with founders. It’s not just about the money or the cheque being written, but also what kind of trust is built over time.

Of course, besides writing the seed stage cheques, Pai is a director on several boards. Most recently, he joined BYJU’S as part of the advisory council for the company. Pai was one of the edtech decacorn’s early backers and has returned to mentor the company’s cofounder and CEO Byju Raveendran at a critical time.

While he did not comment directly about his role at the edtech giant, his overarching view is that founders need help at all stages of their company’s life cycle.

“At a $50 Mn valuation, the kind of help and advice they [founders] need is different than at a $500 Mn or at a $5 Bn valuation. But even at that stage, founders are not superheroes. Everyone learns on the job, and to execute fast growth you need the helping hand of someone with the right experience,” Pai added.

The post Money May Not Be Around, But Mentors Will Be: Mohandas Pai  appeared first on Inc42 Media.

Just a few weeks ago, we wrote, “PhonePe Wants To Be Paytm”. Lo and behold, the fintech unicorn has gone ahead and launched a separate stock broking app called Share.Market this past week.

As we said then, many fintech apps are following Paytm’s ‘super app’ lead, which has been around for several years yet never completely accepted by everyone as the right approach. Well, it turns out Paytm might have been ahead of the curve when it launched Paytm Money in 2018.

When it comes to PhonePe, the question is will Share.Market actually turn out to be the Paytm Money equivalent. And can it actually stand up to larger players like Zerodha, Groww, INDMoney, and is it the right time given the upcoming multibillion-dollar Jio Financial Services play?

We’ll try to take a stab at that question today, but after these top stories from our newsroom:

• The Ola Prime Plus Question: Ola’s answer to ride cancellations and driver concerns is Prime Plus, but is it actually a solution to the problems in ride-hailing?
• Shakeup At Omuni: The Shiprocket-owned retail SaaS platform has let go of 35% of its workforce, including founder and CEO Mukul Bafna. Read this Inc42 exclusive
• Ultraviolette Ready For Primetime: With its high-performance EV bike ready to take on giants in the market, a deep dive into Ultraviolette’s six-year journey to the starting line

Keep reading to see the highlights from the fourth edition of Inc42’s The D2C Summit

PhonePe Takes On Zerodha & Co

PhonePe has ventured into stock broking with the launch of Share.Market, under its subsidiary PhonePe Wealth Broking (registered in April 2021). It will be a separate app to PhonePe, which is built around payments, insurance, ecommerce, and B2B lending.

To begin with Share.Market allows retail investors to trade and invest in stocks, mutual funds, exchange-traded funds (ETFs) and WealthBaskets.

WealthBaskets are similar to Smallcase’s curated collections, where a bouquet of stocks or investment products are recommended by SEBI-registered intermediaries that focus on particular trending themes or sectors, enabling active equity portfolio building.

The launch of the stock broking app has been in the works for more than a year. PhonePe acquired Mumbai-based WealthDesk, a marketplace for investment bundles, and OpenQ, a registered investment advisory (RIA) firm for $75 Mn in May 2022.

This has allowed the Walmart-owned fintech giant to offer the WealthBaskets product as an add-on to the stock broking experience.

In many ways, this is not a classical super app. The separate apps are necessitated by the fact that Share.Market requires a stock broking licence and having operational separation means any potential regulatory action will not affect the larger PhonePe operations.

This is also why Paytm has separated Paytm Money from the core app. Of course, for all intents and purposes, the larger PhonePe app will remain a key piece of the funnel, bringing users to Share.Market through cross-promotions.

With Share.Market, PhonePe claimed it’s looking to attract on-the-fence retail investors as well as reactivate those users who have a Demat account but are not actively trading. As per NSE data, the active investor count is roughly around 35 Mn in July 2023, while India has over 123 Mn Demat accounts as per July 2023 numbers, with 3 Mn accounts opened in the month.

That’s a new record as per the two depositories, CDSL and NSDL, which explains the bullishness of PhonePe and indeed another new player on the horizon, Jio Financial Services.

Missing The Big Piece

Jio’s investment tech product is yet to hit the markets, but PhonePe is several steps behind JFS in one regard, despite starting out earlier.

Stock broking is a one part of the investment tech stack — the real revenue potential comes from the asset management company licence, that Jio holds thanks to its JV with BlackRock.

Zerodha and Groww are two investment tech platforms that do have an AMC licence. In the case of Zerodha, the licence came in August 2023 thanks to a joint venture with smallcase. Groww acquired IndiaBull’s AMC business which was completed only in May this year despite the acquisition being in the works since 2021 when it was first announced.

Other startups in this space do not yet have an AMC licence and therefore are restricted to earning commissions as brokerages rather than a bigger chunk of the revenue from investments in mutual funds. An AMC licence is key for anyone eyeing a slice of India’s $540 Bn mutual fund industry, dominated by the likes of SBI, ICICI, and HDFC.

In August 2021, PhonePe had received approval from its board to set up an AMC or mutual fund business and soon after had approached SEBI for approval. The regulator has yet to approve PhonePe’s application for an MF licence.

AMCs typically charge a management fee based on the asset percentage, while brokerages generally charge per trade or offer flat-fee accounts. PhonePe will need to acquire the AMC licence if it wants to unlock the full revenue potential in this space.

PhonePe Vs Paytm: Super App Stakes

Stock broking is just one of the many new things that are in the PhonePe pipeline. The company has already raised over $750 Mn since the start of 2023 as part of a massive $1 Bn round.

The plan is to use the capital to enter and scale up new businesses such as insurance, wealth management and stock broking, lending (B2B and consumer), ONDC-based shopping (Pincode) and account aggregator services.

Earlier this year, PhonePe received a payments aggregator licence. And with Share.Market, there’s little doubt that PhonePe is looking to become the everything app for fintech and commerce.

Indeed the trajectory is very similar to Paytm, and the market timing is somewhat right. The super app approach has long been believed to have some potential, but the Indian market is only now reaching some maturity in 2023. The most active and habituated fintech customers have become familiar with digital-first financial services.

The super app strategy seems to have worked for Paytm, which nearly halved its losses on a YoY basis in Q1 FY24.

But this improvement has largely come on the back of lending products. PhonePe will need to back its investment tech play with highly efficient lending to match Paytm’s pace. Here, PhonePe is behind Paytm and only has a B2B lending marketplace right now.

So how does PhonePe stack up to Paytm on some key metrics?

For PhonePe, UPI payments and the potential to convert this user base into active investors is a huge competitive edge that even Paytm might not be able to boast of right now. PhonePe has a huge lead in the UPI space — the app processed nearly 4.8 Bn transactions in July 2023 compared to Paytm’s 1.2 Bn.

Paytm has 92 Mn monthly active users, while last year, PhonePe claimed to have over 150 Mn monthly active users. So besides UPI, that’s a massive user base to capitalise on.

In terms of the revenue base, Paytm touched INR 4,974 Cr in revenue for FY22, the last full year for which PhonePe’s revenue figures are available. In comparison, the Walmart-owned company reported INR 1,692 Cr for FY22.

The disparity in revenue scale begs the question: How quickly can PhonePe catch up to Paytm’s lead before the likes of Jio and others jump into the fray?

The Best Of The D2C Summit 

The Souled Store’s D2C Roots: 10 years after inception, the fashion brand continues to garner over 90% of its revenue from its native channels, said cofounder Vedang Patel

Digital-First Before Omnichannel: TMRW CEO Prashanth Aluru believes that early brands need to get the digital strategy right before even thinking about omnichannel presence

CaratLane’s Data Gems: CEO Avnish Anand on how the Tata-acquired jewellery ecommerce leverages data to make the most of the festive season rush

Myntra’s Mantras: Myntra CEO Nandita Sinha on the D2C strategy and how it’s capitalising on the demand for international brands from Tier 2 markets and beyond

Homecoming For boAt: From a brand that imported from China to bulking up the Made-In-India quotient — cofounder Aman Gupta on the big shift for boAt in the past year

Sunday Roundup: Startup Funding, Tech Stocks & More 

• Weekly Funding Down: The weekly startup funding tally fell after a brief gain earlier in August, with just $52 Mn raised across 12 deals this past week, making hardly any dent in the overall tally for 2023
• Zomato Rally: Zomato saw a big bump on the stock markets this week after SoftBank Vision Fund sold 10 Cr equity shares in the food delivery giant
• Nazara Sees New High: Nazara Technologies’ share price touched a 52-week high before settling as the company looks to raise fresh capital through an equity issue

• ONDC’s New Landmark: In what could be a threat to Zomato and Swiggy, ONDC has claimed that it now has 50,000+ restaurants on its platform

That’s all for this week. We will see you next Sunday with another weekly roundup, and till then, you can follow Inc42 on Instagram, X/Twitter and LinkedIn for the latest news as it happens.

The post PhonePe, Share.Market & Fintech Super Apps appeared first on Inc42 Media.

As expected, Reliance (RIL) chairman Mukesh Ambani outlined the grand plan for Jio Financial Services at the conglomerate’s 46th annual general meeting. From payments to insurance to investment tech, JFS is set to disrupt several key fintech segments and pose a significant threat to existing players — both startups as well as legacy BFSI companies.

Jio Financial Services was demerged from RIL in July and became a publicly listed entity in late August. However, it has not had the best of starts as a public company, hitting the lower circuit for five straight sessions before gaining at the end of last week (August 25, 2023).

Interestingly, hours before the AGM, JFS stock saw a brief rally, but the stock fell below its opening price at the end of the trading on Monday (August 28, 2023). Currently, JFS shares are trading at INR 211.65 apiece, with the company’s market cap settling at INR 1.34 Lakh Cr.

Despite the initial hiccups on the stock market, Ambani claimed that JFS has become the world’s highest capitalised financial services platform at inception, and called this financial safety net as one of the key potential success factors for JFS.

All this makes ominous reading for India’s fintech startups, which have so far banked on Reliance Jio’s internet services as a growth ladder. But now, startups not only have to solve the revenue puzzle that has plagued fintech for long, but also compete with a giant such as JFS, backed by Reliance’s technological prowess, retail network and significant reach in the Indian market.

Jio boasts of over 439 Mn subscribers, while Reliance Retail has close to 250 Mn registered customers and 3 Mn merchants, according to the company’s FY23 annual report. These will be the anchors for scaling up Jio Financial Services over the next few quarters.

We know that JFS has already had an impact on the competition, even without any depth of operations right now. Soon after the public listing, shares of fintech giant Paytm saw a dip despite gaining for several weeks.

BFSI is a highly competitive space for retail investors and as such the entry of JFS is likely to eat into the potential investments in the likes of Paytm, Policybazaar (PB Fintech), Fino Payments Bank and others.

For fintech startups, the next few months will involve plenty of rethinking and many of them are likely to push on with product plans that have been sitting idle. Given that JFS will most likely lean on the twin pillars of Reliance Retail and Jio for growth and scale, fintech startups have their work cut out.

JFS Takes On Zerodha & Co

Reliance’s plans in the asset management space have received the most clarity in the early days of Jio Financial Services.

The company has signed a joint venture with the world’s largest asset manager BlackRock to take a bet on India’s $540 Bn mutual fund industry, dominated by the likes of SBI, ICICI, and HDFC.

BlackRock CEO Larry Fink was on hand at the AGM to talk about how Jio-BlackRock is poised to disrupt the AMC space. Fink pointed out that BlackRock has built extensive capabilities in the Indian market and the JV with Jio will unlock several more investment opportunities for millions of Indians.

Jio-BlackRock is also expected to pose a significant threat to startups such as Zerodha, Paytm Money, INDMoney and Groww in the investment tech space.

Indeed many of these startups do not have an AMC licence (Zerodha, Groww being exceptions) and therefore are restricted to earning commissions as brokerages rather than a bigger chunk of the revenue from investments in mutual funds. AMCs typically charge a management fee based on the asset percentage, while brokerages generally charge per trade or offer flat-fee accounts.

Will Jio Finally Crack Payments Game? 

Besides the investment tech space, Ambani also pointed out that Jio Financial Services would be offering payments services for consumers and merchants, and also claimed that Jio would deploy blockchain solutions to make payments more secure and would also foray into services built around Central Bank Digital Currency (CBDC).

“In payments, JFS will consolidate its payment infrastructure, with a ubiquitous offering for both consumers and merchants further driving digital adoption for India. JFS products will not just compete with current industry benchmarks, but also explore path breaking features such as blockchain-based platforms and CBDC,” the chairman said.

While Ambani did not reveal much more about the payments business under JFS, we know that this will centre around Jio UPI and Jio Payments Bank, along with payments aggregator and payments gateway services.

Reliance is also reportedly testing a soundbox payment system which will be central to its plans to compete with payments apps. JFS’ payments business will directly take on a host of fintech companies in India — from PhonePe and Paytm to Google Pay and Amazon Pay, as well as the likes of CRED, WhatsApp Pay and others.

Despite launching UPI services in 2020, Jio has not made much dent in the market share so far. Jio’s app and the payments bank processed 1.34 Mn transactions in July 2023, with a total value of INR 114.12 Cr. Currently, Jio’s UPI services are available through the MyJio app as well as Jio Payments Bank portals. The company is likely to launch a dedicated app to push its payments services wider.

Jio’s payments volume pale in comparison to the likes of PhonePe, Google Pay and Paytm, the three largest UPI apps. For context, PhonePe processed 4743.66 Mn transactions in July 2023, with a total volume of over INR 7.6 Lakh Cr. So Jio has a long way to go before it can directly take on these UPI apps.

With 249 Mn+ Reliance Retail consumers, the JFS payment layer will allow Reliance to scale up rapidly and gives the company a goldmine of data to build features and allied services.

A Major Threat For Insurtech Players

On the insurance side, as speculated, Jio FInancial Services will launch products in the general insurance, health insurance, and life insurance space, partnering with global players, Ambani claimed. Ambani emphasised that the insurance platform will be digital in nature, but did not reveal much more about what consumers or businesses can expect.

As per recent reports, JFS is also planning to offer full-fledged insurance services starting 2024. Jio Financial is readying plans to approach the Insurance Regulatory and Development Authority of India (IRDAI) to apply for a licence.

The conglomerate has reportedly set aside a capital of INR 1,000 Cr for each of these insurance segments. Apart from traditional players such as Life Insurance Corporation of India (LIC), HDFC, ICICI Group and a host of other bank-led insurance plays, Jio Financial Services would also be rivalling digital-first insurance startups such as IPO-bound Go Digit, Acko, InsuranceDekho, and Navi Insurance, as well as aggregators (Policybazaar et al).

As per a report, the life insurance penetration in the country stood at a mere nearly 3% while non-life insurance penetration was much lower at 1% in financial year 2021-22 (FY22). The under-penetration of insurance offers an attractive proposition for Jio Financial Services, which could leverage Jio’s digital infrastructure, Reliance Retail’s business and partner network as well as Reliance’s healthcare plays to dominate the segment.

JFS To Eat Fintech Lending Pie?

The fintech sector is already besieged with high competition and low revenue potential in the payments segment and almost all players are only seeing revenue traction from lending operations.

Consumer durable lending, merchant lending, buy-now-pay-later (BNPL) are likely to be the key focus areas for JFS at the outset, according to a Bank Of America report. Consumer durable lending could be the initial focus for the company, as it has a captive user base that is availing credit for buying from Reliance Retail’s electronics store chain Reliance Digital.

On the other hand, BofA also stated that Jio Financial Services is likely to take time to scale up its lending play and doesn’t have the cheapest access to capital. However, the opportunity is undeniable. Beyond the top 10% merchants, not many are well-serviced by banks, digital lenders or traditional companies, which opens up a major opportunity for Jio Financial Services.

“We think there is a huge opportunity in wholesale lending to retailers/vendors, etc., as it is working capital heavy and many of these companies are cash flow constrained,” BofA said in its note in July about Jio Financial Services.

Will Jio Financial Services Go The M&A Route?

In the past, we have seen Reliance look to dominate new verticals with a mix of capital-led growth and inorganic acquisitions. The acquisitions of Urban Ladder, MilkBasket, Zivame, JustDial, NetMeds and other startups allowed Reliance Retail to grow rapidly in various verticals.

With the exception of some unicorns and listed giants, many startups are struggling with revenue growth and JFS could use its deep pockets to acquire some of these ailing startups.  Startups have faced regulatory headwinds, a funding winter (save for the likes of PhonePe) and Reliance’s mega entry will only deepen the wounds of the sector. Of course, these are still early days for JFS, but the threat to fintech startups cannot be understated.

The post Decoding Jio Financial Services: How Reliance Can Shake Up India’s Fintech Landscape appeared first on Inc42 Media.

Come Monday and all eyes and ears will turn to Reliance and the Ambani family, as the conglomerate’s annual general meeting will more or less give us a peek at what 2023 and 2024 might hold for India’s digital economy.

Reliance Retail and Jio Platforms have taken on a new dimension in the past 18 months, with forays into several new verticals. While Jio 4G catalysed the internet ecosystem and startups at large, the launch of 5G has coincided with Reliance’s biggest push into the digital economy. Of course, at this very moment, the full attention is on Jio Financial Services, which threatens to disrupt the fintech sector.

So much so that Reliance is essentially big tech now and for that reason alone, its moves will not just dictate the direction of the conglomerate but also could be game-changing for startups (not in a good way) and the digital economy.

We take a look at what the Reliance 2023 AGM is likely to have in store, but after these top stories from our newsroom:

• Spacetech’s Chandrayaan-3 Moment: What does ISRO’s historic Chandrayaan-3 success story mean for India’s spacetech ecosystem? Here’s what the overjoyed sector has to say
• Finally, 1st Unicorn Of 2023: Mumbai-based Zepto became India’s 111th unicorn and the first in nearly a year after raising $200 Mn in its Series E funding round at a $1.4 Bn valuation
• Move Over, IITs: Unicorn founders are no longer only hailing from IITs and IIMs and the rise of non-IIT talent shows that tech talent is going through democratisation

Reliance’s Big Day

In a matter of hours, Reliance chairman Mukesh Ambani, Reliance Jio chairman Akash Ambani and Reliance Retail head Isha Ambani will take the stage to reveal the big plan for the months to come. The AGM track record indicates that Reliance will announce new partnerships and the roadmap for key businesses.

For instance, in 2020, RIL proclaimed some major investments in its new energy business. It was also the year when RIL announced Google’s massive investment of $4.5 Bn in Jio Platforms. In 2021, Alphabet CEO Sundar Pichai made an appearance to announce a 4G-enabled smartphone called JioNext and Google Cloud’s partnership with Jio for 5G.

Of course, last year was all about 5G, the foray into the FMCG business and a bigger push into electronics manufacturing. What’s in store in 2023?

Jio Vs Fintech Startups

The biggest expectation from the AGM is around Jio Financial Services (JFS), which is definitely set to give fintech players some sleepless nights. So far, Jio’s telecom disruption has been lauded as a major catalyst for consumer and B2B fintech, but Jio is now stepping directly into the arena posing a threat to many startups.

JFS was demerged from RIL in July and listed earlier this month. JFS also tied up with the world’s largest asset manager BlackRock to take a bet on India’s $540 Bn mutual fund industry dominated by the likes of SBI, ICICI, and HDFC along with startups such as Zerodha, and Groww.

But Ambani is likely to lay down the plans for the B2B credit business, which is expected to come out first, followed by consumer lending. The big plan is to use lending as a funnel to venture into insurance, digital broking and asset management, pretty much like most other fintech startups.

In the past, Mukesh Ambani has said that the financial services play will leverage the technological capabilities that Reliance has built up since before its 4G launch.

Fintech analysts told Inc42 that JFS will be the biggest disruption in the fintech space because no other company can match the breadth and depth of services that Reliance has to rely on.

“Startups only have fintech, but Reliance has first-party data for retail transactions and ecommerce. It also has the data from its telecom business and now also first-party mobile devices. Plus it has the weight of Reliance behind the operations,” says the founder of a Bengaluru-based neobanking startup.

JFS has already had an impact on the competition, even without much depth of operations right now. Soon after the public listing, shares of fintech giant Paytm witnessed some weakness in between a rally.

So far, JFS has not had the best of starts in the share markets. The stock’s price rose on Friday last week, after hitting the lower circuit earlier for five sessions. It will be interesting to see how the market reacts to the big reveals.

For fintech startups, it will be a nervous watch, given that JFS can also lean on the twin pillars of Reliance Retail and Jio, which have also evolved quite a lot in the past year or so.

Reliance Retail IPO Incoming?

Another important story to watch out for during the AGM would be the timeline for the listing of Reliance Retail Ventures Limited (RRVL). It looks like the groundwork for the IPO is already laid as Qatar Investment Authority bought a 1% stake in RRVL for INR 8,278 Cr ($1 Bn) at a valuation of $100 Bn.

Reliance Retail is expected to sell up to 10% more stake in the run-up to the IPO to dilute the promoter stake. Experts believe that RRVL’s IPO size will be too big for the Indian stock markets at its current valuation of $100 Bn.

It will be interesting to see how Reliance Retail continues unlocking the value in the company as it looks to navigate the bearish market. The company operates an omnichannel retail and ecommerce network of more than 18,500 stores combined with ecommerce platforms for grocery, consumer electronics, fashion and lifestyle, and pharma segments.

Digital and new commerce businesses contributed 18% to the total revenue of Reliance Retail in Q1 FY24, with a net profit of INR 2,448 Cr. While the retail arm’s grocery business grew 59% year-on-year (YoY), its consumer brands vertical saw an 8X jump in revenue YoY.

With the fundraise, RRVL will go all-in on the consumer brands business and enter new product categories as it did in the past year with the ‘Independent’ brand.

The Rise Of JioCinema

As for Jio Platforms, the road to IPO is less certain. The company is likely to wait and give more attention to JFS and Reliance Retail, even as it deepens the 5G network.

Market observers believe that the biggest game changer could come in the form of Jio AirFiber, the company’s fixed wireless access device for retail consumers, where it is targeting an install base of 100 Mn homes. This is expected to bring Jio on par with Airtel and also boost the company’s ARPU, which has long suffered from slow growth as the telco prioritised scale over revenue.

The telecom market leader has also bet big on 5G mobile devices, with two smartphones said to be in the pipeline. The company is likely to bundle 5G at aggressive prices with these phones.

Eyes will also be on how Jio’s digital services and products have grown in the past year. We expect a lot of attention on JioCinema, which skyrocketed in popularity after the IPL deal earlier this year and the FIFA World Cup last year.

Since then, JioCinema has added the largest original slate in the Indian OTT space, outproducing the likes of Netflix, Amazon Prime and others. Besides making the IPL free, the platform is the official partner for HBO and NBCUniversal in India.

JioCinema’s parent company Viacom18 has roped in Google’s Kiran Mani as the CEO for the digital business according to reports, besides former Disney exec Kevin Vaz as CEO of TV and digital (regional entertainment). Another Disney alumni Alok Jain is overseeing regional content on digital platforms, with Anil Jayaraj, ex sales head of Star Sports, as CEO of the sports vertical.

The AGM is likely to highlight just how JioCinema has grown in the past eight months. Today, JioCinema charges INR 999 a year for the premium service and in the long run, the OTT business could become a big bulwark for Reliance’s sprawling media business.

Reliance As ‘Big Tech’

All in all, come Monday, a lot more will become clear about how Reliance plans to tackle the rest of FY24. It’s clear that after laying the foundation for the internet economy with the Jio telecom disruption, the company is now eyeing a bigger piece of the market.

For many startups, Reliance was the enabler, but now it’s a rival. Take the likes of Myntra or Nykaa in the beauty and fashion ecommerce space, or Tata-owned BigBasket and others from the JioMart POV.

Now, the time has come for fintech startups to brace for a rivalry with Reliance, and even the global streaming giants.

These are the times of Reliance as a Big Tech company and pretty much no other tech giant in the world has its hands in as many businesses as Reliance. Based on what we expect to see at the 2023 AGM, this reputation is only going to get stronger.

Startup Spotlight: Gen AI Startup Looks To Ease UI Development

Having seen the pains of UI development for early stage product and services startups, former Mindtickle executives Dipanjan Dey and Abhijit Bhole decided to leverage the power of generative AI to fix this major headache.

The duo want to change how frontend developers approach UI design with Kombai. Generative AI has opened up a whole range of new models, and the startup’s product is claimed to interpret visual design cues like humans and has the ability to write code accurately for frontend development.

Dey and Bhole set up Kombai in 2022 and since then it has been a 16-month journey to develop the right frameworks for the product’s generative AI model, from scratch. As the founders claimed, they wanted to ‘bring fun back to frontend development’.

Read The Kombai Story

Sunday Roundup: Startup Funding, Tech Stocks & More

• Funding Rebound? With Zepto’s massive $200 Mn unicorn round, the weekly startup funding saw an uptick — a total of $231 Mn was raised across 16 deals.
• Profit-Booking? SoftBank is looking to sell Zomato shares through block deals as the stock has seen a rally in recent weeks, and same is the case with AntFin, which is looking to sell 3.6% of its stake in Paytm

• Bengaluru & AI: Karnataka IT minister Priyank Kharge has claimed that Bengaluru has turned into a global AI hub thanks to the state’s investments and push for AI startups
• Bringing Unicorns Back Home: More than 20 out of 111 unicorns in India currently have their headquarters outside India. What will it take to bring these value-creators back home?
• D2C Summit Is Almost Here: Join Inc42’s D2C Summit later this week to network and learn from the likes of boAt’s Aman Gupta, Nykaa’s Adwaita Nayar; Curefoods’ Ankit Nagori, Miyntra’s Nandita Sinha and others

That’s all for this week. We will see you next Sunday with another weekly roundup, and till then, you can follow Inc42 on Instagram, X/Twitter and LinkedIn for the latest news as it happens.

The post Reliance‘s Grand Stage Is Set appeared first on Inc42 Media.

GoMechanic investors have approached the Economic Offences Wing to probe the role of the company’s four cofounders in misreporting financials and any potential misappropriation of funds.

In January 2023, GoMechanic was hit by controversy after it emerged that the auto services startup’s founders had admitted to misleading investors with fake revenue figures.

Confirming the development, Orios Venture Partners’ general partner Rehan Yar Khan told Inc42, “The complaint with EOW has been filed by Orios, Sequoia [Peak XV], Tiger [Global] and Chiratae. As investors in GoMechanic, we are the aggrieved parties and are pursuing this legally.”

Other sources close to the investor group also told us that the EOW has been engaged to look into how the revenue inflation by GoMechanic’s founders might have resulted in the misappropriation of funds.

The startup came under the corporate governance spotlight in January 2023 after cofounder Amit Bhasin publicly admitted to committing “errors in judgement” in regard to financial reporting while trying to pursue growth.

“Our passion to survive the intrinsic challenges of this sector, and manage capital, took the better of us and we made errors in judgement as we followed growth at all costs, including in regard to financial reporting, which we deeply regret,” Bhasin had said in a LinkedIn post at the time.

The company was founded in 2016 by Amit Bhasin, Kushal Karwa, Rishabh Karwa and Nitin Rana. Besides Bhasin’s public confession, the other founders of the company were also said to have admitted to misreporting revenue figures, as per sources.

The GoMechanic case emerged at a time when the Indian startup ecosystem was already dealing with plenty of corporate governance lapses. This prompted limited partners in funds, including the likes of the Small Industries Development Bank of India (SIDBI) which invests in alternative investment funds (AIFs), to question funds about due diligence lapses and irregularities at various startups.

Sources close to a SEBI-registered AIF had told Inc42 at the time that the bank had questioned some VCs that had backed GoMechanic. Even the Registrar of Companies was reported to be looking into GoMechanic’s books amid allegations of financial irregularities.

Since its inception, the startup has raised roughly $55 Mn (or over INR 440 Cr) in funding from influential investors such as Tiger Global, Peak XV Partners (previously Sequoia Capital India), Orios Venture Partners, and Chiratae Ventures. Notably, Orios and Chiratae both have received fund commitments from SIDBI.

GoMechanic Sold; Founders Move On

Two months after the controversy broke out, GoMechanic was acquired by a consortium led by Lifelong Group, which is a majority shareholder in GoMechanic rival Servizzy.

Sources told Inc42 at the time that the transaction saw write-offs by all GoMechanic equity investors, while the venture debt investors in the company managed to recover some portion of their invested funds.

While the Lifelong Group did not reveal the size of the transaction, sources told Inc42 that the deal is to the tune of INR 220 Cr (roughly $27.5 Mn).

Responding to our queries, Orios’ Khan added that the firm has stepped up due diligence in all companies when investment and reinvestment rounds come up. “As GoMechanic managed to evade multiple rounds of audits and due diligence, while committing fraud, by Big 4 auditors, we have set up an internal process of “evidence based diligence” for all companies when we invest and reinvest in them,” Khan said.

Under the new best practices at Orios, Khan said that when startups submit bank statements showing transactions and balance, the fund asks them to show online bank account statements on video conference calls to verify the claims.

As Inc42 reported exclusively in late July, GoMechanic cofounders Rishabh Karwa and Nitin Rana are currently working on two separate and unnamed new startups, just six months after the controversy broke out.

Rana is working on a new startup and “Building Travel & Hospitality Product for Indian Subcontinent and World”, as per his LinkedIn profile, while Rishabh Karwa is looking to develop a location-based product for retail storefronts.

Incidentally, earlier this week, Servizzy sent a press release claiming that between April and June 2023, GoMechanic serviced more than 68,500 cars across India. It also claimed ~30% growth in both service revenue and GMV in the quarter.

“Over 10,000 new Miles Memberships have been activated since April 2023 alone, solidifying an impressive count of more than 48,580 active memberships. The team’s efforts continue to strengthen the brand’s position as a reliable choice for car owners nationwide,” the company said.

It remains to be seen whether the potential EOW investigation into GoMechanic will result in any fallout for Servizzy or the new business.

EOW Knocking On Startup Doors

Incidentally, in recent months, the EOW has been kept busy with investigations into allegations of corporate governance lapses at several startups.

BharatPe’s first information report (FIR) against ousted cofounder and MD Ashneer Grover, his wife Madhuri Jain Grover, and family members, including Deepak Gupta, Suresh Jain, and Shwetank Jain, was registered by EOW in May this year. The case pertains to an alleged INR 81 Cr fraud.

More recently, Broker Network founder and former Housing.com cofounder Rahul Yadav fell on EOW’s radar after a vendor alleged fraud to the tune of INR 10 Cr and criminal breach of trust.

Following the registration of the FIR, a lookout circular (LOC) has been issued by the EOW. Yadav’s bank account is said to have been frozen, with searches conducted at his residence.

The post Exclusive: GoMechanic Founders On EOW Radar As Investors Push For Probe appeared first on Inc42 Media.

In fresh legal trouble for Rahul Yadav, the founder of Broker Network, a Rajasthan-based vendor, has filed a first information report (FIR) against Yadav for alleged fraud and criminal breach of trust with the Economic Offences Wing (EOW).

The FIR filed by Vikas Nowal, country head and cofounder of Interspace Communications, has been registered under sections 406, 409, 420, 34 of the Indian Penal Code.

Interspace Communications is an advertising agency that was empanelled by Broker Network to carry out outdoor advertising campaigns in February 2022. In his FIR, Nowal has alleged that the company has defrauded Interspace, which is owed INR 10 Cr by Broker Network (4B Networks Private Limited) for the activity undertaken in 2022.

The FIR claims that a total of 83 ad hoardings were installed by Interspace in Pune from April to August 2022.

Inc42’s exclusive deep dive into Yadav’s Broker Network in June this year had reported on Interspace being one of the vendors that has not been paid by BN since last year. Besides the ad agency, software development company NeoSoft and home loans agent Finqy are also owed amounts to the tune of over INR 10 Cr, as per our original reportage on Broker Network’s problems and cash crunch.

In the case of Interspace Communications, the issue is related to Broker Network having multiple vendors for outdoor advertising campaigns, with only one of these vendors being paid on time.

Former employees at Broker Network told Inc42 in June that besides Interspace, the company also signed another contract with NSE-listed Vertoz Advertising Limited for a similar campaign in Pune. As per invoices seen by Inc42, Broker Network paid Vertoz INR 11.8 Cr through much of 2022, though withheld the payments for Interspace.

Following the registration of the FIR last week, a lookout circular (LOC) has been issued by the police. Yadav’s bank account is said to have been frozen, with searches conducted at his residence, according to an EOW official who spoke to Inc42 on the condition of anonymity.

The official added that Interspace brought the complaint to EOW in July 2023, after another complaint had already been registered in Mumbai’s Amboli Police Station.

We were also told that EOW officials questioned Yadav on Saturday, August 19, 2023, during the official raid at his residence. As of now, no arrests have been made in the case.

Rahul Yadav’s Mysterious Home Loan Defaults

Besides the FIR registered by the EOW, Inc42 has also seen a public notice by ICICI Bank in relation to a property loan default by Yadav and his wife, Karishma Singh. The ICICI Bank notice dates back to April 2022 and is for a default amount of over INR 5.9 Cr for two properties.

Incidentally, both properties are located in Kanakia Paris, a residential property in Mumbai’s BKC area. Besides Yadav, sources allege that other employees of Broker Network also had purchased properties in Kanakia Paris.

Besides Rahul Yadav, his brother-in-law Devesh Singh who’s listed as a director in Broker Network, also purchased properties at Kanakia Paris. Broker Network’s key employees Sanjay Saini, Prateek Chaudhary, former CTO Vivek Jagtap as well as current CTO Rahul Yadav (unrelated to the founder) also bought properties here.

Broker Network’s former employees told Inc42 this week that all these properties belonged to Danishmand Merchant, a name that had already come up in our past investigation into the company.

Sources alleged that most of these properties were purchased at a premium on the prevailing fair value for properties in the neighbourhood. “There was never any intention of paying back this loan,” one of the sources told us.

Merchant’s Ace Housing & Construction is a co-promoter for Kanakia Paris, as per details sourced from Maharashtra’s RERA database. The RERA filings show that Ace Housing has an ‘area share’ arrangement with Kanakia.

Inc42 has reached out to Rahul Yadav for a comment on the loan defaults and we will update this story with a response as and when we receive it.

In the past, Inc42’s investigation had revealed a connection between Rahul Yadav and Danishmand Merchant, who served as a partner at Yadav’s RY Advisory between 2019 and 2020.

Merchant’s other companies Ace Links and Ace Housing & Construction, were alleged to have been involved in Broker Network’s dealings.

Besides this, Inc42 had reported on other transactions that further linked Yadav and Merchant — particularly with three separate leave and licence agreements for office properties in Bandra. These were rented by Broker Network from Merchant and his company, Ace Links, with an attached refundable security deposit of INR 7.5 Cr.

These were signed in 2021, but multiple employees claimed that in October 2021, Broker Network moved to a coworking space in Andheri and then again to another office in September 2022. Employees alleged the rental agreements were for properties used by just 15-20 employees.

When questioned about these rentals, Yadav told Inc42 at the time that the security deposits were repaid to Broker Network, but did not share any proof for the same.

Info Edge Probes Broker Network

The former Housing.com cofounder is also the target of an arbitration hearing by Broker Network’s lead investor Info Edge. The Delhi NCR-based internet giant had initiated a forensic audit into Broker Network, alleging that Yadav had refused to disclose details of financial transactions and related-party activities.

The related party transactions include Yadav’s connection to other companies such as Kult Cosmetics, where his wife Karishma Singh is a director. Besides this, Yadav’s holding company RY Advisory is also said to be linked to Broker Network through other companies.

Info Edge also moved the Delhi High Court against Yadav and Pratik Choudhary, who was also a party to the shareholders’ agreement of 4B Networks.

Info Edge said that in an order dated July 24, 2023, the HC directed Yadav and Choudhary to not sell, transfer, alienate, encumber or otherwise create any third-party rights or interest directly or indirectly in the assets and properties of 4B Networks (whether tangible or intangible).

On the other hand, the court also directed the startup to preserve all books, records, accounts, databases, servers, any other devices, documentation or information.

“The matter has now been referred to arbitration and the parties have agreed to the appointment of a sole arbitrator,” Info Edge said in its filings last quarter.

As of now, it’s not clear whether the new EOW investigation will also cover any facts uncovered by any arbitration proceedings between Info Edge and Rahul Yadav.

The post FIR Against Rahul Yadav: Lookout Notice Issued By EOW, Bank Account Frozen appeared first on Inc42 Media.

India’s real money gaming industry is on a precipice. The recently proposed changes for GST have thrown a major curveball for players such as Dream11, MPL, Zupee, WinZO, Rush by Hike, and a host of other startups that fear the worst.

While the rules will only go into effect from October, the new GST rate could be applied retrospectively which has clearly created panic among many startups. We have already seen this in the case of MPL, Hike and Spartan Poker which have laid off employees, but more severe steps are likely to come.

Besides revenue panic, there’s a fear that VCs might walk away from RMG and invest in other gaming models, denting the fortunes of some large companies. Let’s jump into these problems, but after these must-read stories from our newsroom this week:

• Skill-Lync’s Debt Trap For Students: Fake loan applications, personal loans masquerading as educational loans, no placements and a debt trap. The story of why hundreds of students are outraged at edtech platform Skill-Lync
• Unicorns As Job Creators? Inc42 data shows that Flipkart is the biggest employer among Indian unicorns, with 47,859 employees on its payroll. Where do the other unicorns stand?
• The Zyber 365 Mystery: Ahmedabad-based web3 & AI startup ZYBER 365 recently claimed to have become India’s 109th unicorn. But Inc42’s exclusive investigation shows this is a smoke and mirrors game

RMG Vs The Tax Boss

Let’s get one thing out of the way. The changes in the GST structure impact those online games that include wagering or an entry fee to play with a real-money payout. It covers “games of skill” as well as “games of chance”, but for the purposes of the startup ecosystem, it’s largely going to disrupt those gaming platforms that have fantasy sports, rummy, poker, card games and similar real money casual games as their primary models.

The revenue models of each of these different games will be impacted distinctly by the new changes. Here’s a look at how things change in the two most popular categories:

As we can see, the new GST rules make it more complicated for the latter category to be appealing to users who are chasing real money rewards. Players will need to consistently make 40% or higher profits on their entry amount to get any real outcomes from these games.

The impact is slightly lower on the fantasy sports platforms, which typically involve a one-time entry fee that can be spread across multiple pooled competitions. In pooled competitions, the prize money is distributed to multiple players.

With the new GST rules, the winners of pools might continue to get the same prize money, whereas second or third place players might not get the same payouts as they do now.

So even within the real money gaming ecosystem — which accounted for 77% of the total gaming sector revenue of INR 13,500 Cr as per a FICCI-EY report — there is a clear disparity in terms of the impact. And the higher tax burden is set to hurt smaller companies more.

VCs believe that even though the tax burden has risen, companies such as Dream11 have the revenue safety net to continue scaling up despite the disruption. With INR 142 Cr in profits in FY22 and being a market leader, Dream11 in particular, is in a better position than others to navigate this market. Other companies will have to not only bear the tax burden, but also compete with Dream11 which can count on high brand recall and a legacy in the fantasy sports arena.

“It is the smaller companies that have to worry. They neither have the scale to justify a fund infusion to navigate the new GST world nor do they have the revenue to pay the taxes and also absorb the lower potential revenue,” according to a Delhi NCR-based gaming investor.

Gaming Startups Stare At Layoffs 

So what kind of impact can one expect? MPL has laid off 350 employees, Hike (Rush) has also let go of more than 100 employees and Spartan Poker has let go of 40% of its workforce. And this is just the beginning, according to many of those in the industry.

Founders in the space tell us that cost-cutting has become necessary for many because if they want to survive, they need to solve the unit economics problem created by the potential slowdown in RMG adoption.

This is particularly true for poker, rummy and other card games, where players are smart enough to see that they either have to be ready for higher losses or invest more and balance the tax burden vs the potential for winning.

“In the initial few days of the GST changes going into effect, there will be a drop-off of the casual players who typically put in like INR 200-INR 300 per month. This is about 90% of the user base. It’s only a small percentage that pay fees in excess of INR 10,000 per month,” says the cofounder of a Delhi NCR-based RMG startup.

The cofounder added that most startups are more or less writing off casual users. They expect to retain only a handful of the high value players.

“RMG players were hiring multiple product managers and focussing on expanding on formats, but all of that has to be revisited now. As it is many of these companies were bloated and some of them needed to cut costs anyway. The GST disruption means they have no recourse now,” according to an exec from a game development company.

VCs Are Walking Away

The new unit economics battle in light of 28% GST is not only for creating sustainable models but also to attract investors.

Any unit economics disruption in the current funding winter means delays of months in funding talks and investors are already walking away. Sources within the ecosystem tell us that investors are now exclusively looking at gaming startups that don’t have any real money component. The tax nightmare for real money gaming companies means startups are possibly looking at an additional tax liability of nearly INR 45,000 Cr, as per reports.

In recent weeks, we have also seen instances of unscrupulous online gaming companies syphoning away money from India and even defrauding users.

“We just don’t think the tax exposure risk is worth it. There are problems such as collection on a retrospective basis. A lot of their books will go through audits. It’s likely to create a lot of regulatory friction,” added the Delhi NCR-based investor quoted above.

The investor added that the real money space is saturated with several big players. Now, it makes no sense to invest in a new platform that can hope to take on the big names such as Dream11 in the fantasy sports arena, or MPL, WinZO and others in casual games.

There are also concerns about companies moving abroad, similar to what was seen with the taxation clarity in crypto. Even under that circumstance, operating in India would require companies to be compliant with the local tax laws, if they want to cater to Indian users.

What Next For Gaming Startups?

So where’s the focus turning for gaming investors? The obvious answer is game development. These models are typically multi-year investments and currently many Indian game development startups are starting off with titles in popular genres — battle royale, casual titles, puzzles and more — that involve in-app transactions, which do not come under the new GST rules.

Game development company Yudiz Solutions listed on the NSE SME platform at a 12% premium this week.

Sources also told us that Bengaluru-based gaming unicorn MPL is likely to focus heavily on Mayhem, its game development studio, and is looking to reduce its reliance on RMG revenue in the future. Mayhem raised $20 Mn in April this year from Peak XV and Steadview.

Backed by AET Fund and others, Pune-based SuperGaming is another startup looking at developing mobile games such as Indus (set to launch later this year), MaskGun, Silly Royale, and Tower Conquest. It is also building its own gaming engine for real-time multiplayer games.

Mumbai-based Nazara too is likely to ease off the accelerator when it comes to HalaPlay, its fantasy gaming vertical, given the dominance of Dream11, which will continue to have a sizable market share even in the new regime. The company has multiple other revenue streams in non RMG segments.

Nazara claimed that the GST changes will have minimal impact on its revenue, but will the company continue to carry HalaPlay along if the revenue potential is dented? It remains to be seen whether investors and Nazara’s shareholders will entertain that prospect.

Nevertheless, it’s looking more and more like the future of gaming in India will be driven by game development, studios and publishing rather than by real money gaming, as it has been for so long. Real money gaming’s rise overshadowed other aspects of this industry.

“Worldwide, the value in gaming is unlocked by game development and studios. The major companies such as Microsoft and Sony largely invest only in game development. India needs to get on this track too, and not just rely on fantasy cricket or rummy,” said the gaming startup executive quoted earlier.

In many ways, the flipping of the GST switch has led to a big reset for the online gaming ecosystem. Will it set the sector on the right track?

Startup Spotlight: Exponent Locks Horns With Tesla

Most commercial battery charging technologies worldwide take 30 minutes to 10 hours to fully charge EVs, depending on battery capacity and vehicle types. But Bengaluru-based Exponent Energy claims to have broken all records and has eyes on competing with the likes of Tesla in the global EV charging market.

Founded in 2020 by former Ather Energy executives Arun Vinayak and Sanjay Byalal, the startup is looking to cut charging times to 15 minutes regardless of the vehicle category. The startup is banking on its patented ‘water-based’ off-board thermal management system to accelerate the future of EV charging infra in India.

The startup has also set an ambitious target of deploying 1,000 ‘e^pumps’ and 25,000 Exponent-powered EVs by 2025. Will it get there and solve one of the biggest hurdles in EV adoption?

Read the full Exponent Energy story

Sunday Roundup: Startup Funding, Tech Stocks & More

• Weekly Funding Updates: Just a total of $4.4 Mn was raised by Indian startups in the past week. No, that’s not a typo. Startup funding has never seen these lows for many years
• EaseMyTrip’s Q1 Results: EMT saw its profits plunge by 22% YoY as a result of a significant increase in discounts during the quarter ended June 2023

• Ola Electric Plays Big: Besides launching a cheaper electric scooter, Ola Electric unveiled its plans for the motorbike space with four new concepts targeted for late 2024
• Navi’s UPI Play: The Sachin Bansal-led company has entered the payments space to become something of a fintech super app

That’s all for this week. We will see you next Sunday with another weekly roundup, and till then, you can follow Inc42 on Instagram, X/Twitter and LinkedIn for the latest news as it happens.

The post Real Money Gaming’s Real Problems appeared first on Inc42 Media.

There’s a new buzzword in town: Profitability. Startups are announcing profitability to different degrees — from listed giants such as Zomato to the likes of OYO, PharmEasy, Meesho, MobiKwik, Unacademy and Swiggy.

Is this a real turning of the tide for Indian startups or just skilful manoeuvring of numbers to show some progress in the right direction?

Many are also asking whether the drip feed of advice from VCs about finding paths to profitability in the past 16-18 months has actually reached founders. We’ll unpack this latest trend in the Indian startup ecosystem this week, but before that, here’s a look at the top stories from our newsroom this past week:

• Decoding DPDP: The Digital Personal Data Protection Act could well define the future of tech platforms in India but a lot of nitty-gritties still need to be ironed out
• Disney+ Hotstar Exodus: Once the OTT leader, Hotstar has lost a third of its subscriber base in the past nine months. What went wrong for the former powerhouse?
• The Truth About Tyke: Startup crowdfunding platforms are still a grey area in India and Tyke Invest’s complicated story highlights just why. Our deep-dive into the investment platform’s many challenges

Startups On Profitability Parade

There’s been a flurry of claims by startups and actual regulatory filings showing profitability in the past three months. And each of these companies has chosen vastly different terminologies and parameters for profitability — from profit after tax to EBITDA and Adjusted EBITDA to profit as of a single month or the most recent quarter.

It started with Unacademy in late April, when cofounder and CEO Gaurav Munjal told employees that the startup will ‘almost generate’ a profit at the group level in April 2023.

Debt-laden healthtech unicorn PharmEasy also claimed to have reached a positive EBITDA in April this year, just months before its many operational problems came to light.

One month later, Swiggy chimed in with claims of achieving profitability in the food delivery business and said Instamart was also close to “unit economics positivity”.

Come July, Paytm reported its Q1 FY24 numbers and as we said at the time, the fintech giant is knocking on the doors of profitability. IPO-bound OYO is said to have improved its Adjusted EBITDA margins in Q1 as well.

And now, in August, Zomato eked out its first net profitable quarter, while MobiKwik (PAT of INR 3 Cr in Q1 FY24) and Meesho (profitability at a consolidated PAT level as of July 2023) also made statements about their recent financial performance that cannot yet be verified independently.

The latter two have not filed their FY23 or FY24 financial statements, and neither have Swiggy, Unacademy or OYO. But it would seem FY24’s buzzword is profitability, and in many cases, getting there is seemingly more important than actually proving that you can stay there.

More Than A Buzzword?

Startups have long relied on vanity metrics such as GMV and user base to court investors, but the in-thing now is Adjusted EBITDA profitability or PAT, if you want to really seal the deal. Funding or valuations were once coveted, but profitability is THE buzzword today, valuations be damned.

Just look at PharmEasy which claimed to have had an EBITDA-positive in April, but is now struggling to raise capital from existing investors at a huge valuation haircut to service its existing debt.

So an EBITDA-positive month does not mean that startups have access to enough working capital to replicate this success across many months. And VCs are not betting on short-term profitability, but rather signs of how replicable it is.

Given this, the natural question is how secure are these profitability claims and can they be reproduced quarter after quarter?

For instance, even in the case of Zomato, the one company that has actually revealed its financials, there’s some merit to the question of whether the profitability status can be sustained.

Deferred tax of INR 17 Cr brought Zomato just barely out of the red. At INR 2 Cr, the Q1 FY24 profit for Zomato is 0.0008% of its consolidated revenue. It’s razor-thin margins that won’t necessarily stand up to market fluctuations or even a temporary blip like what happened with Blinkit.

Food delivery, in many ways, is a zero-sum market for Zomato and Swiggy. If one loses out on the order, it’s highly likely the order went to the other. So Zomato has to guard its rear from surprises in its operations when looking to protect its profitability.

Founders Find Focus 

Besides pulling back costs (helped by a heap of layoffs) and scaling out of loss-making verticals, many of them have also looked at revenue diversification and sacrificing volume growth for revenue (Swiggy and Zomato in particular).

Startup founders we spoke to are of the opinion that in many cases, companies have actually figured out how to balance scale with profits, while in the cases of others, it’s largely about curtailing costs significantly. Employee expenses took up a majority of this and that’s why the layoffs have proven beneficial to the bottom line of companies, as harsh as that may seem.

As the founder of a Delhi-based digital commerce startup told us this week, “Even a month’s profitability is better than having losses for a month. Today, it doesn’t matter if a startup gets there with some creative accounting as long as no laws are breached and there’s no manipulation of numbers.”

The founder added that the smartest entrepreneurs not only focussed their energies there but also got the help of their investors in pulling off these turnarounds, at least as far as the short term is concerned.

Just What VCs Want

Which brings us to how investors have pushed founders into this mode. Some may call it the whip and others guidance and mentoring. Last year, when Peak XV (then Sequoia), Beenext and the described the current crisis as crucible moments and worse than past slowdowns, we knew that VCs were squeamish about the next few months.

The spate of governance issues and frauds in the ecosystem have also dented VC confidence in some founders. In lieu of looking to fix multiple fires in their portfolio, VC firms have focussed on their biggest bets or, rather, the bets with the biggest upsides.

A partner and CFO of a global private equity platform told me on the sidelines of last month’s MoneyX, there’s very little portfolio management for firms to do these days.

In his opinion, most investors are focussing largely on compliance and governance because without the right processes and frameworks, startups can not make meaningful progress towards sustainable business models and profitability. “Just having a good CFO can become a huge boon for startups in treasury management or even simply cost savings through proper financial controls,” he said.

So essentially, the incentive offered by VCs has changed from scale towards sustainable scale. It’s only natural that founders are looking to get in sync with this changing tune. A partner at an early-stage VC firm told Inc42 this week, “Founders have sharpened their focus because there’s no other option. They have been told that this is the only way to raise funding and everyone still needs funding to grow.”

In other words, this is not the moment when Indian startups turned into cash generating machines, but rather they are beginning to at least move in the right direction.

Startup Spotlight: T.A.C Taps Ayurveda’s Big Moment

The beauty and personal care category is exploding in the D2C segment in India, with several brands looking to occupy smaller niches and then grow into bigger names with more products. For instance, the Ayurveda Co. or T.A.C has banked on ayurveda as the key USP and emerged as a significant challenger to the likes of Mamaearth, WOW Skin Science, Plum and others.

The company claims to have witnessed 4X YoY growth in FY23 to INR 45 Cr, and now it aims to grow this to INR 150 Cr in FY24. And all this with an omnichannel approach, and a high-touch approach to increasing retention on the retail front.

Here’s T.A.C’s Growth Story

Sunday Roundup: Startup Funding, Tech Stocks & More

• Startup Funding Back Up: After hitting rock-bottom last week, the weekly funding tally had no place to go but up. Over $95 Mn was raised by Indian startups, but don’t call it a recovery by any means

• Q1 Results Pour In: Most tech companies showed relatively positive progress in their financials released this week —
  • Nykaa saw a minor bump in net profit
  • Info Edge shot back into profits after a disappointing end to FY23
  • ideaForge saw its net profits halve in its first quarter as a public company
  • CarTrade’s fortunes swung the other way with PAT surging 4X

• Tech Giants Vs Import Rules: Major laptop makers Apple, HP, Dell and others have urged the Indian government to extend the deadline for import restrictions on electronic devices

That’s all for now. We will see you next Sunday with another weekly roundup, and till then, you can follow Inc42 on Instagram, X/Twitter and LinkedIn for the latest news as it happens.

The post Startups Play The Profitability Card appeared first on Inc42 Media.

Zomato’s first-ever profitable quarter brought a whole lot of cheer. Even union cabinet ministers couldn’t help themselves from congratulating the Deepinder Goyal-led company after the Q1 FY24 numbers were announced in the past week. 

Of course, Zomato is not the first consumer services (B2C) tech company to report a profit, but one cannot overlook the fact that food delivery has long been called a cash guzzler. Zomato’s quarter busts this notion. 

So, there’s certainly a feeling that this is a milestone not just for the company but also for the Indian startup ecosystem as a whole. 

Well, congratulations aside, while the profits are definitely headline-worthy, some grains of salt are actually hiding between the lines in Zomato’s Q1 FY24 numbers. We wanted to take a more practical view on where Zomato is heading. 

But before that, here’s our take, but after these major stories from our newsroom last week: 

• DealShare Dealing With A Lot: Amid bearish market conditions, DealShare is facing a series of challenges, including layoffs, scaling down of operations and now the CEO’s resignation
• Life After GoMechanic: GoMechanic cofounders Rishabh Karwa and Nitin Rana are working on two separate startups, six months after controversy hit the auto servicing startup. Read our exclusive story
• No End To Layoffs: Tiger-backed Spinny laid off 300 employees and ex-Tesla exec’s Tekion let go of 200 employees in India, while Increff and Actyv.Ai also went through layoffs this past week

Zomato Peeks At Profits

Zomato banked on Adjusted EBITDA till last quarter, but in Q1 FY24, it didn’t rely on this crutch. Instead, as we reported, the deferred tax of INR 17 Cr brought the company out of the red, but only JUST.

At INR 2 Cr, the profit is 0.0008% of Zomato’s consolidated revenue in the fiscal. So, it’s not like the situation has been turned around completely. These are green shoots that may well die down in one bad quarter or unexpected tax jolts. Nevertheless, it has brought some optimism among those watching Zomato.

The bullishness is because of how Zomato has pulled up its core food delivery business, and Hyperpure growth, which is proving to be a lynchpin for both restaurant partners as well as quick commerce dark stores. 

The bottom line improvements have come largely as a result of cost cutting in employee benefits expenses (3% lower YoY) as well as some rationalisation in advertising and sales costs which only increased by 3% QoQ and 13% YoY, whereas revenue growth was north of 17% QoQ and  70% YoY. 

One cannot deny that Blinkit’s revenue contribution of INR 803 Cr for FY23 has had a big impact on Zomato’s overall operating revenue. But Blinkit itself saw some headwinds in the past quarter. 

For one, quick commerce revenue growth was not very encouraging, and secondly, perhaps more worryingly, the number of transacting users remained flat compared to the quarter ended March 2023. 

Blinkit CEO Albinder Dhindsa is confident of reviving this after the blip of delivery partner strikes (more on this later) and other logistical challenges such as adverse weather conditions in this period. 

Blinkit Spoils The Picture

For the purposes of analysing whether Zomato can sustain this profit breakthrough, let’s discount food delivery, which saw an operating profit of INR 181 Cr in the quarter. 

The company still has to pick up the loss-making parts of its business — Blinkit, Hyperpure and dining out. Quick commerce saw Rs 133 Cr in loss, while Hyperpure’s bottom line contribution was a negative INR 35 Cr. 

Hyperpure showed its worth with 29% QoQ and 129% YoY revenue growth in Q1 FY24, outpacing the overall revenue growth rate. But as usual, Blinkit proved to be the weight that dragged down Zomato in the quarter. 

Nevertheless, Dhindsa believes that Blinkit can reach Adjusted EBITDA breakeven over the next four quarters after becoming contribution positive in June and July 2023. Despite the slow GOV growth, Blinkit’s Adjusted EBITDA loss narrowed to INR 133 Cr in Q1, an improvement of INR 70 Cr QoQ.

The company has announced plans to add 100 dark stores to Blinkit’s network in FY24, which would require the most amount of investment for the business. This will undoubtedly complicate unit economics in the short term, especially if the problem of delivery partners striking comes back to haunt Blinkit. 

Like we wondered after the Q4 results in May, food delivery might well become a dependency for Blinkit in the short term, as it looks to make these investments. It’s no wonder then that so many of Zomato’s improvements (financially speaking) are on the food delivery side. 

Blinkit’s store additions are expected to be in cities where Blinkit is already present to increase the density of stores and thereby capture a larger market share in most active cities, where competition is also the highest.  

Is Food Delivery Maturing?

Speaking of competition, in May Swiggy claimed to have hit profitability in its food delivery business, as of March 2023, (after factoring in corporate costs; excluding ESOP costs). 

At the time, CEO Sriharsha Majety said Swiggy was one of the few global food delivery platforms to achieve profitability, though this announcement was not accompanied with actual financials of the company. 

On the quick commerce front, a Swiggy spokesperson told Inc42 at the time, “Instamart would reach unit economics positivity in the next few weeks.” 

Like Zomato, Swiggy also looks to be relying heavily on food delivery profits to keep quick commerce fuelled up. 

Given that Zomato also achieved profitability in the March-June quarter, we have to wonder whether food delivery as a sector is maturing and becoming more indispensable for the most active users, which are consumers in metros and Tier 1 cities. 

Competing with Swiggy, which has its hands in various delivery pies (ecommerce, D2C brands, Instacafe), will not be cheap. Even on the food delivery front, both companies have adopted similar strategies in recent months. 

Zomato Vs Swiggy: An Eternal Rivalry 

The two biggest players have made no bones about the fact that their focus is on growing revenue from customers, reducing discounts as much as possible, while also squeezing out higher ad revenue from restaurants. It looks like these measures are finally paying off for the food delivery duo, and this might feed the quick commerce ambitions in the short term. 

Zomato relaunched Zomato Gold earlier this year to fuel repeat orders, while Swiggy has the Swiggy One loyalty product. Besides this, Swiggy added a standard INR 2 fee for every order to boost profitability per delivery and both have looked to lure in new restaurants with a 0% commission promotion. 

Swiggy recently gained parity with Zomato by launching a co-branded credit card. Both companies have bolstered the dining out verticals. Zomato is expected to add a new vertical, called ‘Going Out’, next quarter that combines dining out and events ticketing. 

Both also have just one major competition in the form of Zepto, which can yet complicate the quick commerce business and spoil the wallet share for Zomato and Swiggy. Zepto is close to raising $150 Mn to expand quick commerce and its instant food delivery (Zepto Cafe) verticals.  

We don’t expect Zepto or Swiggy to completely spoil Zomato’s party, but it will definitely be interesting to see how Zomato balances its need to push Blinkit growth with its focus on sustainability. 

30 Startups To Watch: July 2023 Edition

The latest edition of our much-followed ‘30 Startups To Watch’ series, as usual, puts the spotlight on the early stage innovators in the startup ecosystem. 

In July 2023, fintech, ecommerce and enterprise tech sectors dominated our list, but startups from generative AI and semiconductors — two red-hot domains — also caught our eye. 

The 38th edition of ‘30 Startups To Watch’ features the likes of Agrigator, Rehook.ai, Fundly.ai, HexoAI, Leumas among others in the B2B segment, while Kikibix, Swytchd, OneGreen were among the consumer tech startups in the list. 

Check Out Our Full List Here

Sunday Roundup: Startup Funding, Tech Stocks & More

• Weekly Funding Sees New Low: Indian startup funding hit a new weekly low with just $11.5 Mn raised across 9 deals. This is a massive 74% fall from the already-low funding numbers of the previous week
• Results Season: Freshworks nearly halved its net loss for the June quarter, while Tracxn saw profits as well as revenue slip, and Nasdaq-listed MMT posted 3X higher profits in its latest numbers 
• Import Impasse For Laptops: Apple, Samsung, HP are said to have halted imports of laptops and tablets into India after a recent ruling increased their customs duty burden 
• New IPOs On The Horizon: Mamaearth received SEBI approval for its initial public offering, while the IPO of game development company Yudiz Solutions got underway on Friday, August 4.

That’s all for this week. We will see you next Sunday with another weekly roundup, and till then you can follow Inc42 on Instagram, Twitter (aka X) and LinkedIn for the latest news as it happens. 

The post Zomato’s Profitability Paradox appeared first on Inc42 Media.

January 2022: DealShare Turns Unicorn With $165 Mn Funding Led By Tiger Global
February 2022: DealShare Raises $45 Mn In Series E At $1.7 Bn Valuation
April 2022: DealShare Aims For $3 Bn GMV By March 2023
May 2022: DealShare Plans To Add 1,500 Employees, Acquire 10 Businesses In Expansion Spree
November 2022: DealShare To Invest INR 500 Cr In Next 2-3 Years In Private Label Brands
December 2022: DealShare Customer Base Touches 20 Mn
January 2023: DealShare Lays Off 100 Employees, 6% Of The Workforce
January 2023: DealShare’s FY22 Loss Balloons 543% YoY To INR 431 Cr
June 2023: DealShare To Invest INR 1,000 Cr In 5 Years To Help MSMEs Scale Up
July 2023: DealShare Without A CEO As Vineet Rao Steps Down

We have to give DealShare credit where it’s due. Despite the mega losses in FY22, layoffs earlier this year, the exit of a CEO, and the rapidly-changing competitive landscape, the Tiger Global-backed unicorn is not lacking any optimism.

Even its press release about cofounder Vineet Rao stepping down as the CEO was buried under a couple of paragraphs of what can only be described as bluster about a ‘strong balance sheet’ and a ‘quest towards profitable growth’.

The ecommerce unicorn was valued at $1.7 Bn at the time of its last fundraise in January 2022, but like in many other Indian unicorns, the bloated valuations are finally deflating and finding their ground.

But again, DealShare’s bullishness makes it hard to pin down the company’s many challenges. For one, even as its primary social commerce model has faded, the startup has not had any qualms in talking about the opportunity in private labels, MSMEs and all the tried-and-tested buzzwords that ecommerce companies turn to when things aren’t going so well.

DealShare: Scaling Down Like A Unicorn 

The CEO’s departure comes at a time when the startup is moving to a hybrid online and offline model.

In a statement, the startup said that Rao would support the board to help identify the new CEO. However, it didn’t disclose the reason behind his resignation. As such, Rao’s decision to step down abruptly without securing a replacement is bound to raise many questions. Rao continues to hold more than 10% stake in the company.

It must be noted that DealShare has made several key appointments over the last few months. In July, it appointed former Tata CLiQ Saurabh Kishore as its chief technology officer. Prior to Kishore’s appointment, DealShare didn’t have a CTO, and cofounder Rajat Shikhar, who has led product teams previously, largely handled the CTO responsibilities.

Besides this, in December last year, DealShare also appointed former Big Bazaar chief executive Kamaldeep Singh as the president of the retail business. This came soon after the company said it would invest INR 500 Cr in the private label business.

Further, the company claimed this year that it would invest INR 1,000 Cr to target MSMEs in India over the next five years. Despite its bullishness, DealShare has not exactly outlined how these investments will bolster its revenue or bottom line.

Over the course of the past couple of months, Inc42 has spoken to a number of former employees and investors in the ecommerce and B2B commerce space about where DealShare is heading and the picture painted is definitely less rosy than the most recent headlines about the company.

Amid bearish market conditions, DealShare is facing a series of challenges, including shuttering warehouses, implementing layoffs, scaling down operations in various states, and the CEO’s resignation at a critical time.

As per sources close to the company, it completely shut down operations in Maharashtra in late June. DealShare primarily had warehouses in Mumbai and Pune for B2C and B2B verticals, with nearly a dozen warehouses in Pune being shut. The company has also shut operations in Hyderabad, with Gujarat next on the chopping block, as per sources.

Employees in these states were told to resign in June due to a supposed fund crunch and were given two months of salaries in compensation. Over 400 employees have been let go in the past four months.

The thin margins across its many products mean that the company is seemingly solely relying on VC funds to grow and scale.

Questions sent to DealShare cofounder and co-CEO Sourjyendu Medda about the exits, layoffs, downturn in business and challenges in scaling up the hybrid retail business were not answered.

After pulling back from some states, the Tiger Global-backed unicorn will focus largely on Delhi NCR and Rajasthan, where it sees most business. DealShare is said to be doubling down on these two particular regions and scaling back from other hubs, as reported by Inc42 earlier this year.

So, what exactly went wrong for DealShare that the unicorn has had to bite the bullet and call off its expansion spree?

How DealShare Fell Into The Red

Founded in September 2018 by Sourjyendu Medda, Vineet Rao, Sankar Bora, and Rajat Shikhar and Rishav Dev, DealShare began life as a social commerce marketplace which looked to target new online shoppers through affiliate links shared on messaging and social apps.

Dev exited the company in 2019 and is currently a cofounder of a fashion brand, however, the other four cofounders have key roles. While Rao was the CEO till this week, Medda is currently still the co-CEO (despite no actual CEO). Bora is the COO at the company, while Shikhar is the CPO at DealShare.

To date, it has raised close to $400 Mn from investors such as Tiger Global, Matrix Partners, Alpha Wave Global, Westbridge, ADIA, Unilever Ventures and others.

The company started out by allowing consumers to get discounts on products for buying in groups. Before launching its app, the company offered products through WhatsApp, which is where its social commerce credentials were honed.

DealShare’s idea was similar to a number of other startups such as Meesho, Trell, GlowRoad, CityMall, SimSim, Bulbul, and others. Essentially, these apps brought the affiliate marketing model to smartphone apps such as Instagram or WhatsApp where individuals can share links and earn money for conversions through those links.

But social commerce, which boomed during Covid and the height of TikTok mania in India failed to move the revenue needle for these players.

Rivals such as Meesho, GlowRoad, Trell and others have pivoted to other segments and models due to mounting losses. Bulbul was acquired by the Good Glamm Group in March 2023 in what we described as a puzzling acquisition at the time.

Essentially, social commerce was a thesis that never panned out. But DealShare had at least convinced investors about the model’s potential.

The startup entered the coveted unicorn club in January 2022 after it bagged $165 Mn in Series E round and followed this up with a $45 Mn round led by ADIA, which catapulted its valuation to over $1.7 Bn.

DealShare had major plans to expand and scale up with this funding. The startup’s statement said that it would invest in technology and data science, and target a ten-fold expansion in its logistics infrastructure to increase geographic reach. In addition, it also said it would establish a sizable offline store franchise network.

But instead, DealShare has scaled back and the promise of social commerce is all but dead. Besides offering a digital B2B wholesale platform for kirana stores and retailers, DealShare operates an online grocery store for consumers as well. Its earlier social commerce play has more or less been retired now with a focus on B2C and B2B2C ecommerce.

In July, the company claimed to have over 1 Cr customers, with 1.5 lakh daily orders fulfilled. In its private label business, DealShare said it has eight brands across 16 categories, besides connecting 500 other brands to 1,000+ retailers in India.

It’s perhaps fortunate that DealShare managed to secure a funding round at the time it did. Since March 2022, valuations have become fickle and VCs are not shy about calling out the need for correction. Revenue projections, which were once rather ambitions, have also sobered down.

Losses Grow, Users Decline 

Even before it turned a unicorn, DealShare has been ultra-bullish about its revenue projections. In July 2021 (FY22), after the startup raised $144 Mn, cofounder Medda said DealShare was on track to hit “$1 Bn gross merchandise value run rate by the end of the year and is very close to breaking even.”

As we now know, DealShare saw losses grow by nearly 7X in FY22 to INR 431 Cr, far from breaking even. The company primarily earned revenue from sale of goods, as a result its expenses leaned heavily towards purchase of stock in trade. It purchased stock worth INR 2,088 Cr in FY22 and earned INR 1,925 Cr in the year from sale of products.

Losses are not alien to the ecommerce sector, of course. While no one expects an ecommerce company to become profitable in its first few years — even Flipkart is in the red and Meesho’s FY22 loss stood at a staggering $500 Mn — there needs to be some justification for the fundraise, which usually depends on scale and revenue rate.

Let’s understand whether DealShare has the scale and engagement to justify the valuation and show that it can potentially accrue enough revenue from this scale to break even.

As we can see in the below charts, DealShare’s engagement (monthly and daily active users) and downloads have declined drastically, according to data sourced through Apptopia.

Unsurprisingly, downloads peaked to around 2 Mn per month just before DealShare’s unicorn round in January 2022 when it raised $165 Mn and since then monthly downloads have not cracked the 500K mark in the past 15 months.

Even though these numbers pertain to the Android app only, DealShare recently claimed that 99% of its volume comes from this channel.

The daily active user count has not been higher than 420K per month for the past three months. It’s not clear how the company plans to drive engagement and the downloads without raising fresh funds to fuel marketing and promotions.

Users are also fed up with DealShare’s tech and delivery issues.

Multiple social media posts, such as this one, point to the company automatically cancelling orders, delivering tampered packages and not refunding the amount for cancelled orders to customers.

Many customers told Inc42 that the company cancels orders without notice and does not refund the money to the source of payments. Instead, the amount is deposited to a DealShare Wallet, which has a one-year expiry period for fund deposits.

Given that orders are automatically cancelled at times, users find it complicated to utilise their wallet balance as highlighted by tweets as late as July 2023. Besides this, the platform is inundated with complaints about delays in deliveries for products such as flour, rice and other staples.

Cracking The Retail Game

The primary problem for DealShare today are the executional issues in its distribution and warehousing operations. The layoffs earlier this year have further dented the operations in certain regions.

B2B wholesale distribution is a complicated beast due to the competition and the aggressive margin play involved.

Warehousing and distribution are said to be the biggest success factors in online B2B wholesale commerce, and challenges in this regard can hamper margins in the long run. This is the area that the likes of JioMart, Udaan, Jumbotail, Shopkirana and others have looked to grow in the past few years.

Even at the best of times, the margins are low because distributing to stores is fraught with logistics challenges. Startups compete by building warehouses and customising their supply chain for manufacturers and kiranas, and offer perks such as upfront payments to manufacturers to get longer contracts.

Competing in this segment requires not just extensive experience to build distribution networks but also financial flexibility to discount certain orders. Companies have struggled with razor thin margins due to the high competition from traditional B2B wholesalers.

Udaan was founded in 2016, two years before DealShare, but its losses in FY22 surged 1.2X to INR 3,075.80 Cr compared to INR 2,503.30 Cr in the previous year. This was on a revenue base of INR 9,880 Cr. In the year, Udaan spent INR 9,415 Cr in purchase of stock. Even at that scale, breakeven remains elusive. DealShare has a long way to go before catching up.

In early August, a report by The Arc claimed that despite having cash reserves of $150 Mn, the management is not allowed to access this cash for day-to-day affairs. The publication claimed DealShare management requires investor approval to access these reserves.

The company also said it would be focussing heavily on a hybrid approach with branded offline stores backing up the B2C and B2B2C ecommerce operations.

DealShare Vs Udaan, JioMart & Co

The pandemic more or less forced retailers and kiranas to use digital platforms to order directly from manufacturers. It not only widened the opportunity for Udaan, Peel-works’ Taikee, Shopkirana and others but also compelled giants such as Jio and Tata (armed with BigBasket) to enter the fray.

New-age companies such as Udaan, JioMart and DealShare offer a convenient way for retailers to buy products at wholesale prices, but DealShare is not in the position to dictate pricing to manufacturers just yet.

Even Udaan struggled with this issue and took FMCG giant Parle to the Competition Commission of India. Udaan had alleged that Parle was deliberately blocking supply of certain products to the startup, which forced the company to buy from the open market and thereby compromise on the margins.

Such scenarios are not uncommon in the B2B space. Besides Parle, even Amul stopped supplying products to Udaan.

Reliance Retail’s JioMart seems to have made a huge leap by adding Metro Cash & Carry to its bucket. JioMart’s entry has already made life difficult for the likes of Udaan, and DealShare will have to contend with this major headwind as well.

Even Flipkart has jumped in with both feet and is banking on a healthy mix of product categories to get higher margins on average. But in the B2B segment too, Flipkart has considerable losses.

However, it must be noted that DealShare has the backing from Unilever Ventures, which is the venture capital and private equity arm of global FMCG giant Unilever. It’s not clear how much of DealShare’s business comes from Unilever and Hindustan Unilever-owned brands. The latter operates over 65 brands in India across categories.

Given that the competition DealShare is perhaps stepping into this space a little too late and on the backfoot. Its extended focus on loss-making social commerce and B2C business may prove to be a dead-weight for the startup.

Revenue has to outpace costs of purchase of stock, as highlighted by Udaan’s financials and to get there, DealShare has to get the right margins from its network consistently over many quarters.

While DealShare says it would be setting up retail stores to back ecommerce operations, this hybrid play will also require significant investments, and it’s not likely to deliver profits in the short term.

If it is looking to scale up and expand its geographical reach, DealShare has to seek sustainability by charging higher margins than players such as JioMart or Udaan. This may make the company less appealing to manufacturers as a whole, especially if DealShare is not able to sign up more retailers to buy this stock at wholesale.

This is where the challenge lies for DealShare. Even at its optimistic best, the company cannot deny that B2B ecommerce and scaling up the retail play will have several unit economics challenges. The exit of the cofounder and CEO at this juncture makes this journey that much harder.

The post DealShare’s Cart Of Woes: CEO Exit Amid Slowdown, Operational Mess Raise Red Flags appeared first on Inc42 Media.

Accel-backed agritech startup Mooofarm has responded to allegations of embezzlement, revenue inflation and fake employees raised by its former finance head Vineet Bhati, claiming that its criminal complaint predates the one made by Bhati.

Further, the company has denied Bhati’s claims and maintained its stance around the allegations raised in its complaint.

“Mooofarm terms their former finance head’s allegations as baseless with no evidence to back it. He was the sole authority to make payments and the founders had no knowledge. In addition, the company’s financials are fully audited till 2021-22 and we are fully compliant with our processes,” the company told Inc42 in response to Bhati’s allegations.

Last week, Gurugram-based Mooofarm revealed that it had filed a criminal complaint against Bhati for allegedly embezzling INR 10 Cr from the company and investing them for personal gains. Bhati fired back with his own set of allegations and claimed that instead, the founders were inflating revenue and growth with fake employees and fake customers.

While the matters in both cases are yet to be accepted as first information reports (FIR), Mooofarm claims that it had filed a preliminary complaint against Bhati on July 10, 2023. The company told us that it was able to ascertain more facts after this and file a more detailed complaint with the Gurugram police on July 20, 2023.

Earlier, responding to Mooofarm’s allegations, Bhati had countered saying his police complaint, dated July 13, 2023 was filed before Mooofarm. But this is not the case as per Mooofarm’s latest comment to Inc42.

Mooofarm’s preliminary police complaint was based on an analysis of the company’s current accounts, which show that Bhati made several transactions from this account to his personal accounts from December 2022 to May 2023. An analysis of Bhati’s account showed the corresponding entries from Mooofarm’s accounts and then deposits to investment brokerage accounts.

Mooofarm maintained its original allegation that Bhati was using the company’s funds to invest in derivatives and options. Sources close to the company now claim the total amount withdrawn from the accounts is over INR 45 Cr, which could eventually be attached to the case.

Bhati did not respond to questions from Inc42 about the basis for the claims raised in his complaint against the Mooofarm founders. It must be noted that these claims were only raised after we had originally published Mooofarm’s allegations.

The former finance head also did not respond to questions about the bank statements showing withdrawals with his name in the transaction remarks.

It must be noted that Bhati had raised these allegations in emails to these key shareholders in mid-July 2023. Inc42 has seen those emails, but Mooofarm’s investors Accel, Aavishkaar Capital and Navus Ventures did not comment on the situation.

Will Mooofarm Controversy Boil Over? 

Founded in 2019 by Paramdeep Singh, Aashna Singh, Jitesh Arora and Abhijeet Mittal, MoooFarm offers a dairy-as-a-service full-stack platform where farmers can buy cattle and other livestock for dairy farming, access telehealth and balanced nutrition services from veterinarians that are said to increase milk yield, and also get financing aid to manage operations and buy dairy inputs.

Till date, the Gurugram-based startup has raised over $16 Mn from investors such as Accel, Aavishkaar Capital, Aditya Birla Ventures, Rockstart, Navus and others.

Bhati was one of the first employees of the company, having been on board since July 2019 till earlier this year when he said he resigned from the company.

While the embezzlement allegations against Bhati and his subsequent claims of revenue inflation by Mooofarm management have already put both parties at loggerheads, there were more allegations raised by the former finance head.

At one point during his stint in the company, Bhati was classed as a promoter and held 5,000 equity shares in the company till September 2021.

In May 2021, he transferred 3,200 shares to Australian LLC DoGoodles Pty Ltd, followed by 1,200 shares transferred to cofounder Mittal and 600 shares to cofounder Arora in September 2021. Essentially, at the end of FY22, he held zero shares in the company and his remuneration for the year was INR 14 Lakh.

Talking about this, Bhati alleged that “the management without knowledge, consent and intimation transferred 5,000 shares in their name (at a per share price of INR 23, however the value per share was INR 60,000 approx at that time) and removed me from the post of Director.”

But we were not given any further evidence of such a forced dilution of his shares. Mooofarm did not respond to questions about the shares being transferred to two of the cofounders.

While the company has alleged embezzlement, it’s not clear if it will be able to recover any of the money alleged to have been moved by Bhati.

In FY22, Mooofarm reported INR 50.73 Cr in revenue from operations, a near-50X jump from the INR 1.2 Cr revenue stated in FY21. The company remained in the red despite scaling up its revenue. Losses for FY22 grew to INR 14.84 Cr, a 5X jump from FY21’s INR 3.2 Cr loss.

Will the loss of working capital due to the alleged fund syphoning prove to be detrimental to the business in the medium term?

The post Mooofarm Denies Ex-Finance Head’s Allegations Of Fake Revenue  appeared first on Inc42 Media.

More and more second-time startup founders and serial entrepreneurs are looking at whitespaces in the tech ecosystem to start up again. And GoMechanic cofounders Rishabh Karwa and Nitin Rana are two more noted entrepreneurs joining this bandwagon.

Rishabh and Rana are currently working on two separate and unnamed new startups, even as dust is far from settled on the GoMechanic front. Indeed, it was just over six months ago that the controversy broke out.

Rishabh and Rana are two of four cofounders of GoMechanic, along with Kushal Karwa and Amit Bhasin. We don’t know much about Rana’s new startup, but more details are available about Rishabh’s latest venture.

For one, his X (Twitter) bio reads, ‘Building for Local Storefronts around the World’, and his recent tweets indicate that the GoMechanic cofounder has spent a considerable time in the US.

The other GoMechanic cofounder Rana is working on a new startup and “Building Travel & Hospitality Product for Indian Subcontinent and World”, as per his LinkedIn profile.

Neither have registered a new entity in India or the US yet as per Inc42’s checks on official portals.

Rishabh has dropped hints about his next business since June this year.

“We are trying to create [sic] is a Suspension Score for Business to check the risk their Business Profile is facing. Truly believe it can help a lot of Small Store Owners avoid a lot of frustration!” Rishabh revealed at the end of a thread on July 19 about the risk for businesses being red-flagged by Google Business, and therefore Google Search and Google Maps.

Rishabh did not respond to questions sent via an X (Twitter) direct message about his new venture or indeed what happened towards the end at GoMechanic after its controversies came under the spotlight.

Life After GoMechanic

The Peak XV (Sequoia) backed startup’s founders admitted to financial misreporting, and was acquired by a consortium led by the Lifelong Group, which is a majority shareholder in GoMechanic rival Servizzy.

The deal saw write-offs by all GoMechanic’s equity investors, while venture debt investors managed to recover some funds. Sources told Inc42 at the time that the distress sale was executed at INR 220 Cr (roughly $27.5 Mn), roughly half of the total lifetime funding raised by GoMechanic.

Most importantly, GoMechanic founders were not part of the deal and did not get any equity in the acquiring company.

While only one cofounder — Amit Bhasin — has publicly spoken about the misreporting and fake revenues, in private, all four cofounders are said to have admitted to the discrepancies that eventually turned GoMechanic’s fate.

As per sources close to one of GoMechanic’s key investors, punitive or legal action against the founders, including Rishabh and Rana, has not been ruled out, though nothing is certain as yet.

For legal action against founders, a consensus has to be reached by all the shareholders in the company.

Last month, sources close to GoMechanic told Inc42 that the matter is still sensitive, indicating that the deal may not have been finalised. But Servizzy has clearly taken over GoMechanic’s operations as the latter’s website is now seemingly being run by Servizzy’s parent entity Service Easy Technology Private Limited.

What Are GoMechanic Cofounders Cooking Up?

Nevertheless, Rishabh has been quite vocal about starting anew, posting about the journey of building a new product and startup. His social media posts about Figma plugins and projects indicate some degree of progress.

“The good thing about losing something you have built is you get to experience building something new again!” he tweeted in early June, followed by “0 to 1 can be the most stressful & most fun time simultaneously!” one month later.

It’s clear that Rishabh is looking to solve problems for businesses that have an online listing and want to improve discoverability. He regularly asks his timeline for questions about Google Business APIs and other listings-related problems that businesses currently face.

Second-time founders starting again from scratch is a major trend that has fuelled new business creation in the past three years. And while Rishabh Karwa has not yet raised funds to build a new product as far as we know, the question is will the controversies around GoMechanic change anything for his new venture or Rana’s.

Despite controversies in their previous companies, the likes of Rahul Yadav, Ashneer Grover have raised funds from investors — Yadav’s Broker Network raised over INR 280 Cr by itself.

While Grover is caught in many legal battles and Yadav is likely to see one too, the GoMechanic cofounders seem to have so far evaded court drama. Is it because the four confessed to their malfeasance? Or is there more trouble on the horizon even after the company has been sold?

Rishabh Karwa as well as Rana’s next ventures, might well secure more funding than GoMechanic — it’s not unheard of in the case of new startups from serial entrepreneurs — and this might actually turn out to be the defining achievement of their careers.

But at least for the first few years, there will be a nagging doubt about both cofounders’ new ventures from the overhang of the GoMechanic controversy. We saw this in the form of questions around Yadav’s Broker Network in the early days and even for Grover’s Third Unicorn now in its first few months.

So besides taking on giants such as Google or Apple and other existing giants in their respective industries, both Rana and Rishabh Karwa would also have to fight perception battles of their own.

Correction Note | August 01, 2023; 12 PM

• An earlier version of this story said Broker Network had raised $280 Mn. This has now been corrected to INR 280 Cr

The post Exclusive: GoMechanic Cofounders Eye New Startups Six Months After Fake Revenue Fiasco appeared first on Inc42 Media.

Amid the ongoing funding winter, there’s also a spring of second-time and serial founders starting up again in India.

From those who quit startups under mysterious circumstances to those who exited after acquisitions — startup founders in India with the right (and wrong) experiences are coming back to the board with new ventures.

It helps that this is a good time for seasoned practitioners to launch new ventures, and not just because the focus of investors is on the early stage. The larger motivation of wanting to solve the problems of monetisation and sustainability and rewrite the mistakes of the past have also spurred more entrepreneurs to bring new ideas to the table.

• Decoding Ola Electric’s IPO Plans: Experts believe that many of Ola Electric’s ambitious plans do not align with reality and are exaggerated given the state of India’s EV market
• Mooofarm In A Crossfire: The Accel-backed startup is caught in an alleged embezzlement tangle with multiple allegations flying around between the founders and the former finance head
• Milkbasket Layoffs: After exits at the CXO level, at least 130 employees of Milkbasket are set to lose their jobs amid restructuring at the Reliance Retail-owned company

Second Time Luckier?

Even before 2021, the peak of startup funding in India, the likes of Kunal Shah and Jitendra Gupta had already proven that some founders tend to see disproportionate amounts of funding in the second venture. CRED raised $600 Mn+ in its first year, while Gupta’s Jupiter secured $24 Mn in its seed round in 2019 soon after launching.

But 2021 saw a number of noted entrepreneurs start new innings, given that investors were using the bullish market to spray funding.

For instance, Abhinay Choudhari, a cofounder of BigBasket exited the company to launch laundry solutions startup LaundryMate, after Tata acquired a majority stake in BB in May 2021.

Similarly, Milkbasket cofounder and CEO Anant Goel stepped down from the startup and launched another venture called Sorted. Ola cofounder Ankit Bhati’s new startup Amnic also got launched in 2021 and was backed almost immediately by investors such as Peak XV Partners.

A Pattern Of Exits From Big-Name Startups

The trend of second-time entrepreneurs grabbing the investor eye continued in 2022.  For instance, BharatPe’s Bhavik Koladiya quit to become a shareholder and CEO at OTPLess.

In 2023, we have seen one or multiple cofounders of Sharechat, Zestmoney, Teachmint, and Chingari quit their companies, besides GoMechanic, which was largely due to governance issues.

Teachmint cofounder and former CTO Anshuman Kumar is now the founder of Duolop, a relationship management app for couples and spouses. Based on his tweets, we can also see that GoMechanic’s Rishabh Karwa is working on a new idea related to places and listings.

The trend has been clear for a number of years. But the funding winter has accelerated plans for many founders. For instance, there is a realisation that the product-market fit, which was almost taken for granted when VC money was flowing, is more critical now.

At the same time, some of these entrepreneurs are no longer able to influence these matters in their company because things have changed drastically since they started out, or simply because there is new ownership that takes the decisions. The stagnation of business in other cases forces entrepreneurs to take up new challenges.

Founders are also realising that their products or services are not solving the problems in the right direction. As we saw with CRED’s Shah and Jupiter’s Gupta, they often turn to areas of their expertise and start anew. Finding the right product-market fit by diving deep into a problem is more crucial than ever.

As Zerodha cofounder Nithin Kamath tweeted a few weeks ago that founders are likely to quit companies because they are often shortchanged by the better and more positive outcomes due to how diluted their equity is by the time they exit.

“If all the investment has to be returned, there will likely be no upside left for the founders & teams. This is when interest in running the business can drop,” Kamath had said.

The Investor Bias For Second-Time Founders

But being a seasoned founder is a major advantage for these entrepreneurs over those who are starting up for the first time. They already have the investors in place in many cases, early due diligence, which is already admittedly thin, gets even thinner in the case of a noted founder. Past experience reduces chances of failure in many cases.

After proving that he can scale up a business with Ola Cabs, Bhavish Aggarwal was able to raise millions for Ola Electric much more easily. Ola Electric has also scaled up rapidly, and even though there are challenges in the business, the company has managed to carve a separate identity, thanks to the inherent trust that investors have in Aggarwal.

But the bias can also be a significant weight on investors at times and can blind them to some red flags. After the Housing.com fiasco, Rahul Yadav bagged millions in funding for Broker Network in 2021 and as we saw in our investigation, this money was not exactly put to good use.

Nevertheless, investors we spoke to acknowledge that maybe 2023 has changed some of this blind faith that VCs had on serial entrepreneurs. Even those who have the experience of building and running are being evaluated less leniently.

More Serial Founders Incoming 

As we have heard from several VCs and investors over the course of the past few months, the focus on sustainability and profitability has forced a new mindset among founders.

The fact that early stage capital is more easily available for the right valuation means that ideas are more likely to be backed if it’s an experienced hand running things. Angels and VCs are more positive about early-stage investments in FY24 as they are primarily looking at the value over a four-five year horizon.

Given this turn in the market, founders prefer to start off from scratch rather than trying to turn the heavy ship of scaled-up startups around. That job is likely to go to professional CEOs as founders exit — one of our predictions in January for the year 2023. Even startups looking to list in late 2024 and 2025 are likely to rejig leadership teams, including founders, this year to allow new CEOs time to bed in prior to listing.

Plus, a greater emphasis on corporate governance systems has reined in founder influence on operations, with specialised leadership positions such as CFO or CTO being more relevant these days.

While publicly no investor would want to admit to this, the fact is that rich valuations have made it harder for founders to sustain the startup, and therefore, the better option is to return cash to the investors and start off again.

Another reason why it’s looking like the season of second-time founders in India.

Announcing FounderX By Inc42

While serial entrepreneurs have some advantages, those who are looking to join the founder pool cannot ask for a better time either.

We firmly believe that now is the best time to start up. Building on Inc42’s mission to accelerate India’s startup economy and our success with AngelX & CapitalX, we’re announcing FounderX, an eight-week immersive programme for aspiring startup founders.

With India’s top 1% founders and operators as coaches and sherpas, FounderX is bringing the best of the Indian startup ecosystem to aspiring founders.

Our fellows will work in teams, validate ideas with real customers, master the art of building the right team, test their business model in sandbox environments and even learn how to raise funds by pitching to marquee investors, with no full-time commitments needed for this journey.

Check Out FounderX To Know More

Sunday Roundup: Startup Funding, Tech Stocks & More

• Funding At New Weekly Low: Indian startup ecosystem witnessed a significant drop in funding this past week as a mere $42 Mn was invested across 16 disclosed deals. Looks like the second half of the year is off to a worse start than the first six months
• Nazara’s Profitable Start To FY24: The gaming giant reported consolidated profit of INR 20.9 Cr in the first quarter of the current fiscal, significantly higher than its position last year

• Info Edge Vs Rahul Yadav: Info Edge has sent a legal notice to Rahul Yadav’s Broker Network after its attempts to audit the company went nowhere due to alleged non-cooperation by the management
• BYJU’S Markdown: Peak XV Partners would be significantly marking down the fair value of its investment in the edtech giant in August 2023, according to reports

That’s all for this week. We will see you next Sunday with another weekly roundup, and till then you can follow Inc42 on Instagram, Twitter (aka X) and LinkedIn for the latest news as it happens.

The post Spring Time For Second-Time Founders? appeared first on Inc42 Media.

UPDATE | July 27; 23:00 IST

Former Mooofarm head of finance Vineet Bhati has responded to the allegations of embezzlement and countered with more allegations about a total embezzlement of INR 45 Cr said to have been carried out by the “management of Mooofarm Pvt. Ltd.”

Bhati also said that he had filed a police complaint on July 13, 2023, a week before Mooofarm’s own complaint. Inc42 has seen a copy of this complaint which alleges that the company’s management was involved in fraudulent activities related to unauthorised investments and lost company funds in stock and derivatives (Future and Options) trading from January 2021.

He also alleged that management was using the personal bank account of other employees from August 2021 to June 2023 to create a fake revenue of INR 130 Cr, and that even investors were misled by these figures. Both these facts were also sent to fund managers of Mooofarm’s key investors, two days after the complaint by Mooofarm was filed. Inc42 has seen a copy of the email.

We have reached out to Mooofarm’s founders and the investors named above with more questions on the barrage of allegations. Watch out for our continuing coverage on Mooofarm.

We have updated our original story below with more details based on Bhati’s comments and his side of the story.

Agritech startup Mooofarm has filed a police complaint against Vineet Bhati, the company’s head of finance, for allegedly embezzling funds from the company’s accounts for personal gains.

According to sources close to Mooofarm, the alleged embezzlement was discovered in the beginning of July 2023, and is said to have been going on for the past 3-4 months. The complaint is said to have been filed with the Gurugram Police (Sector-5) on July 20, 2023.

Sources also told Inc42 that Bhati is said to have syphoned out more than INR 10 Cr from the dairy-tech startup and transferred it to his personal account as well as trading account associated with investing in derivatives and options.

The company declined to reveal the modus operandi of the alleged embezzlement or speak about how far back it goes but confirmed the development in a statement shared with Inc42, reproduced in full below:

“Mooofarm has filed a police complaint against its Head of Finance for embezzlement of an unspecified amount of money from their head office in Gurgaon. The employee in question unlawfully made multiple fund transfers from the Company’s bank account into his personal account using it to participate in trading of high-risk derivatives and options,” a Mooofarm spokesperson said.

The statement added “The employee in question has submitted his confession over email owning up to the fraud. Company has also obtained financial records of the illegitimate transactions and has submitted the details in the police complaint. Mooofarm takes this incident extremely seriously and will make every effort to prevent similar incidents from happening in the future. The Board of Mooofarm and its investors remain committed to building a world class Dairy-as-a-Service Agtech and are fully aligned with the steps taken by the management of the company.”

In his response, Bhati laid out allegations about the money being invested through Zerodha by Mooofarm founders Paramjeet Singh, Abhijeet Mittal, Jitesh Arora and Aashna Singh.

“They have intentionally done these investments to gain higher returns to pay off [dues] and restart their previous company namely AVTEG Pvt. Ltd. which is under the recovery proceedings from Punjab Govt, Jammu Govt, TDS Dept, PF Dept, Employee dues and Vendor dues for an amount of INR 15 cr approx,” Bhati told Inc42.

Mooofarm management’s complaint has not yet been registered as an FIR (first information report) by the police, we were told by our sources, and the actual amount alleged to have been embezzled might change in the final FIR as and when it is registered.

As is typical in such cases, law enforcement authorities conduct independent inquiries about the complaint before registering an FIR. Police can only take action against any alleged fraud once the FIR has been registered.

Depending on the severity of the allegations and the police’s findings at this stage, the potential FIR may be transferred to financial crime divisions.

Vineet Bhati’s Long Association With Mooofarm

Founded in 2019 by Param Singh, Aashna Singh, Jitesh Arora and Abhijeet Mittal, MoooFarm offers a dairy-as-a-service full-stack platform where farmers can buy cattle and other livestock for dairy farming, access telehealth and balanced nutrition services from veterinarians that are said to increase milk yield, and also get financing aid to manage operations and buy dairy inputs.

Till date, the Gurugram-based startup has raised over $16 Mn from investors such as Accel, Aavishkaar Capital,  Aditya Birla Ventures (ABV), Rockstart, Navus Ventures as well as venture debt fund Alteria Capital. Its most recent round was a Series A in December 2022.

While not a cofounder, Bhati was employed with the company ever since it was founded in July 2019. Given his tenure, he is likely to have been a key figure in the agritech startup’s growth in the past four years.

In FY22, Mooofarm reported INR 50.73 Cr in revenue from operations, a near-50X jump from the INR 1.2 Cr revenue stated in FY21. The company remained in the red despite scaling up its revenue. Losses for FY22 grew to INR 14.84 Cr, a 5X jump from FY21’s INR 3.2 Cr loss.

About the revenue, Bhati claimed that FY23 revenue had touched INR 120 Cr, but alleged that “90% of the revenue of the company is fake and illegal,” – Bhati.

Bhati’s response claims embezzlement was done through fake tech and marketing vendors, as well as fake employees where the money was being syphoned out of the company.

He further claimed revenue was being shown as coming in through several fake customers. Mooofarm’s founders are alleged to have not just used fake employees to send money out of the company, but also rotate funds in the company’s current account shown as sales and purchases of cattle through fake customers.

“During the day, they used to rotate the same funds multiple times. They started pressuring the finance team to reduce the TAT [turnaround time] between the funds receipt transaction and funds payment transaction so that rotation can be more in a day [sic]”

These allegations are seen in Bhati’s criminal complaint and also his email to investors in July 2023.

At one point during his stint in the company, Bhati was classed as a promoter and held 5,000 equity shares in the company till September 2021.

In May 2021, he transferred 3,200 shares to Australian LLC DoGoodles Pty Ltd, followed by 1,200 shares transferred to cofounder Mittal and 600 shares to cofounder Arora in September 2021. Essentially, at the end of FY22, he held zero shares in the company and his remuneration for the year was INR 14,00,000.

“The management without knowledge, consent and intimation transferred 5,000 shares in their name (at a per share price of INR 23, however the value per share was INR 60,000 approx at that time) and removed me from the post of Director acting in a dishonest and fraudulent manner and made me a Financial Head on 08.09.2021. The Management have misused and abused me only to get the financial benefit, advantage and personal gains,” Bhati alleged in his response.

How The Embezzlement Was Caught

Sources close to the company claim that so far there is no more action being mulled besides the police complaint. They added that the discrepancy was more easily discovered since these were transfers made by Bhati to his personal account.

“They (the management) saw some fabrication in the monthly income statements shared by Vineet (Bhati) with the shareholders. When questioned he is said to have confessed immediately,” said one of the sources who had first-hand knowledge of the development.

Additionally, we were told that investors such as Accel, Aavishkar and others were immediately informed, after which the police complaint was filed by the company’s founders.

But even Bhati has apprised Mooofarm’s investors about the alleged fraud, and amid this crossfire of allegations, we have to wonder what will happen to Mooofarm.

Our coverage of Mooofarm will continue through the next few days, at the very least. Stay tuned for a deeper story on the agritech startup.

Update Note | July 27; 23:00 IST

• We have changed the headline of this story. The original headline was: “Accel-Backed Mooofarm Alleges INR 10 Cr Embezzlement By Finance Head; Files Police Complaint”
• Some portions of the original article were removed based on Vineet Bhati’s responses.
• We have prominently highlighted the portions that include Vineet Bhati’s responses.
• The original version of the story claimed that Vineet Bhati was a director in the company till December 2022, when he resigned in October 2021. We regret this error.

The post [UPDATE] Accel-Backed Mooofarm Caught In Crossfire Of Embezzlement Allegations Between Founders And Finance Head appeared first on Inc42 Media.

In another major blow to embattled BYJU’S, Peak XV Partners has reportedly told its limited partners that the VC firm would be significantly marking down the fair value of its investment in the edtech giant in the upcoming reporting period.

Peak XV declined to respond to Inc42 on the contents of the letter to its LPs or the current value of its investment in the edtech startup.

Sources close to Peak XV told Inc42 that the markdown in the BYJU’S investment is expected in August 2023

Peak XV also cited a lack of visibility into the company’s audited financials for FY22 and FY23 as a factor for taking “corrective measures” in its BYJU’S investments.

The letter to the LPs, reported by ET, comes soon after the resignation of Peak XV managing director GV Ravishankar from the BYJU’s board.

The letter reportedly claims that Peak XV was unable to influence the BYJU’S leadership on the lack of audited financials.

While the VC firm has said that it would be marking down BYJU’S investment, it did not give any further details on the potential value of the investment. “This is a developing situation, and we, alongside the other investors, continue to evaluate all available options,” said Peak XV, as per the report.

The report on the Peak XV’s letter to LPs comes a day after Prosus, the largest external shareholder of BYJU’S said that the company’s reporting and governance structures have not evolved sufficiently for a company of its scale.

“Despite repeated efforts from our Director, executive leadership at BYJU’S regularly disregarded advice and recommendations relating to strategic, operational, legal, and corporate governance matters,” Prosus said in a statement shared with media.

The Netherland-based VC firm added that the decision about its representative Russell Dreisenstock’s resignation from the board of BYJU’S was taken after it became clear that Dreisenstock was unable to fulfill his fiduciary duty to serve the long-term interests of the company and its stakeholders.

Peak XV’s Ravishankar, Dreisenstock, and Chan Zuckerberg’s Vivian Wu tendered their resignations from BYJU’S board last month.

Further, BYJU’S statutory auditor Deloitte, who was on retainer till 2025, also resigned citing the delay in providing adequate information to audit the company’s financial statements for FY22.

While the edtech giant appointed BDO (MSKA & Associates) as its statutory auditor, there is much confusion over when the company would actually report its numbers for the past two financial years.

Following the departures of the directors, BYJU’s has seen some reshuffling in its CXO layer. Former Vedanta Resources’ executive Ajay Goel was named as the company’s chief financial officer (CFO), while former SBI chairperson Rajnish Kumar and Aarin Capital cofounder and chairman TV Mohandas Pai were appointed to the a newly-constituted advisory council.

The resignations of the directors and statements from key investors come in light of a public legal battle between BYJU’S and the lenders of its Term B loan. While lenders had sought to accelerate the repayment of the loan, BYJU’s filed a lawsuit against the lenders alleging harassment over the recovery of the dues.

Most recently, the company reached a consensus with its lenders to reach amended terms for the $1.2 Bn by August 3, 2023.

Nevertheless, there are more headwinds expected for the company, which is looking to significantly lower its monthly burn. After a spate of layoffs, BYJU’S vacated a number of offices in Bengaluru to trim its costs this past week.

The post Peak XV To Markdown BYJU’S Valuation Citing Delayed Financials appeared first on Inc42 Media.

Just over 15 months ago, Paytm founder and CEO VIjay Shekhar Sharma claimed the company would break even on an EBITDA level by September 2023. “Importantly, we are going to achieve this without compromising any of our growth plans,” Sharma had said in April last year and it now looks like Paytm is well on track to hit this milestone.

If we look closely at Paytm’s trajectory after its Q1 FY24 results yesterday, it would seem that indeed the company is on track to hit this milestone later this year.

On the back of the growth in the lending and the merchants business, the CEO even said in the latest earnings call that Paytm is on track becoming free cash flow positive by the year-end.

So we thought we’ll take a stock of how the fintech giant might get there, but first a look at the top stories from the inaugural edition of Inc42’s MoneyX, India’s largest VC and angel conclave.

• Dry Powder Season In India: Peak XV Partners managing director Rajan Anandan believes that the funding winter has receded and now is the time for dry powder to find its way to the right startups
• The Question Of Domestic Capital: Even as family office investments have grown exponentially, the need of the hour is investor education as startups continue to be a risky asset class, said Waterfield Advisors founder Soumya Rajan
• GIFT City Boost: Despite being around for just over two years, more than 70 AIFs and 50 fund management entities have set up shop in the GIFT IFSC, which is fast becoming a new gateway for the global PE/VC ecosystem
• Navigating LP Waters: Family offices, HNIs and other limited partners (LP) are evaluating VC funds in the same way that these VCs evaluate founders and startups, changing the dynamics of investors raise new funds
• The Founder-VC Dynamics: While corporate governance debacles at Indian startups are alarming, investors cannot be expected to teach ethics to founders, said Pine Labs CEO Amrish Rau in conversation with Peak XV’s Mohit Bhatnagar

Paytm’s Q1 Snapshot

While there are indeed many positive takeaways from the Q1 results — the fintech major nearly halved its losses for instance on a YoY basis — there are red flags too. For instance, on a sequential or QoQ basis, the net loss more than doubled from Q4 FY23.

The silver lining for Paytm came from its revenue growth across segments, which will hold it in good stead once the ESOP costs of Q1 FY24 are nullified in the next quarter or two.

Overall revenue grew by nearly 40% YoY to INR 2,342 Cr, led largely by momentum in the payments GMV, merchant subscription revenues, and loan disbursals. The losses in Q1 were primarily due to the higher employee benefit costs, which ballooned to INR 2,800 Cr, thereby dragging Paytm into the red this quarter.

ESOPs Eats Into Profits

One of the reasons for the higher QoQ losses was that ESOP costs surged 32% to INR 730 Cr, which is typically seen in the initial few years after a public listing. While the fintech giant reported a third consecutive EBITDA positive quarter, this did not account for ESOP costs.

Even as ESOPs continue to be a major pain point for the company, it has not shied away from dishing out stock options. Just hours before its result, the company announced that it would grant an additional 1.7 Mn ESOPs to its workforce. This is likely to continue eating into the profit margins for the company in the next few quarters.

These employee-related costs are indeed part-and-parcel of Paytm’s fairly recent public listing in November 2021. But it remains to be seen when these costs will be finally out of the picture for Paytm.

Where Will Growth Come From?

One area that most fintech players are eyeing is obviously the lending business, where Paytm is using its wide acquisition funnel to pump out some serious numbers.

The platform disbursed 1.28 Cr loans (compared to 85 Lakhs last year) worth INR 14,845 Cr in Q1 FY24, which is a huge 167% jump from the INR 5,554 Cr of disbursed loans last year. Currently, it boasts of over 10 Mn unique borrowers from a monthly transacting user base of 92 Mn, with lending and financial services (BNPL included) contributing INR 522 Cr in revenue.

In comparison, the payments revenue rose 31% YoY to INR 1,414 Cr during the quarter under review. Indeed, when you look at the QoQ growth, revenue from payments has fallen from the INR 1,467 Cr Paytm logged in Q4 FY23, while revenue from lending has grown from INR 475 Cr in the March quarter.

“Prepaid and credit are the flairs that could add extra margin to payments in India,” said Sharma in response to an analyst query during the earnings call. He added that loan EMIs and credit card payments have seen much improved GMV, which in turn improved the fintech giant’s net payment processing margin.

More than anything, this is the biggest indication of just how reliant Paytm is on lending business.

Will Merchant Services Step Up?

One other area that Paytm would look to tap is the payments aggregator licence, for which RBI approval is still pending. This would allow merchants to accept payments from customers by integrating Paytm’s tech into their apps or websites and thereby bypassing the traditional bank accounts or credit cards.

This would make Paytm a lot more useful for retail and online merchants, who currently need a banking layer to accept these payments. It would also bring features such as instant settlements and faster refunds that merchants can leverage to reach  more customers.

Paytm already has a steady line of merchants on its platform and a PA licence would significantly boost the product proposition for these merchants.

The number of merchants registered grew 25% to 3.56 Cr in Q1, compared to 2.83 Cr a year ago. Further, the transaction value on merchant devices such as soundboxes, PoS machines and QR codes grew by 55% to INR 796 Cr in Q1 FY24.

New Dawn For Paytm 

Essentially, both lending and merchant services have outperformed the payments business for Paytm in the quarter ending June, compared to the previous three months. This goes to show that Paytm is no longer payments-first, but has diversified to financial services areas that are actually delivering the revenue growth.

Indeed, we had raised this question at the end of the Q4 FY23 as well. Lending margins are higher on the personal and merchant loans side, so cross-selling on both fronts will be key for Paytm in the near future.

The fintech giant has tied up with several banks to underwrite and offer the loans, but getting a banking licence Paytm Payments Bank would be the real coup de grace for the Vijay Shekhar Sharma-led company.

Perhaps, the steady revenue momentum from the lending and merchants business will give Paytm enough room to navigate and manoeuvre itself through the regulatory maze. Analysts will undoubtedly be bullish about Paytm after the Q1 results, and this next week could see Paytm rally even more strongly than in the past few months, where its share price has grown steadily.

This is definitely an optimistic time for Paytm and Sharma for one would be brimming with confidence about what the rest of 2023 and 2024 will bring.

Startup Spotlight: Pixxel & India’s Spacetech Dreams

Founded in 2019 and already attracting some of the world’s biggest tech companies, Pixxel has become something of a spacetech pioneer in the Indian startup ecosystem. The company’s primary thesis was that the extant satellite data was not enough for advanced applications, and so it went about revamping this domain with hyperspectral imaging satellites.

Today, the biggest use cases for Pixxel are related to hyperspectral imagery for agriculture fertiliser makers, oil and gas companies and mines. Having raised $71 Mn from the likes of Google, Blume Ventures and Lightspeed, Pixxel is now gearing up to launch the first six of a 24-satellite constellation — named Fireflies — by next year that it claims will make it India’s spacetech leader.

Read the full Pixxel story

Sunday Roundup: Startup Funding, Tech Stocks & More

• Furlenco Gets Funding Raft: The furniture rental startup got a cash infusion of $36 Mn amid a minor bump in Indian startup funding this past week when a total of $111 Mn was raised in 19 deals.
• Reliance’s Q1 Results: While Reliance Retail’s digital and new commerce businesses contributed 18% to the total revenue, the same as the last quarter, Jio Platforms saw a 12.5% bump in net profits for Q1 FY24
• Dunzo Takes A Hit: The hyperlocal delivery startup has started another round of layoffs amid major cash flow issues which has grown more serious in the past few weeks

• Return Of Startup IPOs: The likes of Paytm, Zomato and others have seen a significant upward rally after a torrid past 18 months. Will this signal a revival of startup IPO plans?

That’s all for this week. We will see you next Sunday with another weekly roundup, and till then you can follow Inc42 on Instagram, Twitter and LinkedIn for the latest news as it happens.

The post Paytm Knocking On Profitability’s Door appeared first on Inc42 Media.

It’s not often that a company raises its first external round 17 years after inception, especially if it continues to rake in profits, but that’s exactly what Kaar Tech did last week, when it raised $30 Mn led by A91 Partners.

In an ocean of startups and in the burgeoning enterprisetech space, Kaar Tech has flown under the radar after being founded in 2006 and has plugged away at the digital transformation space in key geographies with a bootstrapped approach. All while building its products and tech platform from India.

The company’s first fundraise is something of a surprise in a year when total startup funding has plummeted by 72% (YoY), but in other ways it’s not really surprising given that investors are largely focussing on sustainable business models. With profits in the past several years, Kaar Tech certainly stands out among loss-making startups.

Cofounder and CEO Maran Nagarajan told Inc42 that the company has not done anything different in the past couple of years even as other tech companies have had to reassess lines of business and cut back on workforce or spending.

Kaar Tech was founded by Maran Nagarajan, Ratnakumar Nagarajan, Selvakumaran Manickam and Gaurdian George in 2006 and initially focussed largely on the SAP consulting opportunity and built its core around SAP S4/HANA, which is an enterprise resource planning software used by large manufacturers and enterprises to streamline operations.

“All of us founders spent more than a decade in Western countries in various tech and consulting roles — the US, the Netherlands, Singapore and the Middle East. So we had a good idea of what companies in these geographies needed. When we came back to India in 2006, we decided to focus on the SAP and SAP S4/HANA space, which was our strength.” – Kaar Tech CEO Maran Nagarajan

Kaar Tech’s Digital Transformation Suite

SAP consulting typically involves enabling companies to streamline processes and get a clear view on the utilisation of its resources across any operational activity. The typical customer profile for Kaar Tech are companies in the manufacturing space where the digital transformation wave has truly embedded itself.

Elaborating on the SAP-centric solutions, Maran said that for enterprises in any discrete manufacturing vertical leverage SAP S4/HANA is the core, covering everything from financials, human capital management, inventory management, manufacturing, distribution and logistics to supply chain management. Kaar Tech has built its domain expertise in these core areas over the past 16 years.

The Chennai-headquartered company has focussed largely on SAP for most of its lifetime, and only ventured into other areas in 2022, given the broader needs of its target base of enterprises. As digital transformation needs burgeoned, so did Kaar Tech’s suite of offerings for companies.

“We gradually shifted into other areas that can also be offered as a horizontal service. We now offer our platform for data engineering, cloud engineering, product engineering and business process management, which have been in place for just over a year now,” Maran added.

Besides the core areas, Kaar Tech offers edge tech solutions for HR and talent management, financial supply chain solutions, warehouse management, third party logistics and transportation management, vendor management, forecast planning, customer relationship management, marketing, customer data management and more.

“There is a third layer that is ‘beyond edge tech’. Here we are talking about AI or ML-based solutions, or blockchain or process automation through robotics. These are all point solutions depending on which component of the business has engaged us,” Maran said, adding that most of these pieces have been added gradually after Kaar Tech had established domain expertise in SAP.

The idea is that when large enterprises eye digital transformation, they tend to require holistic engagement and end-to-end solutions. The company typically targets enterprises with market caps of between $500 Mn to $5 Bn as this allows Kaar Tech to cast a wider net in terms of the customer base, but also allows the company to focus on more sectors.

Currently, the company is working on 90 active projects, with over 300 enterprise customers served since inception.

Maran added that each project can bring in between $1 Mn to $10 Mn in revenue depending on the degree of engagement by Kaar Tech’s team of consultants and engineers. In FY23, the company claims to have earned INR 350 Cr in revenue with a profit of INR 65 Cr, up from INR 41 Cr in FY22.

Inc42 has not seen the company’s FY23 financials to independently verify the claimed profit amount.

Eyeing Acquisitions In The US

Of course, the fundraise changes things from the point of view of growth and scale, and the expansion into new horizontal areas in large part prompted the decision to raise funds, after more than a decade of being bootstrapped.

As it entered the horizontal space, Kaar Tech realised the need to add more pieces to its tech platform. One way is to acquire companies that fit the puzzle, which is the primary objective of the first round raised by the company.

“We would like to do an acquisition to strengthen the areas we have recently entered. This is likely to be in the data engineering or business process management space. And we are also  looking at the digital commerce space very closely where we are in advanced talks to acquire a company,” Maran told Inc42.

Maran added that the latter acquisition will be funded by the company’s generated profits, whereas A91’s funds will be used to acquire a data engineering or BPM company. He added that in the last two years, Kaar Tech has doubled its profits and that’s the objective for the next 24 months as well before a potential IPO.

Setting Targets For IPO Run

Kaar Tech’s primary competition is the likes of Yash Technologies, IBM, TCS, Wipro, Indus Novateur, NTT Data, Accenture, Deloitte, Capgemini, among other IT services giants. However, on a region-to-region basis, the company has a host of competitors that go beyond these names.

Maran claimed that Kaar Tech’s differentiation comes from the size of the companies that it targets for its digital transformation products and solutions. And this allows Kaar Tech to expand faster than some of its competitors and be more agile in its solutions.

As in the case of most B2B enterprise tech products, Kaar Tech earns most of its revenue outside India. CEO Maran has relocated to the US, for instance, to handle the projected business growth in the North American market, and cofounder George is primarily based in Europe to manage the EU business.

Maran believes that given the profile of clients in the Middle East — including the likes of petrochemical giant Aramco — there is a lot of organic customer acquisition happening in that region. However, the big focus will be on the US market, which is also one of the primary factors for the company’s push for inorganic growth through M&As in North America.

As far as India is concerned, the biggest challenge comes from the fact that Indian businesses do not yet have the maturity to implement large-scale digital transformation projects. “We have not had Indian customers after 2012 or 2013, because if you look at the service margins we expect, Indian businesses do not rise up to our benchmarks and the scarcity mindset is also a challenge when looking at revenue expectations from India.”

Essentially, the people-reliant consulting business does not suit Kaar Tech’s revenue expectations, where most of its employees have billable roles. “We assign people to certain projects and deploy people within large enterprises, so we want to operate with better margins, paying terms and milestones. So that’s why our scope was higher in the Middle East and will continue to be so in the US and Europe.”

The A91 investment is also likely to be the final external round that Kaar Tech raises before hitting the public markets by 2026, according to the CEO. The plan is to target the quarter between December 2025 and March 2026 with Indian and US listing both an equal possibility at the moment.

Kaar Tech is targeting a revenue base of INR 1,000 Cr by the time it lists, and plans to double its workforce by then to 5,000 employees in India and Southeast Asia.

Maran told us that the company fancies its chances for a potential Nasdaq listing, because it anticipates that 40%-50% of the revenue will come from the US by 2026 and most of its acquisitions in the US will also give it a bigger presence in the market.

Given the IPO ambitions, Kaar Tech’s first and potentially final external round, is meant to be a fuel-up before pressing down on the accelerator.

The post What Made Kaar Tech End Its 17-Year Bootstrapping Streak And Raise $30 Mn From A91 Partners appeared first on Inc42 Media.

There are a few Indian startups that can lay claim to being a verb. In that sense, Dunzo is a rare commodity. But in another sense, Dunzo’s story, particularly in the past couple of years, is also all too common in the Indian startup ecosystem.

For the so-called Twitterati and early adopters of internet products in India, ‘Dunzo it’ became a common refrain between 2017 and 2020 — whether it was for sending things from one place to another or for ordering things from a nearby store.

Founded in 2015 by Kabeer Biswas, Dalvir Suri, Mukund Jha, and Ankur Aggarwal, Dunzo has been a darling of the Indian startup scene for years.

In many ways, Dunzo has been a lone flag-bearer in the graveyard of hyperlocal startups that mushroomed and promptly shut down between 2015 and 2016. For many years, Dunzo was the last startup standing in this space.

Dunzo outlasted many of these rivals, and by 2018, its model remained unique in the context of Indian startups. The singular nature of its success also meant that when the quick commerce wave began around the end of 2019, with the emergence of the dark store model, Dunzo was well positioned to capitalise.

And it did capitalise to a great extent in the early days of quick commerce, but competition has grown stronger.

For Dunzo, access to capital has become a problem. Recent reports, based on anonymous posts on Grapevine, hint at financial troubles brewing in the company, with managers allegedly getting a flat salary of INR 75K for June 2023 — although the company has promised to release the remaining amount later this month.

We could not get a direct response from the company on the delayed and partial salaries, but sources close to the company claim that Dunzo is going back to what made it a household name among savvy internet users in the first place.

The hyperlocal delivery game is fraught with low margin and unit economic challenges, and when one adds quick commerce expectations to the mix, things get more complicated. While the popular notion was that Reliance’s investment would let Dunzo fuel up for blitzscaling, the opposite has come true.

Dunzo Goes Back To Its Roots

According to sources close to the company, Dunzo is said to be transitioning from a dark store-centric quick commerce business to bringing larger supermarkets and grocery stores on a revenue-sharing basis.

This is the original hyperlocal delivery proposition that Dunzo had created a niche in since 2015 onwards till 2020 before jumping into quick commerce. The retreat is perhaps in line with the cost-effective strategy that the company is adopting in mid-2023.

However, it must be noted that quick commerce through dark stores will be a focus for the company in certain areas where it is guaranteed high demand and better unit economics.

For instance, in April, the startup decided to shut dark stores that were seeing less than 1,000 orders per day, as per sources. Now it’s reevaluating more such dark stores and going back to the hyperlocal play in many cities.

In these cities, the idea is to use the same inventory management tech that has remained a mainstay at Dunzo and turn it to supermarkets for relatively quick deliveries — if not always within 10-15 minutes.

This way, the company would curb the high overheads associated with dark store expansion and focus on tech to match delivery riders with orders from retail stores, and therefore complete orders without the human resource cost of managing a dark store.

The reasoning is sound, but there’s one major headwind for Dunzo in this plan. Grocery and household shopping behaviour in metros and Tier 1 cities has quickly transitioned to quick commerce platforms such as deep-pocketed Swiggy Instamart, Zomato-owned Blinkit and Zepto.

While Mumbai-based Zepto has raised just over $360 Mn since its launch in early 2021, Dunzo has raised over $450 Mn in the past nine years. In fact, as we reported exclusively, Zepto is on the verge of joining the unicorn club and has pulled ahead of Dunzo in terms of fundraising with its latest $150 Mn round.

In comparison, Swiggy and Zomato have raised billions and have a huge revenue base to invest from.

Even as these rivals have scaled up in the quick commerce space, Dunzo had to shut down dark stores late last year.

What primarily went wrong for Dunzo was its mixed focus on hyperlocal deliveries and ‘Dunzo Daily’, the quick commerce offering.

The competition clearly earmarked quick commerce as the growth area, whereas Dunzo continued to hedge its bets and therefore the proposition was not clear to many users.

In 2023, quick commerce has changed its convenience proposition from speed to variety — apps are looking to become the super markets for a new generation of consumers.

Another thing that went wrong: Dunzo was slow to grow is assortment of products.

Besides growing their network, Swiggy, Blinkit and Zepto have also sharpened their focus around particular inventory items that supermarkets typically cater to, and have generally tried to boost the average cart size with new higher-value product assortment.

For instance, the imported sections on Blinkit, Instamart and Zepto carry high-value items that some larger supermarket stores such as Modern Bazaar, Delhi-based Le Marche, Nature’s Basket or Food Hall are well known for. Quick commerce platforms are also tailoring their supply chains for seasonal produce and the likes of Blinkit and Swiggy have also added electronics and other categories to their buckets.

Sources added that today Dunzo does have plans for hyperlocal delivery of electronics from major retailers. But these plans are still in the early stages of development.

The third area that Dunzo dropped the ball on was marketing.

In other words, Dunzo perhaps did not spread its wings wide enough to catch the wind that was blowing on the quick commerce tail (more on this comparison later in the story).

Yes, quick commerce is a marketing-heavy segment and Blinkit and Instamart realised this early on with their promotions blitz. Swiggy and Blinkit also have a higher install base to convert users on to their quick commerce plays and spread promotional costs across multiple verticals.

Zepto banked on its 10-minute delivery pitch to win new-to-quick commerce consumers and also launched ad campaigns to hit the ground running.

Dunzo, which was once the hip kid on the block, finds itself increasingly unfashionable with its return to the ‘old-school’ model, even if some might call it more sustainable.

B2B: Dunzo’s Other Big Hope

Besides the move back to hyperlocal deliveries, Dunzo’s other big focus is on the B2B logistics vertical, where it is counting on ONDC and Reliance for growth and scale.

There’s little doubt that Dunzo’s B2B logistics business has been the biggest beneficiary of Reliance Retail’s mega investment. The startup offers last-mile delivery for Reliance’s Jio Mart ecommerce play.

Besides this, the logistics arm, formally known as Dunzo For Business (D4B), is an empanelled ONDC logistics partner, along with relatively smaller pure-play logistics tech companies, to enable fulfilment services for onboarded sellers.

As we reported last year, ONDC sellers in Bengaluru were concerned about Dunzo leveraging data collected through ONDC fulfilment to boost its parallel dark store-led quick commerce business. But now that this dark store business has been more or less shelved, perhaps sellers might view Dunzo a bit more positively.

ONDC has also expanded beyond Bengaluru and to other locations in recent weeks, which opens up more revenue possibilities for Dunzo. But again, there is some confusion over long-term revenue outlook for logistics on ONDC.

On the logistics and price front, ONDC partners are revisiting their plans, with the network having recently floated its incentive policy for sellers but keeping subsidies intact for buyers.

The incentive programme that is being floated by ONDC provides a subsidy of INR 50 to a consumer on every transaction above INR 100. In addition, ONDC also subsidises consumers with up to INR 40 on every transaction, explaining cheaper or no cost deliveries.

Plus, the likes of Shiprocket, Delhivery, Shadowfax and others have also joined ONDC, which would limit the potential reach of Dunzo’s logistics business.

Essentially, even though B2B hyperlocal logistics seems like the clearest way for the company to break even and reduce operational costs on the commerce front, it is faced with multiple hurdles as of now.

Dunzo: A B2C Brand In A B2B World

A year and a half after its last major fundraise, Dunzo faces the twin challenges of balancing B2C and B2B operations as well as looking for the next capital infusion to grow and scale these up.

That’s a challenge that many startups are dealing with today. As per reports in April 2023, Dunzo’s leadership is bullish about turning profitable by September 2024. That’s still a long way away, and Dunzo’s losses till FY22 meant it would take significant effort to climb out of the red.

Dunzo’s consolidated loss in FY22 widened 2X to INR 464 Cr from INR 229 Cr in FY21 on the back of doubling of its expenses.Meanwhile, its total revenue stood at INR 67.7 Cr in FY22, also registering a 2X rise.

Employee benefit expenses accounted for 26% of the total FY22 expenditure and the layoffs in January and April 2023 would have certainly had a positive impact on this.

Where we can see a clear gap between Dunzo and the competition is in the marketing spend. Dunzo’s advertising promotional expenses in FY22 came up to INR 64.4 Cr or just over 10% of the total expenses of INR 531 Cr. In comparison, Zepto spent a whopping INR 176 Cr in the same fiscal year for marketing or nearly 33% of its total expenses.

As we indicated above, Mumbai-based Zepto has also fuelled up to make a bigger marketing push and scale up its operations.

Despite being around for nearly a decade, Dunzo’s scale and valuation are closer to Zepto than Zomato or Swiggy. However, in terms of the experience of scaling up, Zomato and Swiggy have the upper hand and have also experimented with various models before settling into something resembling a groove.

Swiggy and Zomato are primarily delivery platforms — whether it is food or groceries. Zepto has the sharp focus that this segment perhaps deserves. Dunzo had the ‘It’ factor, but that’s not doing it much good in 2023.

With inputs from Bismah Malik

The post How Dunzo Lost The ‘It’ Factor appeared first on Inc42 Media.

Consumer fintech is already largely digital lending, and now even ecommerce and consumer services players have joined the flock. This past week two major consumer internet giants — Flipkart and Swiggy — announced their foray into ‘lending’.

This just goes to show that the digital lending opportunity is going beyond fintech. While Swiggy has announced an entry into the co-branded credit card segment, Flipkart’s eyes are on the personal loan business. And it’s also stepping on sister concern PhonePe’s shoes with this major lending push.

How will this bigger financial services play (to add to the BNPL biz) change Flipkart in the long run? Especially since this is a completely different problem to solve than ecommerce and that’s before we even think about the revenue implications in the long run. We take a look after this detour to the top stories from our newsroom this week:

• PharmEasy’s Bubble: From an INR 6,250 Cr IPO to reports about raising funds at 90% valuation cut, PharmEasy’s fortunes have swung wildly in less than a year. Our in-depth story on what has gone wrong
• Startups On Debt Spree: Debt funding in Indian startups rose 80% YoY in H1 2023, as equity investments have slowed down. But is this causing an overreliance on debt among startups?
• Prime Venture Partners’ Moneyball: As VCs get conservative, they are seeking founders who have inherently built a mindset of not pushing for growth at all costs, says Prime VP’s Sanjay Swamy

Flipkart Enters The Loan Zone

Flipkart has always been a marketplace and now instead of selling physical products, it’s selling loans. It’s being seen as a critical tool to pull the ecommerce major from the red into the black as personal loans have several revenue streams and is generally the largest segment in retail lending.

The ecommerce giant will leverage the combined user base of Flipkart and Myntra to reach an audience of close to 300 Mn, and shopping data and behaviour will be a key data differentiator for Flipkart in competing against the likes of Navi, CRED (also a new entrant), Paytm and others in the personal loans space.

As per a report in The Arc, Flipkart is building an underwriting model in-house to ease the risk assessment process before loan disbursals. Like most of its rivals, the company will provide personal loans of up to INR 5 Lakh, with flexible repayment cycles ranging from 6 months to 36 months.

Ecommerce Giants Turn Lenders

Of course, personal loans is not the first lending category that Flipkart has entered. It launched a BNPL solution in 2017, as it looked to boost the order size and allow customers to pay for products in multiple instalments without a credit card.

As the BNPL market exploded with individual startups and larger players, Flipkart’s rival Amazon also joined the fray in 2020. Since then, BNPL has grown substantially, but the low ticket size and the constant churn of retargeting users who pay the outstanding has become a marketing drain on many ecommerce players.

For Flipkart, the lending play is particularly important given that the threat of JioMart has grown considerably in the past year. Plus, the launch of Jio Financial Services is another potential disruptor for Flipkart, Amazon and Tata Neu. The Tata Group’s super app also has a loans marketplace, with Tata Capital being the lending partner in this case.

Clearly, Flipkart is not the only ecommerce marketplace that wants to disburse loans, which begs the question of whether other consumer internet businesses will also come after the lending pie?

Even Swiggy has jumped on the bandwagon as per reports this week. The foodtech and quick commerce giant is said to be launching a co-branded credit card with HDFC Bank to compete with Zomato, Myntra, Paytm and others.

In May, Swiggy cofounder and CEO Sriharsha Majety claimed that the company has achieved profitability in its food delivery business, while Instamart quick commerce was said to be on track towards positive unit economics. The credit card play will undoubtedly help boost Swiggy’s dining-out business, for which it acquired Dineout last year.

Flipkart On PhonePe’s Turf

With the personal loan launch, Flipkart has pipped PhonePe to the post. Following PhonePe’s separation from Flipkart earlier this year, the sister companies have been playing in the other’s court.

Stepping on Flipkart’s shoes, PhonePe has also entered the ecommerce space with the launch of its ONDC-native app Pincode.

And now Flipkart has gone for B2C lending, which is still missing from PhonePe’s armoury. PhonePe’s digital lending ambitions took a temporary hit after it decided to not go ahead with acquisition of ZestMoney, but it has already entered the merchant lending space to get a toehold.

This week, it was also reported that Flipkart has started a $700 Mn employee stock option plan (ESOP) buyback as part of its separation from PhonePe. The company’s marketplace arm, Flipkart Internet’s standalone net loss surged 1.5X to INR 4,361 Cr in FY22 from INR 2,881.3 Cr in FY21. The Bengaluru-based company’s total income rose 31% YoY to INR 10,659 Cr in FY22.

Digital Lenders Vs Pretenders

Personal loans — depending on the commission and fee structures — can be extremely lucrative from a unit economics standpoint. Just look at Paytm, which saw its loan disbursals surge 167% YoY to INR 14,845 Cr during the April-June 2023 quarter, while the number of loans also increased 51% YoY to 12.8 Mn.

The growth in the value of loans and number of loans disbursed was 7.56% and 18.25%, respectively, on a quarter-on-quarter basis. Overall, the Vijay Shekhar Sharma-led fintech giant has issued 24.7 Mn loans worth INR 27,399 Cr so far in 2023. To reach even close to this scale, Flipkart will need to tap its existing user base aggressively.

One Delhi NCR-based startup founder, who has built a loan book of INR 900 Cr in the past seven years, claims it’s not easy for consumer giants to simply add a personal loans feature and reap the rewards. After a point, the business needs to differentiate itself through technology and world-class underwriting. Flipkart has not exactly proved this yet.

The fact that its user base is spread beyond the metros is perhaps the biggest advantage for Flipkart as a loan origination partner for Axis Bank. Flipkart’s millions of users can actually be a great leveller when it comes to competing with the likes of Navi and CRED.

Kunal Shah-led CRED, which has around 60 Mn users, claims it had helped create a loan book of INR 10,000 Cr for its lending partners through the CRED Cash offering for its members with high credit scores. And recently it has ventured into the personal loans segment for the masses too.

Flipkart will also be up against the likes of Moneytap, Bajaj Finserv, Moneyview as well as a host of other apps such as Slice, Jupiter Money, Lazypay that have pivoted to personal loans in recent months after RBI’s changes for PPI-based lending products last year. In short, it’s a digital lending rush and Flipkart is already late to the party.

So will this be the move that snaps the ecommerce giant’s loss-making streak? And even if it does, can Flipkart really turn its focus away from the cashburn-heavy ecommerce and become a lending-first company?

Sunday Roundup: Startup Funding, Tech Stocks & More

• Startup Funding: The funding rounds for Leverage Edu, Battery Smart and GIVA accounted for nearly 70% of the $155 Mn raised by Indian startups this past week.
• What’s Hurting Nykaa Fashion: Competition from Myntra and deep-pocketed players like AJIO and Tata CLiQ has pushed back Nykaa’s fashion vertical at a critical time for the company

• ideaForge Pops: Drone manufacturer ideaForge listed on the NSE and BSE at a 94% and 93% premium, ending the week at INR 1,295 or 90% higher than issue price
• Fantasy Cricket Boom: With 24% YoY growth fantasy sports platforms in India saw gross revenues of INR 2,800 Cr during IPL 2023, according to a RedSeer report
• Rejig At BYJU’S: Hit by controversies, the edtech giant is said to be appointing an advisory committee to counsel CEO Byju Raveendran on board composition and governance structure

That’s all for this week. We will see you next Sunday with another weekly roundup, and till then you can follow Inc42 on Instagram, Twitter and LinkedIn for the latest news as it happens.

The post Flipkart Rolls Lending Dice appeared first on Inc42 Media.

Early stage investments continue to be a small solace amid the funding winter. After the peak of 2021 when records were broken and new funding heights reached, this is an unprecedented slowdown for VCs. But for Prime Venture Partners, pretty much nothing has changed, claims managing partner Sanjay Swamy.

“From a VC point of view, 2021 was the year of extremely overheated summers. It was probably as irrational a time in this ecosystem as there ever will be in the foreseeable future,” Swamy told Inc42 in a no-holds barred interview.

Having launched four funds and seen the ecosystem from a nascent stage since 2012, Prime Venture Partners have seen the rise and receding of the investment tide across several cycles.

Led by managing partners Swamy, Amit Somani and Shripati Acharya, Prime has been a key partner for a number of red-letter startups across fintech, edtech, SaaS, mobility and now even generative AI-led models. While its current fourth fund saw a final close last year, its first fund delivered 4X returns to its limited partners, Swamy added.

Some of its other investments are Quizizz, PlanetSpark, Sunstone, MyGate, Dozee, WheelsEye, Niyo, Freo, KredX, OTO, Zuper and SurveySparrow. This week, it led an INR 4 Cr round for Bengaluru-based generative AI startup ZuAI.

Sanjay Swamy and more than 40 of the top VCs, private equity investors, family offices and angel investors at Inc42’s MoneyX on July 20, 2023.

It has also seen key exits from its portfolio such as Happay which was acquired by fintech unicorn CRED in December 2021, Recko by Silicon Valley fintech giant Stripe, and Perpule by ecommerce behemoth Amazon.

Swamy believes that given the firm’s experience, Prime VP is perhaps in an enviable position and therefore has been able to get these high-profile exits. It’s also a factor of Prime Venture Partners sticking to its strengths over these past 11 years. Other VCs do not have the years behind them to have an investment rigour like Prime, something Swamy is proud of.

So what’s his view on the messy situation in 2023 with Indian startups amid corporate governance issues galore and the heightened focus on sustainable business models. And how has this changed early-stage investing?

Edited excerpts

Inc42: Everyone was bullish about the startup ecosystem after 2021, but now everyone also claims it was an anomaly. How did VCs lose sight of this now-obvious aberration? 

Sanjay Swamy: Drawing comparisons to 2021 is the wrong place to start anyway. We have gone from one end of the pendulum’s swing in 2021 to another extreme today, so we’re not in an equilibrium state, even now. Things will settle, even though for us, it doesn’t feel like a different year.

Having said that, we can see that there’s pain in the ecosystem across VCs and startups.

We are bearing the brunt of the sins of 2021 — I don’t think even the companies have benefited from a building perspective, because a lot of bad habits crept into this ecosystem.

We saw inflated salaries and a lot of talent is currently unemployable. And it’s hard for the startups or even these employees to scale back to more conservative ways.

Right now, since the timing of the next round is going to be uncertain in today’s market, the proof points that investors need are also changing all the time.

As VCs get conservative, they need founders who inherently have the mindset of not pushing for growth at all costs, but sustainable growth, especially at the unit economics level.

Inc42: In 2023, do you believe that founders are discarding some of those bad habits? 

Sanjay Swamy: Today, entrepreneurs have now come back to a position of rational thinking and reason. But the investor ecosystem has yet to firm up long-term thinking because people are not sure when it’s all coming back. And so that has brought in a lot more caution.

Companies that raised in the 2021 period did not necessarily have the performance benchmarks to justify their high valuations. They are the ones that are most screwed. And they have to use this existing money that they have got to better justify the valuation that they got, otherwise they will do what nobody likes to do, which is a down round.

This medicine, as bitter as it is, is necessary. And so I actually think it’s good for companies to suck it up and say they got lucky. They are climbing back down to reality. Nobody complains when valuations are inflated and everybody complains when it goes down.

Thankfully, the new startups starting out don’t have that luxury right or that pain of down rounds as well. So as a result, they’re able to start with the knowledge of this reality. They have more information — from talent to salaries to fundraising possibilities — to plan accordingly. The new crop of entrepreneurs coming in is more steeped in reality.

Of course, they all have the desire of breaking through and building a big company, but they know the constraints particularly when dealing with VCs, so there is a bit more rationale in their dealings with Prime Venture Partners and other investors.

Inc42: There is a lot of talk about sustainability and profitability, but can you actually get a clear view of this at the early stage? How do you assess their potential path to success?

Sanjay Swamy: Since Prime Venture Partners is a seed investor, it’s important to see what the company can achieve with the money we put in and will they be in a position to justify a reasonable next round.

At our stage, there’s hopefully a great founding team, there’s a huge market, there’s some proof point of the primary value proposition. And the goal of the round that they’re raising with us is to get from that early validation to a little more solid product-market fit. And that includes some level of commercialisation so that for the next round, we can point to the data and say, here’s the proof.

So anyway, coming back to our stage, we know they will not be profitable as a company. We’re not expecting that. But it’s more important to know for certain that their growth is sustainable and very scalable. And it is going to take an investment to realise the real upside of those businesses.

This is more clear when it comes to B2B or B2B2C, but can only be a hypothesis for B2C. It’s not as black and white in the case of consumer businesses, so the challenge of evaluation is higher on the B2C side for us at the early stage.

Inc42: Have you had to go back to the drawing board and rethink some of the parameters you evaluate startups on? How has your thesis or view on dealflow changed since the madness of 2021?

Sanjay Swamy: Look for Prime Venture Partners, almost nothing has changed. Because we have always been fairly thoughtful in our choices, even if I say so. Even in a year like 2021, we only did six deals and in a normal year, we do four to six. That was one of the peak years for us. So broadly speaking for us, even then we looked at what it might take to build a large sustainable company here over a period of time — so that hasn’t changed.

One of the questions we ask at the early stage with the low scale of revenue is — have the founders visualised success down the road. And what does that look like? We will slice and dice the data and talk to customers and all that stuff to verify their conviction. The most important thing is what does success look like? And here is where the founder and their vision play a big role.

Have they done enough to derisk, can they deal with situations that are going to arise and have they thought it through? We need them to prove with some reasonable conviction that this is a 10x better approach to anything else in the market. That’s a reasonable way for us to connect the dots between the potential of the idea and the founder.

Secondly, in my mind it’s easier to build a large company than a small company because large companies attract many suitors. Larger companies tend to attract a disproportionate amount of investment at the later stages, because everyone wants a piece of that success.

So we also look at where the founder sees the business in the next few years — are they content with a $10 Mn ARR business or do their ambitions include a $100 Mn ARR and then continuing to grow from there.

I like to use a sports analogy here. You know in football, even the goalkeeper can score from his goal, right? It has happened every now and then, but it’s a freak occurrence. If you want to increase the odds of scoring, you know, you’d rather take a penalty kick. However, infrequent a penalty kick might be, your chances of scoring are much, much higher than a goalkeeper.

So that is how I view the opportunities and that’s how we believe VCs should work. This is not a volume game at all, at least not for us.

Inc42: In the context of corporate governance debacles at various startups, everyone says this is the time for startups to learn and implement best practices. As VCs, do you feel like this is also the time for investors to relook at their processes and see where the gaps are? 

Sanjay Swamy:  Absolutely. Investors didn’t realise the amount of risk and liability that they are subject to, because they trusted a lot of founders. And in most cases, founders were not aware and perhaps not as competent as they needed to be. They had not hired the right resources. And in other cases, the founders were actually competent but did a lot of things that they shouldn’t be doing.

So the reality of this is venture capital is a cottage industry. It’s not a scale business. Every time you try to do things at scale you compromise on a few things, because some of these are just not scalable. But ultimately, there’s a personal and a human touch that matters a lot. Which means that you can’t just continuously keep finding new companies and investing in them.

The Prime Venture Partners model is literally the opposite of almost all VC funds and certainly seed funds in that we do very few deals in a year. Because fundamentally, we believe that outsized returns can only come if you’re actually derisking by being involved with the companies and helping them.

Now when it comes to corporate governance, we think it’s a foundational thing for startups. Of course, there is an element of proportionality that one has to factor in depending on the sector, but some things are non-negotiable.

We have fintech companies in our portfolio for instance and they can’t say we won’t do our books properly or get audits done regularly, because this is basic hygiene in fintech.

While early on, a startup may not have everything in place, the next round is always the opportunity to catch whatever mistakes and bad habits have crept in. Subsequently, it just has to be ongoing discipline, like having your finance team involved in reviewing the MIS and actually discussing it with the founders.

Somebody in your team will present $2 Mn of revenue in a board meeting but the collections are only $1.5 Mn. That sort of screws things up badly.

We ensure that we are very clear here with our portfolio. We get a clear definition of what revenue itself means — it can be so ambiguous in the tech industry.

We have tried over the years to come up with as balanced an approach as possible for the stage we invest in, but even at the time of funding, our default position is to make sure that these companies even early on have the right level of governance, a company secretary for all their filings, a good audit partner, a CIO wherever possible And that’s the part of the VC business that I say is not scalable. I can’t have 100 people looking into that.

The post VCs Now Avoid Founders Who Chase Growth At All Costs: Prime Venture Partners’ Sanjay Swamy appeared first on Inc42 Media.

Update: After Inc42’s in-depth look at the problems at PharmEasy, reports emerged about the company raising INR 2,500 Cr from existing investors in a rights issue. The healthtech unicorn is said to be raising these funds at a 90% valuation cut.

Click here to see how PharmEasy is trying to free itself from its pile of debt.

Our original story follows

From high hopes of an INR 6,250 Cr IPO to its current beleaguered state — the fortunes of healthtech unicorn PharmEasy have swung wildly in less than a year.

Before we delve deeper, here’s a quick snapshot of what is ailing the company:

• A serious lapse in franchise operations that has left franchisees exasperated
• Mismanagement of the profitable Thyrocare business after acquisition
• A fast-brewing financial crisis around its own $300 Mn Term B Loan (BYJU’S is not alone)
• Layoffs and departures of key personnel, with the tech team reduced to 100 employees from around 500 last year
• Employees allege lapses in the leadership despite five cofounders leading the various verticals for PharmEasy

The franchise model challenges have also spilled over to social media, where several individuals have blamed PharmEasy for charging them high fees and not providing adequate support.

Sources close to the company, pharma sector experts and former employees claim these issues have been bubbling for a few months and now things have come to a boil for the Mumbai-based healthtech unicorn.

Inc42 has learnt that the company has reduced its workforce by over 500 employees through resignations or layoffs since last year. Inc42 has reported on some of these layoffs over the past year, including an exclusive on the situation at PharmEasy subsidiary Docon Technologies.

Former employees, some of whom have recently quit the company, allege that despite having five cofounders, PharmEasy has serious leadership gaps, adding to the chaos.

PharmEasy did not respond to requests for comments and responses to the allegations of mismanagement or the lack of a financial safety net.

PharmEasy’s Pandemic Swing

Any story about PharmEasy inevitably speaks about how the company was founded by five friends who grew up in pretty much the same neighbourhood in Mumbai.

Dharmil Sheth, Dhaval Shah, Harsh Parekh, Siddharth Shah, and Hardik Dedhia teamed up to take the pharma ecommerce plunge with PharmEasy in 2015. Since then, the parent company, API Holdings, has rapidly expanded on the back of venture capital and debt, raising more than $1.5 Bn, as per Inc42 data.

Today, the company has as many as 36 subsidiaries that operate the B2C epharmacy ops, B2B pharma supply, franchise stores, SaaS for pharmacy management, pathological testing and ancillary telemedicine services.

While other healthtech companies have stuck to one or two of these models as a core business, PharmEasy bullishly went after the entire stack. To get there, it went on an acquisition spree, spending more than $865 Mn in the process.

But acquisition does not equal success, and as we can see, Thyrocare’s profits have fallen to FY2019 levels after PharmEasy acquired the company in mid-2021.

In FY23, Thyrocare saw a major drop in revenue to INR 491 Cr from INR 568 Cr in FY22. Its profits plummeted in June 2021 (FY22). The deal coincided with the end of the second wave of Covid in India when testing numbers had peaked.

The diagnostics company reported profits of INR 34 Cr in the first six months of FY23, as opposed to INR 109 Cr in H1 FY22, just after the PharmEasy deal. A portion of these profits is also being used to pay the interest on the debt that PharmEasy had taken to buy the company.

Plus, PharmEasy’s parent API Holdings is deep in the red. In FY22, PharmEasy’s consolidated revenue from operations grew to INR 5,729 Cr from INR 2,235 Cr in FY21. Its losses also shot up to INR 2,731 Cr in FY22 from INR 641 Cr in FY21.

The higher losses were a result of PharmEasy’s acquisitions in the year and its rampant marketing and salary spend. Employee benefit costs surged to INR 1,459 Cr from INR 270 Cr in FY21, while advertising and promotional activities accounted for INR 494 Cr, up from INR 134 Cr. Total expenses shot up to INR 8,492 Cr in FY22, nearly 3X higher than INR 2,981 Cr in FY21.

Without its FY23 numbers, we can’t say with any certainty that PharmEasy has managed to cut back the heavy spending. One way the company has looked to push revenue is through the franchise model for both PharmEasy-branded pharmacies as well as Thyrocare’s diagnostics biz, but these are fraught with major issues.

But the fact is that the company is faced with stiff competition in the epharmacy and diagnostics space, and employees allege that it continues to spend considerably on marketing and customer acquisition.

The shaky financial situation has created a host of problems for Thyrocare, which otherwise has a stellar reputation in the market. With Thyrocare’s profits also down, PharmEasy will have a tough time showing why investors should invest at a higher valuation.

Now that PharmEasy’s IPO ambitions have been put on hold, the company is still chasing a new funding round as it looks to get out of the debt hole.

Franchise Models Plagued By Issues

The franchise operations, like any other franchise model, hinge on PharmEasy attracting store owners and existing unorganised players in the diagnostics and pharmacy space. While theoretically it is a cost-effective way to expand and scale up, there are plenty of problems that have dogged this vertical.

Franchise owners are unhappy with the commission terms being changed mid-way through FY23 and then again earlier this year (in the ongoing FY24). This has left franchises with very thin margins. Further, on the pharmacy franchise side, store owners bemoan the lack of support from the company in handling operations.

Let’s dive into these issues separately:

Thyrocare Feels The Heat From Rivals 

“The franchise model is not unusual in the diagnostics business. Every major player wants a deeper presence in the major cities, but the likes of SRL and Lal Pathlabs offered better commissions for each walk-in or lead,” a former PharmEasy employee, who was working on the B2B and franchisee tech products, told Inc42.

Like any other franchise model, PharmEasy charged fees from pharmacists, store owners and merchants to open up new locations under the Thyrocare umbrella. In the initial days, the company took 10% as commission from a franchise store for each transaction until a certain fee ceiling was hit. For example, if the ceiling is INR 2 Lakh, PharmEasy would not charge any commission beyond this point.

This proposition appealed to several store owners. But the growing competition meant that PharmEasy could not afford to leave any revenue on the table when it came to the franchise model. In the diagnostics business, Thyrocare competes with the likes of Redcliffe, SRL, Abbott, Metropolis and many others. Almost all of these have heavy discounts for basic tests, which PharmEasy has to match to keep up pace, said one Thyrocare franchise owner based in Kalyan, near Mumbai.

Lately, PharmEasy has changed this structure, the franchise owner added. The company now charges a direct commission from each franchise for every test instead of the earlier model of charging commissions until a specific ceiling was hit. Moreover, franchises have to pay a small fee for each consumable (such as vials or collection kits) used in the collection process.

“If a test costs INR 150 for the patient, we are now being paid INR 60 instead of INR 80 earlier,” the franchise owner mentioned above told Inc42.

He also said that even though his Thyrocare outlet gets a lot of walk-ins, he is not empowered to offer the same discounts as the PharmEasy app where users can get offers such as buy-one-get-one offer for some tests. Customers who want to avail this offer cannot get it at a franchise location and have to use PharmEasy’s app with Thyrocare’s direct sample collection service, which bypasses franchises.

It’s no wonder that franchise owners claim the company is shortchanging them on commissions as well as potential new business.

Franchise owners also have to face the customer’s ire when it comes to delays from the PharmEasy/Thyrocare testing labs. Many franchise owners have taken to Twitter and other social media platforms to talk about the lack of support on the operations front from PharmEasy.

Besides diagnostics, the company also has a franchise arrangement for pharmacies under the PharmEasy brand. In this case, many store owners have complained that employees assigned as support personnel for franchisees have been withdrawn by the company in recent weeks.

Staff Crunch Hurts PharmEasy Franchise Ops 

One such franchise store owner claims there is a group of 400-500 PharmEasy franchises that is dissatisfied with the company for charging up to INR 4 Lakh up front but not providing the support that is expected in the early days.

“Within 15 days, PharmEasy withdrew many of the people it had assigned to help us manage operations. They said they would handle marketing and digital enablement, but most of the time we cannot get hold of anyone in the company,” the PharmEasy franchise store owner mentioned above said.

As per the terms of the agreement, PharmEasy says it would provide fulfilment, marketing and digital enablement for franchise pharmacies, but franchise owners say that the company has reneged on these services.

The retail franchise model has become the go-to-market strategy for all leading pharma chains. Apollo, MedPlus, Wellness Forever and others have expanded rapidly on the back of franchise models even during the peak Covid times. And now, franchises are trapped in PharmEasy’s terms and conditions since they have already paid a cost up front.

Medical stores and diagnostics centres are typically clustered around major hospitals. This means moving to a rival franchise is also not always possible since there is very little possibility of multiple outlets of the same brand in one area.

The lack of hands-on support for franchises, employees allege, is directly related to layoffs and resignations at PharmEasy.

In many ways, PharmEasy’s debt situation has forced it into a corner. The company has to chase revenue through every avenue and cut costs significantly to raise its next round and free itself from the chain of debt, which began with the Thyrocare acquisition in 2021.

PharmEasy’s Tech Platform On Life Support

The tech platform, which was seen as a competitive moat for PharmEasy when it came to the Thyrocare acquisition, is also fast eroding due to layoffs and exits of key tech leaders, sources said.

Sources and former employees told Inc42 that there are hardly any employees left in the tech team to build new products, and most products are in maintenance mode.

For one, the technology or product that helps read prescriptions does not always work. This means PharmEasy is processing orders for prescriptions it has no idea about. “You can add any prescription and it will usually be accepted. In case of rejection, a doctor will call and prescribe medicines.”

Speaking to Inc42, one retailer in South Delhi alleged that medicines are often prescribed on the phone by PharmEasy agents without any diagnosis, and at times, these tele-doctors also upsell products.

This Twitter thread by the well-regarded TheLiverDoc highlights how telecallers look to tack on herbal medicines to other orders; these herbal medicines are not always safe for general consumption.

Indeed, retailer associations have complained about the lack of due diligence and compliance by epharmacies, including improper storage of medicines and selling medicines without prescriptions.

Employees allege that the company is no longer able to compete with other epharmacies through discounting due to a funding crunch.

“Even though whatever we sell has high margins, the volumes are down. We are currently doing 50K orders per day from an average of 80K in FY22; orders mostly coming from metros,” one former employee claimed.

Employees also allege that despite the exits of key personnel and the restructuring of the managerial layer, PharmEasy’s founders are typically missing from day-to-day operations and only address town halls once every quarter.

PharmEasy On The Funding Trail

It doesn’t help PharmEasy that a significant portion of its monthly expenses go towards debt repayments. As per reports, PharmEasy has a monthly repayment outlay of INR 15 Cr, and its monthly cashburn is also around INR 15 Cr.

The company also claimed that it reached a positive EBITDA for the first time in April this year, with a net revenue of INR 600 Cr. These numbers could not be corroborated in any regulatory filings.

PharmEasy reached a valuation of $5.6 Bn with its last funding round of nearly $350 Mn in October 2021, which saw investments from Amansa Capital, ApaH Capital, Janus Henderson and others. Cut to June 2023 and Janus Henderson’s regulatory filings showed a markdown of its PharmEasy investment with a valuation of $2.7 Bn.

Plus, the online pharmacy has reportedly breached a loan covenant in its INR 2,280 Cr ($285 Mn) Term B loan agreement with Goldman Sachs in August 2022.

As per the loan covenant, PharmEasy had to raise an equity round of around INR 1,000 Cr ($120 Mn) to fund its monthly burn. However, it has failed to do so, and today, the company continues to repay the loan at an interest rate of up to 18% per annum.

PharmEasy raised INR 750 Cr through convertible notes in October last year from existing investors and also raised a debt round from Temasek’s EvolutionX, but a majority of this has gone in debt repayments.

The company was reported to be in the process of raising further equity funding to push for scale and growth on both epharmacy and diagnostics front. However, so far, there’s no official indication that PharmEasy has improved its financial position enough to attract investors.

Earlier this year, PharmEasy is said to have appointed Avendus Capital as advisors for fundraising, but there’s no certainty of the company actually raising any funds given its current situation. Avendus did not respond to a comment on the funding talks.

Given the global macroeconomic slowdown, investors are primarily looking to back companies that have made some meaningful progress in terms of sustainability.

PharmEasy hoped to pay off INR 2,000 Cr of its debt from the proposed IPO proceeds of INR 6,250 Cr. Having postponed its IPO plans to 2025, the epharmacy unicorn is looking to raise equity capital, but the healthtech and epharmacy landscape has changed drastically.

Two More Complications: Regulations & Competition

For PharmEasy, operational and executional challenges are compounded by the regulatory pressure on the epharmacy segment as well as growing competition. In April this year, it was reported that the government sought a report from epharmacies to understand what consumer benefits they were providing beyond discounts.

The lack of direct regulations pertaining to epharmacies in India has exposed startups such as PharmEasy to legal challenges from retailer associations and other bodies.

Delhi-based South Chemists and Distributors Association (SCDA) is one of the bodies that had moved the courts against epharmacies. SCDA’s legal and media head Yash Aggarwal believes authorities need to temporarily shut down epharmacy platforms until a full-fledged legislation is drafted.

“When things are against the law, especially with regard to the health of the public, follow court’s directions and shut these platforms till norms are promulgated in the matter,” SCDA’s Aggarwal told Inc42.

Indeed, many epharmacy platforms were pulled up by the Drugs Controller General of India (DCGI) in February for allegedly violating rules under the Drugs and Cosmetics Act, 1940.

The situation is particularly precarious given the high competition in epharmacies with players such as PharmEasy, Tata 1Mg, Flipkart Health+, Amazon, NetMeds and others. The entry of horizontal ecommerce marketplaces such as Jio, Tata, Flipkart and Amazon has certainly catalysed the regulatory crackdown on epharmacies.

Former employees managing PharmEasy’s online business told Inc42 that no player can afford to ignore the threat from Amazon, Flipkart, Tata (1Mg) and Reliance (NetMeds). The vertical integration and specialisation that epharmacies have built over the years can easily be nullified by the scale of these large players.

The likes of Reliance, Tata and Flipkart have taken the ‘super app’ route to compete with pure-play epharmacies such as PharmEasy. Reliance Retail-owned NetMeds has also entered the retail pharmacy space with physical stores in Chennai. Reliance Retail claims it will open 2,000 such stores in a year.

PharmEasy might have grabbed the healthcare industry’s eyeballs with its Thyrocare acquisition and rapidly building its telemedicine stack, but it’s looking more and more like the unicorn needs a bigger dose of funding to continue on this trajectory. Will the cost-cutting and changes in its franchise model be enough to bring in long-term sustainability and convince gun-shy investors amid this funding winter?

The post Is PharmEasy’s Debt-Laden Bubble About To Burst? appeared first on Inc42 Media.

It’s the age of AI and we are just living in it. In just over a century, humanity has bounced from one pandemic to another, and from the industrial revolution, we are well in the era of artificial intelligence, and specifically generative AI.

It’s well and truly here in India too, with startups sitting in an advantageous position even though big tech giants have taken the first-mover advantage.

And like the industrial revolution inspired a host of small businesses and forced the workforce to skill up and learn their way around new machinery, we are at the cusp of a similar transformation.

The generative AI revolution will definitely offer startups a big window of opportunity. However, it’s not a window with a crystal clear pane — there are a lot of unknowns in this space given how rapidly it is evolving.

This Sunday, we are taking a stock of this still-emerging, still-evolving generative AI space. Before we look at how startups are grabbing this opportunity, we need you to take 20 minutes of your day to read the following big stories from our newsroom this week:

• Chingari’s NSFW Avatar: As its short video business suffers from low engagement, Chingari has added features for adult entertainment services that it hopes will end the revenue dry-run for the company
• BYJU’S Fights Fires: The edtech giant is looking to sell a portion of its stake in offline coaching giant Aakash to solve its ongoing debt crisis and regain the faith of investors
• Subscription Economy Blues: RBI’s Recurring Payments Guidelines continue to disrupt the ease of doing business in India as all payment stakeholders are yet to seamlessly integrate the framework

India On The Generative AI Bus

We all know that it’s too early to talk about where generative AI will lead us and perhaps also a bit foolish given how quickly things are changing, but Indian startups in the gen AI space are already feeling quite bullish about what they can do. And the same can be said for the VCs as well.

But there’s a feeling among founders and VCs in the startup ecosystem that India cannot afford to miss the bus.

In fact, given how the Indian tech economy has matured and entered new phases, VCs believe that India will actually be higher on the development curve when it comes to generative AI. This is a level playing field at the moment, because there’s a lot that needs to be solved.

India has grown from a services giant to a product-led tech economy and startups can leverage that past to build on the generative AI opportunity, said enterprise tech investor and Ideaspring Capital founder Naganand Doraswamy.

“We believe that the Gen AI movement favours companies in India as they have inordinate access to great talent and can compete favourably with companies in other parts of the world. Startups can leverage data generated by a massive online population, diversity and world class talent,” added Anandamoy Roychowdhary, a partner for Surge at Peak XV Partners.

Plus, the latest update for ChatGPT has brought support for Hindi, Assamese, Kannada, Tamil, Telugu and more, opening up a new world of possibilities for the Indian language internet ecosystem.

Competing With Big Tech AI

Of course, large companies are still dominating the AI market and startups need to keep an eye on what’s brewing at the likes of Microsoft, Google, Adobe, Nvidia and others to stay on pace.

Indian generative video startup Hippo Video founder Karthi Mariappan believes that there are several niches that startups can occupy because of how generative AI product models are oriented. And there is still a large ceiling for innovation when it comes to micro-segments or niche areas.

On the text side of generative AI, there are several models, but there are no language models for generative AI videos, which is Hippo Video’s focus. “So everyone in this space has to train whatever small language models we get into a specific application. So that is where it takes longer time, as well as it gets more into specialist areas, like videos but also other non-static images,” he added.

Generative AI Is Horizontal 

It’s this hope of carving out niches that can grow big is what has drawn so much venture capital to generative AI startups. Plus, given that even marquee funds such as Peak XV Partners, Tiger Global and others are eyeing early stage deals more keenly, it’s not surprising that many of them have backed generative AI startups in the early phases of development.

Including the early stage Surge portfolio, Peak XV it has led investments in several generative AI startups such as Cube, Hippo Video, Mad Street Den, TrueFoundry, Inferless, GAN Studio, RedBrick AI, BiFrost (Southeast Asia) among others.

But developing a global generative AI success story from India means dealing with the reality of how expensive it is currently, even though there exists a wide opportunity for business models, according to All In Capital founder Kushal Bhagia.

Hippo Video’s Mariappan says the hardware costs alone are very high for most startups because of how many discrete graphics processors are needed to generate AI video.

“It’s definitely capital intensive as of today. But we see that tapering down as more and more innovations come in. Now Nvidia is releasing data centres specific for Gen AI. So kind of a lot of innovations are happening on the DevOps front that can reduce the costs in the long run,” Mariappan said.

On a recent visit to India, OpenAI cofounder Sam Altman was asked a question about whether Indian AI startups can compete with the likes of Open AI with just $10 Mn in capital. His response drew the ire of the public, but later he clarified, “The question was about competing with us with $10 Mn, which I really do think is not going to work. But I still said try! However, I think it’s the wrong question. The right question is what a startup can do that’s never been done before, that will contribute a new thing to the world. I have no doubt Indian startups can and will do that! And no one but the builders can answer that question.”

But generative AI is not just about AI startups. Many VCs see AI as a horizontal tech play which can influence the course of all startups, across sectors.

For instance, Surge startup RedBrick AI is building extensions to open source LLMs to make medical annotation easier. “Today, less than 1% of the world’s medical images are labelled, rendering them useless for actual AI. Imagine how good AI can get when this crosses 50%,” Roychowdhary said.

Similarly, Prime Venture Partners’ Sanjay Swamy told Inc42 that AI can change the game for incumbents in people-reliant sectors such as fintech, consumer services and edtech and replace human resource-intensive models that are proving hard to scale up sustainably. He believes generative AI could change the whole unit economics game for startups. They are likely to need fewer resources to pull off bigger operations.

The Question Of Talent & Jobs

But of course the biggest elephant in the room when it comes to India’s generative AI fortunes is whether India has the talent pool to compete with the US and other markets. The other human interest angle is that India also has a significantly high amount of entry-level professionals whose jobs are at risk when it comes to automation.

First let’s address the talent question. The team at early stage generative AI startups is a key component in the generative AI deal evaluation matrix for VCs, even more so than in any other non-AI tech startup. That’s because go-to-market (GTM) strategies and the product-market fit have to be just as agile and flexible as the development of the product.

A strong team is needed to handle this delicate balance, according to Pearl Agarwal, founder of micro VC fund Eximius Ventures. “To build confidence, the founding team needs to be demonstrably comfortable with working on technologically complex solutions, especially with LLMs, be in sync with global innovations in the space, and have enterprise connections to drive early GTM,” Agarwal added.

Hippo Video’s Mariappan believes that the US is very much in the lead when it comes to talent and exposure to generative AI models.”The number of startups that come out of generative AI in the US are 3x-4x more than what is being done in India, so we still feel the talent pool can rise up or needs to be nurtured to that scale.”

While large language models are driven by the US, India needs talent that can play the AI Lead role, he added. In other words, people who understand those models, how they react, the basis of these models and then apply these parameters to make it work for individual products.

Now coming to the critical part about jobs and how AI will impact everyday lives.

OpenAI’s Altman called AI an ‘existential risk’ and said the AI revolution will lead to job changes just like the industrial revolution or the internet. “In two generations, we can adapt to any amount of labour market change and there are new jobs and they are usually better. That is going to happen here, too. Some jobs are going to go away. There will be new, better jobs that are difficult to imagine today.”

Similarly, Mariappan believes that while AI will change the kind of jobs available, it cannot change the creativity and rigour applied by humans at their jobs today. The focus will be on employees funnelling their skills and creativity into models and products so that AI can showcase them, albeit in a different way that tech platforms do today.

Startup Spotlight: The Next-Gen Drone Tech Startup 

In the world of drones, startups and manufacturers are trying to crack the problem of complete or Level 5 autonomy for unmanned aerial vehicles. And that’s the puzzle that Delhi NCR-based TSAW Drones is looking to solve.

Founded in June 2019, the startup develops and deploys (commercially) level 5 autonomous drones and is looking to eliminate supply chain bottlenecks in the logistics space.

TSAW has so far focussed solely on the healthcare segment, but it is now eyeing the booming defence tech sector as well as offering its services to data centres for monitoring and surveillance.

Here’s The Full TSAW Drones Story

Sunday Roundup: Startup Funding, Tech Stocks & More

• State Of Startup Funding In H12023: Since the unprecedented funding boom of 2021, startup funding has mostly returned to 2020 levels. Amid the funding winter, Indian startups raised just $5.4 Bn in H1 2023, a 72% YoY decline!
• Nithin Kamath On Corporate Governance Storm: As Indian startups face tough questions about corporate governance challenges, the Zerodha cofounder believes that even VCs have plenty to answer for on this front
• Dream11 X Team India: The fantasy gaming unicorn has become the new lead sponsor of the Indian cricket team, replacing BYJU’S, reportedly paying INR 358 Cr for the rights

• ideaForge’s Stellar IPO: Drone manufacturer ideaForge’s public issue was subscribed 106X at the end of IPO window. Will the stock pop on listing later this month?

That’s all for this week. We will see you next Sunday with another weekly roundup, and till then you can follow Inc42 on Instagram, Twitter and LinkedIn for the latest news as it happens.

The post India & The Age Of Generative AI appeared first on Inc42 Media.

What’s happening at BYJU’S? That’s the question everyone is asking this week, and the answer is not clear even after the past few days of talking to sources, and the back-and-forth of statements from investors, auditors and the company.

It’s become a bit of a media game now, but regardless of the reputational harm on BYJU’S, there are some serious questions — from the lack of filings to the legal battle against lenders of the $1.2 Bn Term B loan and the future of the company.

If indeed there is any material risk from the recent resignations of board members, then it’s not just BYJU’S that will be shaken, but the ripple effects of the highest valued company in India will reach far and deep, including the reputational damage for the startup ecosystem.

Before we dive into the questions for BYJU’S, take a detour through our top stories this week:

• Dark Side Of Shark Tank: With Shark Tank India comes the limelight, but also the risk that the Sharks may never actually invest in your company despite committing. Here’s what happens when the show ends
• Corporate Governance Storm: It’s investor audit season for Indian startups and VCs are scrutinising every claim made by founders. How does this impact the ecosystem? We take a look
• How Mojocare Faked It: B Capital, Chiratae and Peak XV-backed Mojocare is the latest startup to face the heat after its founders confessed to fudging books. What led the startup to the point of lying?

Torrid Time For BYJU’S 

It’s been 18 months to forget for BYJU’S — caught between a trifecta of pressures from carrying a massive organisation, the global macroeconomic slowdown, the post-Covid headwinds, the company looks weary and wounded. Last year, CEO Byju Raveendran even admitted going through sleepless nights as he looked to solve the many problems and deal with personal emergencies.

These problems necessitated layoffs and a change in its operations, but it does not seem to have delivered right results. At least that’s what a reading of the past few weeks would tell you.

The legal fight with its $1.2 Bn TLB lenders aside, the company was also hit by raids by the Enforcement Directorate, inquiries from the Ministry of Corporate Affairs, questions over lack of regulatory compliance, and lack of profitability for expensive acquisitions such as WhiteHat Jr.

Nothing has gone right for the company in the past few months, and this past week’s resignations of three key board members and the auditor Deloitte raises even more questions for the edtech giant which has a towering $22 Bn valuation — at least on paper.

While the company claims this move was necessitated due to a change in shareholding, it did not elaborate on when this change occurred.

Breakdown Of Trust In The Board 

BYJU’S declined to speak to Inc42 and did not respond to our questions on shareholding, the delays in filings and whether the vaccuum in the board will be filled any time soon.

Sources told Inc42 that three board representatives had been mulling exits for the past several weeks due to a breakdown in trust and communication between these director and BYJU’S cofounder and CEO Byju Raveendran.

There was also dissatisfaction over how the company has dealt with the issues surrounding the lenders of its $1.2 Bn Term B loan. BYJU’S has sued lenders over alleged harassment in recovery of the loan. “He did not take the board’s advice under consideration when dealing with recent issues at the company,” one of the sources added.

At first, the company denied that any board members are stepping away and then later said it is looking to reconcile with these investors and then suddenly claimed that the resignations were needed due to a change in shareholding. These series of contradictions in a matter of days point to a serious problem at the company.

Will FY22 Numbers Be Delayed Further? 

It’s hard to ascertain much about the company because unlike most other private companies, BYJU’S is usually tardy when it comes to filings.

Even by the lackadaisical standards of Indian companies in reporting their financials, BYJU’S has taken things to another level. It was only in September 2022 that we were shown the state of the company’s financials in FY21. Though it was 18 months late, many thought that BYJU’S had turned a new leaf and would perhaps be more consistent in its filings.

But that is clearly not the case. The company has not filed its FY22 numbers, 15 months after the completion of that fiscal year. We can’t even begin to estimate when the FY23 numbers might come. And with Deloitte resigning from its role as auditor due to the company’s lack of readiness for an audit before releasing the FY22 numbers.

The new auditors will likely take months to get familiar with BYJU’S systems and even the company’s CFO is barely a few months old at the company.

BYJU’S In A Pinch

Without audited FY22 numbers, it’s hard to see how BYJU’S will get out of its current financial mess. If indeed it has to accelerate its TLB repayment, it will need to raise funds from other investors.

And while the company is said to be in talks to raise this amount, it’s not clear who might invest in BYJU’S right now without seeing how sustainable its operations are. Plus, the sudden exit of investors from the board gives out wrong signals to upcoming investors.

As we reported this week, investors are going through founder and startup claims and projections with a fine-tooth comb, so BYJU’S will also need to pass that benchmark to raise funds. And right now, the company’s ability to work with investors is being questioned.

According to a report by The Arc this week, CEO and cofounder Raveendran claimed to have raised $250 Mn in his personal capacity from BYJU’S investors Qatar Investment Authority, Tiger Global and others. This was in 2021 when the Aakash deal came into jeopardy after BYJU’S failed to make a final payment of nearly INR 2,000 Cr on time to complete the transaction.

It’s doubtful that Raveendran can pull off the same move twice, and in any case the company owes a lot more than $250 Mn right now to meet its debt repayments and to extend its runway.

In fact, if anything investors are looking to sell shares as per reports in January this year. Several early investors including Lightspeed Investment Partners and Chan Zuckerberg Initiative are reportedly looking for buyers to offload stake in the edtech major.

What Hurts BYJU’S Hurts Indian Startups

The biggest problem for BYJU’S is that it raised mounds of debt and equity at a time when capital was free flowing and it has not used these capital infusions to fix the holes in its operations. It’s only done that in the last 8-9 months when these holes grew too large.

It remains to be seen if this issue will be settled without major spending for BYJU’S. While the lenders are open to negotiations, they have rejected the edtech giant’s proposal for one-on-one meetings, and are also considering options including further litigation or seizing collateral as recovery.

The problems have definitely dented the image of edtech in India, but there’s also the question of what this means for the Indian startup ecosystem. Given the funding track record BYJU’S, the list of investors in this chain (funds and their LPs) would be longer than many public companies.

This is not just another startup. The feeling in the ecosystem is that this will further dent the image of the Indian startup ecosystem, where VCs are already being asked questions about returns and the lack of corporate governance standards.

By some measures, BYJU’S is close to being too big to fail given the huge and serious repercussions this will have on the confidence in India’s tech economy, but even a giant that’s shaking and stumbling might be enough to scare away new investments. It’s time for BYJU’S to steady itself soon or it’s not just one company that will pay the price.

Startup Spotlight: How To Build An App For Senior Citizens

India is said to have over 700 Mn internet users and this number is rapidly growing. Just as startups have looked to tap the younger new-to-internet users, GenWise is looking to solve digital challenges for the senior citizens who are coming online for the first time.

Founded in 2023, the app is looking to make senior citizens ready for digital financial management, social engagement, communication, healthcare and more. Having raised $3.5 Mn, GenWise plans to develop a digital personal assistant to help elderly users grasp concepts and information without seeking assistance from relatives.

The startup’s biggest challenge is the relatively low maturity of the tech ecosystem in India when it comes to the seniors care space. How will GenWise overcome this and also unlock monetisation?

Here’s The Full GenWise Story

Sunday Roundup: Startup Funding, Tech Stocks & More

• Minor Uptick In Funding: Indian startups collectively raised $149 Mn across 20 deals in the past week, which is over 20% lower than the week before. H1 2023 has seen close to $5.4 Bn in funding with one week to go, a huge fall from the $19 Bn raised in H1 2022
• Apple Cards In India Soon? The tech giant is said to be in talks with banks to launch its co-branded credit cards in India
• PhonePe’s Big Lending Play: After launching its payments gateway, PhonePe is now taking on Paytm with a merchant lending vertical

• Paytm’s Moat? Analysts believe that Paytm can fight off its new fintech competition with a sharper focus on the soundbox product for merchants, where it enjoys a first mover advantage which will be hard to erode
• Amazon Adds To India Bet: Amazon has claimed it will invest another $15 Bn in India by 2030, in addition to the $11 Bn it has already invested in the country

That’s all for this week. We will see you next Sunday with another weekly roundup, and till then you can follow Inc42 on Instagram, Twitter and LinkedIn for the latest news as it happens.

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It’s audit season for Indian startups. Each passing week brings in fresh corporate governance trouble and more focus on the issues at Indian startups.

“In our private groups, VCs are swapping numbers of independent auditors, sharing their audit experiences with the Big Four. VCs are reviewing their SHAs with Indian startups to see how they can exercise inspection rights.” — a founding partner of a prominent Bengaluru-based early-stage venture fund.

With more than a dozen companies and at least half a dozen prominent venture capital firms entangled in controversies related to corporate governance and due diligence debacles, conversations in the VC world have turned from deal flow to audits and inspection rights.

This past week, Mojocare joined the list of startups going through a forensic review following similar investigations into BharatPe, Zilingo, Trell, GoMechanic, Broker Network, Infra.Market and others. And many VCs are facing questions from LPs over similar issues at US-based FTX, and Southeast Asian startups Spenmo and PayFazz.

Raining Audits In The Funding Winter

And this might just be the tip of the iceberg when it comes to Indian startups, sources in the VC ecosystem told Inc42. “You will start to see more reports about such audits in Indian companies. Several informal conversations are ongoing between co-investors and those with board seats are being asked to take charge of such matters,” the fund manager quoted above told us.

More than anything, the list of startups that have been alleged to have misreported revenue or those that have confessed to such fudging has led VCs to take all numbers with a pinch of salt and eroded trust in the monthly income statements that are usually prepared for shareholders.

Another Bengaluru-based venture fund partner believes that usually VCs look more closely into the books in the case of a fundraise or exits, but such deep scrutiny is becoming more common. “Not many people outside the VC world might even know about inspection rights that VCs have. Even angel investors are requesting such rights now, which was atypical before last year,” the partner added.

Simply put, inspection rights allow certain shareholders to get to the facts of the matter in relation to any reports sent by the company. Typically, this is done to weed out aspects related to revenue leaks, mismanagement of funds, allegations of unexplained related party transactions or other corporate governance hurdles. Inspection rights also allow VCs to investigate the startup in case of a potential legal action against the entity.

Take the case of GoMechanic — founders admitted to have falsified revenue by creating fake garages and inflating the sales numbers. Or Mojocare, where founders also admitted to fabricating invoices and manipulating inventory to show higher GMV. But without these admissions, even the monthly income statements would not indicate any foul play.

That’s where VCs exercise inspection rights to verify the authenticity of the numbers they are shown.

Questions about the authenticity of sales and revenue have added to the pressure on venture capital funds in India, several of which are also being questioned by upstream investors about how this will impact returns in the long run.

The global macroeconomic slowdown has hit tech investors and unicorns badly with the likes of BYJU’S, PharmEasy, Swiggy, Pine Labs, Ola going through valuation markdowns in recent weeks. These companies that have towering valuations, particularly those that have IPO ambitions, were expected to be potential exits for investors.

“There’s no certainty even around mature startups, and at the same time, the growth portfolio is stumbling due to wilful fraud and misreporting. After the 2021 funding peak all startups were well capitalised so when startups face a cash flow crunch ahead of their previous projections, VCs are bound to wonder what happened,” says a Bengaluru-based corporate accounting and audit expert who has conducted due diligence and investigated a host of startups and tech companies for over two decades.

While the larger picture is about cleaning the startup ecosystem of bad practices, there is fear among founders about increased investor compliance and stringent clauses in term sheets or shareholder agreements.

How Startup Audits Typically Work

So what exactly are investors looking for when they begin inspections or a review of the business?

The first port of call on the audit journey is the revenue cycle. “If investors see abrupt growth in a revenue cycle, it’s now a red flag. Earlier, this was celebrated as growth, but now it’s looked at with scepticism,” the auditor added.

The auditors will typically look into how the claimed growth compares with industry metrics and get some market context.

The next crucial aspect is diving into the revenue graphs. Typically, B2C companies have seasonality in sales so there will be spikes in revenue for certain months and this would typically be seen year after year. On the B2B side, there are dips when businesses look to curb spending in the fourth quarter of the fiscal year. So B2B startups will usually have lower collections in this period.

Of course, everything might look fine when diving into the revenue cycle and growth data. The next indicator of potential fudging of numbers comes from customer data. Auditors will ask the companies for specifics of CRM data. This is easier for B2B companies that usually have 1000s of customers, but B2C companies can even have millions. Auditors look for red flags through dipstick testing, since examining every customer is not always possible.

For instance, multiple B2B startups in one segment might claim they have a certain market share, but it’s simply not possible in B2B fintech for example, where there is a fixed TAM for all startups.

“So we do a sentiment analysis to understand how authentic these claims are. You will find indicators on social media, review sites and forums that can give us an approximation of the number of users. If a startup claims to have millions of customers but only has a handful of app reviews, that’s definitely a concern,” the accounting expert added.

Startups have also found themselves in a spot of bother due to ties with vendors that are relatives or don’t exist altogether. In such cases, auditors do a relationship analysis between vendors, employees, founders and even investors to find commonality that could indicate cash flowing to suspect vendors.

“We can do address analysis between all the parties to find common patterns or look at which vendors have been paid without a GST certificate. A startup may have a lot of vendors with invoices under INR 20 Lakh where a GST certificate is not needed. This can be legitimate or a source of cash misappropriation, so our job is to look at what’s the real picture.”

Erosion Of Trust: VCs Question Founder Claims

Even though investors have spoken in public about audits, forensic reviews and other probes into startups recently, the reality is that many don’t want these inspections to come under the spotlight. “There’s a lot of focus these days on the cash flow crunch for startups in media and other reports, so VCs are definitely looking more closely at startups that come into this negative spotlight. But even in other cases, founders are being grilled over each and every claim,” the early-stage investor quoted above added.

Another ‘trend’ that’s catching on is founders confessing to misreporting when the audit hammer is around the corner. We saw this in the case of GoMechanic and most recently Mojocare, where founders confessed to having inflated GMV and fudging books.

“It’s not like everyone is cutting corners because they want to. Sometimes they don’t realise the consequence of booking a receivable that will never actually materialise. There’s a difference between wilful fraud and oversight such as this, and even a forensic audit might never fully reveal the intention of a founder,” a Delhi NCR-based venture fund founder told Inc42.

Nevertheless, as VCs look to weed out the bad apples, it has even brought unwanted scrutiny on founders who are known to have pristine reputations. It also creates a trust issue and a lot of the venture capital world runs on trust in entrepreneurs.

Of course, any kind of churn pulls in even those startups that are not actually overstepping the line. It’s expected, but there is a risk of such audits completely derailing founders’ focus from growing their business to covering their bases. And this could very well end up dragging the overall growth of the ecosystem.

A second Delhi-based angel investor says,”This is much needed. Only after separating the bad actors can the ecosystem grow in the right way and direction. Unfortunately, some good founders will be caught in the middle, but it is actually a correction that will help them in the long run.”

Indian startups are not the only ones facing this scrutiny, but at this point it’s feeling the pinch due to its maturity stage. The erosion of trust has shaken up deal flow even further and made it difficult for founders to raise funds now. Investors are finally standing up to bad actors in the ecosystem, but the pressure has increased for startup founders.

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