We should be learning one important takeaway from the #Stayzilla issue, but we are missing it
Only announce (better yet stop announcing) what you raise!
Time and time again, VC funds, when they commit capital, have this habit of committing a larger amount, and then putting conditions of release (what is called tranche). If the funding that is coming in is tranched, and if you and the VC fund decide to make an announcement, only announce the amount that is being released — not the ceiling amount. Better yet, stop making announcements about funding.
The fact that companies use fundraising announcements to build confidence with vendors and employees, and then say that the amount never reached the account, is paramount to fraud. VC funds have a responsibility towards this as well.
In May 2016, Stayzilla announced that it had raised US$13.5 million from its investors. Insiders say the money that actually hit the bank was a much smaller fraction of it. Either that or between May 2016 and Dec 2016, the company managed to burn through US$13.5 million USD, which doesn’t add up either.
Follow a proper process, and be fair
India is not new to shutting down of firms. But at some point, you decide that things are not going your way and you have little money in the bank. You have a responsibility to make a list of liabilities and call all the vendors and employees and make an offer with whatever money is left, proportionately.
If 60 per cent of your liabilities are salaries and 40 per cent are vendors, then you split it accordingly and make an settlement offer. You tell them, this is an amount you can make right away, or if they want to negotiate, they can come to the table once everyone is settled.
Ninety-eight per cent of the time, the vendor or employee will take the settlement. Something is better than nothing. Service providers would have paid a minimum 15 per cent service tax when they raised the invoice to the government, so even if the amount covers just that, they’d feel happy about it. Saying nothing just aggrevates the situation.
Time and time again, stayzilla, or TinyOwl, or IndiaMart seem to be making this same mistake. Learn from how manufacturing companies do this — the rules are not any different.
A year ago when Tinyowl founder went to their Pune office to shut it down, he got held hostage by the employees and some local politicians had to get involved and after a two day stand off it was resolved. We haven’t learnt a thing out of that ordeal.
There is a need to build a CIBIL like system for companies
There are companies like Reliance that never pay on time, or never pay at all. And there are cases when a company is doing well, but because of unavoidable circumstances it goes broke. As a vendor you should be able to look up the company’s rating, and do business. If the rating is good, and you provide a service and the business for some reason goes belly up, it is acceptable risk on all sides. But if on the other hand the company is high risk, has a history of not paying on time, then you go in with your eyes open, with the risk that the payment might never happen and you pad your pricing for risk.
In the case where the rating is good, and if you want to protect yourself against the uncertainty of the market, you can avail of insurance that would cover it.
Be accountable until the end
All VC funds have a tendency to resign from their board seats so as to not attract liabilities even before the decision to shutdown the company arrives. As a VC fund and director, you should stay on the board until all the liabilities have been addressed and there is a sign off on all the vendors and employees. It is not fair to jump ship and leave the founders to fend off on this all by themselves, when in 90 per cent of the time, the board has had a say in the direction and speed in which the company should go.
In the case of Stayzilla I hold Matrix, Sequoia and Nexus equally accountable
I understand that business is risky. And at times businesses do go down under and debts will need to be waived. What is not acceptable is saying that companies will continue to have bad governannce and that vendors need to suck it up. Or that false expectations are set with vendors and employees with promises of funding and money in bank, but is not actually there.
We negotiate and barter so hard with these vendors that they have razor thin margins. And when we say “no payment,” they get hit very hard, and unlike governed and funded startups, they seldom have the wiggle room to absorb that shock in most cases.
Also read: Is venture capital going bust in India?
If we dont adapt and change the direction, there is more coming. There are already several reports of Snapdeal, Myntra, Mobikwik, etc., having outstanding dues. And at the instance that there is no way for a small company/startup who is a vendor to these companies to cover their risks, expect extraordinary measures to be taken. It is up to us, as folks governing the ecosystem, to make adaptations so that risk is buffered and spread across the entire ecosystem — and that vendors at least had a chance to buy-in into this risk in the first place.
The #stayzilla issue is a symptom, not the cause. It is sad to see ecosystem builders focused on the case, and getting emotional, rather than taking steps to ensure this doesn’t happen again — and the ecosystem remains a fair entity where trust is kept. You lose trust, and everything is lost. That is when we truly go back to the medieval age.
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