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April 07, 2016

Indian Startup Ecosystem attacked by "Integrity Cancer": Kashyap Deorah

Kashyap Deorah, author of "The Golden Tap: The Inside Story of Hyper-Funded Indian Startups" and the former President of the Future Group's e-commerce venture, has a LinkedIn post describing various examples of ethically challenged behaviour at Indian startups.

Senior management of a startup create new companies that provide services to their hyper-funded startup. The startup loses money through its nose while the service provider makes great margins. The service provider compensates its shareholders through dividends and individuals through fees. In similar news, relatives of the founder of a large e-commerce company become sellers on the platform, get tipped off about when the company will sell at negative gross margins, and sell to the e-commerce company at a higher price only to buy back in bulk at a lower price.
...A VC firm struggling to return money to its investors after seven to eight years finds a portfolio company in a space that is tipped to be on the radar of global investors due to a hyper-funded Chinese equivalent. VC invests $5 million at a certain valuation. Startup issues a press release announcing twice the investment amount at a 50 percent higher valuation. Entrepreneur loves it because competitors get scared off due to the stated valuation and fund-raise. VC loves it because they are able to demonstrate greater multiples on mark-to-market as they look to raise a new fund. Both work together to tweak the story to the liking of the global investor and pitch their startup as the top choice. In one such occasion, the reporter involved is a relative of the entrepreneur.
...An influential angel investor looking to start a new company in a certain market space goes to an existing startup operating in that space. He poses as investor, gets all details including alternate company names they looked at. He buys the domain for one of those names, starts a competing business and raises seed money the size of a Series A. A similar story plays out with a VC. A VC firm with a term sheet out to a startup continues to take a close look at competitors without revealing that they have a term sheet out, even when asked about conflicts. A deal is announced a few weeks later. VC does not reply to emails of competitors who got the short end of the stick. Non-disclosure agreements are no longer used in the country because enforceability is a joke. 
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