Where should money be invested in eCommerce? On the idea or the founder?
Yesterday we woke up to the news of ShopClues founder Sandeep Agarwal being arrested for insider trading charges by the FBI. Subsequently he has been released on bond and the matter in under investigation. ShopClues becomes the latest reason for eCommerce to be spoken with skepticisim. In the past there have been examples of eCommerce ventures TimTara, Fashion & You and Deccan Healthcare – all that have a gray shade to their stories.
But does that mean there is something wrong with eCommerce in India? We don’t think so. “The impact of the arrest would be more for the ShopClues brand and has nothing to do with the eCommerce sector,” says Anil Joshi, president, Mumbai Angels. Seedfund’s Sanjay Anandram echoes Anil to say, “this is something related to an individual and has nothing to do with the sector.” eCommerce like all sunrise sectors taking shape in an economy is still battling with a plethora of problems – payment gateway, delivery logistics, customer acquisition – and so on. However, it is also the space with the second largest number of startups in India, and probably more are getting built as we write this.VCs, PEs and most investors are today backing an idea; a business plan -- which has the potential to grow and give them returns in multiples for their investments. And in all cases it is the founder – the captain of the venture -- that the money is being bet on. Therefore instances such as ShopClues become a concern. Ashish Kashyap, CEO, ibiboGroup who spoke to us on the redBus acquisition story, said the difference in the Indian internet story back in the early 2000s and now is that: “now there are real businesses, real customers, real models of internet business in the country. Everything is real, the fundamentals are strong, it has taken a long time, but people need to be patient,” he said.
So while the ShopClues business continues to run, one cannot be sure of the future. Their reputation will suffer, even before it has been built. And the most important factor of ‘trust’ -- that an eCommerce brand is trying hard to build among customers, will take a hit. Amidst all this, spare a thought for the employees who probably also believed in the founder and his vision for the venture.
Speakers at many conferences that we have attended, have laid emphasis on “investing in the entrepreneur” – so what happens in such a case then? Where the money was probably invested because of the rich credentials that the founder had. Achievements and successes can surely open doors – and that is probably what worked in Sandeep’s favour as well. Sandeep’s LinkedIn profile gives a snapshot of his achievements, and is definitely impressive enough to impress a VC. So the question therefore is, how good a safeguard is education and experience to invest in? “People are an important part of any business. And if a person has an impressive background and a good track record, that is an advantage,” says Sanjay.
Anand Lunia, founder, India Quotient ventures however thinks that an impressive background is no guarantee to the person’s credibility. “Certain class of investors have special interest in people with impressive backgrounds. But that cannot be the merit for basing an investment decision on,” says Anand. Even in this case, Sandeep probably never expected to get caught for the alleged activities he indulged in his previous life.
Nexus Venture Partners said “no comments” when we asked them for their reaction to this development. ShopClues had recently raised $10 million from Nexus & Helion Venture Partners, and it is therefore important to know what happens to that investment, as a result of this news. There would be safeguards in the term sheet between the investor and the investee, and one can argue that the amount of investment -- $10 million -- is not a big one.
An investor, who wished to remain anonymous, told us there is nothing surprising about the ShopClues news. Promoter trading is rampant in India and both VCs and government are not party to this. The Indian government still doesn’t consider eCommerce an ‘industry’, therefore regulatory checks and balances, or government intervention coming into the space is still a long time away. Nor will the startups/ventures come under the scanner of a regulatory body like SEBI, because there is no shareholder interests involved – as most companies are still startups and a long way away from being listed. Therefore it all boils down to the trust a VC has on the founder, and to what extend is he willing to stick out his neck. A proper due diligence on the entrepreneur is as important as an eye on numbers.
While we wait for the truth to unravel, we leave you with this thought by Leo Tolstoy – How much land does a man need? Six feet from his head to his heels was all that man needed!
