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Flipkart reshuffle: Investors vs Founders

In good times, the interests of the founders and the investors are perfectly aligned. When the environment becomes tougher though, the interests diverge subtly. In India, this process started last year in the current entrepreneurial round. Investors started taking a more active role in many companies they had put money in. And this trend is only likely to accelerate in 2017.

twitter-logo Prosenjit Datta   New Delhi     Last Updated: January 13, 2017  | 20:16 IST
Flipkart reshuffle: Investors vs Founders

The appointment of Kalyan Krishnamurthy as CEO of Flipkart last week led to a certain amount of angst in social media, especially from founders of other start-ups and employees in the e-commerce space. The appointment was seen as a big investor - Tiger Global - flexing its muscles in the management of Flipkart. Till last year, the founders, Sachin Bansal and Binny Bansal had a largely free hand. However, last year things changed somewhat.

Sachin Bansal, whose focus was on growth was made the executive chairman while Binny Bansal took charge as CEO. The buzz was that Binny Bansal was taking on the CEO role at the behest of investors who wanted costs to be reined in and operations tightened. Now Binny Bansal has been elevated to the role of group CEO, whatever that entails. While Kalyan Krishnamurthy is probably going to be in charge of day to day operational decisions as the CEO.

Krishnamurthy's elevation has also seen the exits of a few other senior people in Flipkart. The buzz is that as the valuations of Flipkart has dropped, and as Amazon India shows an insatiable appetite for spending money to expand, investors in Flipkart are becoming more cautious.

At any rate, investors flexing their muscles and taking charge is not unknown, either in India or globally. In the US, investors even forced out Steve Jobs from Apple in the early years because they felt he was not the right person to lead it. They have forced out many other managements.

In India, the much talked about case in 2015 was the exit of Rahul Yadav, the co founder and driving force behind Housing.com. The investors who had put in enormous amounts of money had got tired of Yadav's behaviour and they wanted him out. They brought in Jason Kothari as CEO for the company.

(PropTiger, another real estate company has just announced an all stock merger with Housing.com and Jason Kothari is now joining Snapdeal, another company in which Softbank, the lead investor of Housing, has a significant stake).

But these are not the only examples. In most of the cases of acquisitions and consolidation of in different e-commerce arenas, the nudge has invariably come from investors. For example, the Flipkart deal with Letsbuy was aided by common investors. In other cases also, investors have often nudged a company to sell out or get acquired by a dominant player if they think that exits are going to be difficult.

While it is hard not to feel a certain sympathy for founders who have slaved day and night and taken all sorts of risks to build up their companies and who have a very clear vision of where they want the company to go, one should also understand the other side of the picture. Professional investors and venture capital firms give significant funds to start ups because they believe in the founder's vision.

However, they also need to watch out for their own interests. A huge majority of start ups fail, and only a few go on to become successes. Many investors are willing to wait 5 to 7 years to see returns - and even more if they think the start up is going to dominate the industry - but they eventually want an exit at a profit.

They also know that start up founders often have great passion and ideas, but do not have the management skills to manage firms once they become big enough. One of the things that big investors and venture capitalists bring to the table while investing in a start up is the kind of management depth and expertise they can call upon or the relationships they can forge with other players in the ecosystems. This is why even founders are choosy about whom they raise money from. Quite often, it is not just the money but also the contacts and other advantages the investor can bring in that makes the difference.

In good times, the interests of the founders and the investors are perfectly aligned. When the environment becomes tougher though, the interests diverge subtly. Founders often want to go for broke, and dominate a sector even if it means losing money in the short and medium run. Investors are often willing to lose money as well if growth is coming, but they also want to see that their money is being spent prudently, if the war for market share is likely to be long and hard. This is when investors start flexing their muscles and take a greater interest in the management of the start-ups they have founded.  

In India, this process started last year in the current entrepreneurial round. Investors started taking a more active role in many companies they had put money in. And this trend is only likely to accelerate in 2017. Founders should be prepared for that.

 

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