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  • Vinay Nair

The Real Troublemakers of our Startup Ecosystem

Updated: Jan 27, 2020

Often, when we talk about the startup ecosystem (especially the "successful" unicorns and "soonicorns" of Silicon Valley and beyond), we do so with a sense of starry-eyed wonder. We heap praises on these innovative new businesses for being the "growth engines" of our modern economies and sing paeans to their massive potential for disruptive change. While we are not necessarily wrong in our optimistic assertions about many of their prospect for growth, the dazzling promise of the future can often blind us to the dark underbelly of things: troubles that simmer under the surface and raise their ugly heads when we least expect them to.

It is no secret that more than half of all startups fail in the first four years, and a much larger percentage do so as more years pass by...

Building a successful, sustainable startup is hard work, and sometimes it is terribly frustrating to watch them being ruined and razed by a few who brew trouble and build obstacles that wouldn't have been there if not for them. Such troublemakers can be found at every turn within the startup ecosystem, and can potentially bring the efforts of hundreds to nought.

Do they always mean to spell trouble? Not necessarily...

Sometimes it is the power or the money that gets to their heads; at other times, their deteriorating decision-making skills are to blame.

In either case, they are bad news and the best we can do is learn our lessons from them!

Investors Guilty of Flushing 'em with Funds

Unless one has the ability to bootstrap their business or take in money from friends and family to fuel a startup, an investor can often prove to be quite imperative. Although I am the last person to advise a founder to desperately woo investors, there is no denying that they are a crucial part of the startup ecosystem.

Love them, or hate them, we absolutely cannot ignore them.

But trouble brews when they give us more reason to hate them than love, by throwing caution to the wind while counseling founders they work with. 

Total Funding and Deal Size in South East Asia, 2009 - 2019

Investors and venture capitalists, being usually more experienced than a startup founder in the broader business space, are often relied upon by members of founding teams for insightful advice. If dispensed correctly, such advice can truly benefit a business, and take it to great heights.

Unfortunately, however, many investors do not take this responsibility seriously enough to encourage prudence. Instead, they act like a rich, neglectful parent who stuffs their child's wallet with cash even before they learn of its value. While flushing a startup with funds can make for impressive headlines, they spell serious trouble for their bottom lines in the future. When an investor keeps rewarding financial haemorrhage by pouring money into a loss-making business as though it were a bottomless vessel, the chances of it succeeding steadily declines. 

Perhaps the poster child for such reckless disdain for financial prudence is Masayoshi Son, whose SoftBank Group is frequently tied to glorious unicorns that have bitten the dust or are about to! Pumping their portfolio companies with funds, SoftBank's CEO has often been dubbed a "free-spending benefactor" who gave wings (read: an endless supply of money) to startup founders under his aegis. The fact that these wings were precariously made of wax and some of these companies were pulling an Icarus by flying too close to the sun, didn't seem to bother him. Well, at least till very recently, it did not, as he kept driving up the valuations of companies he worked with: Uber, WeWork, and closer home, Oyo. 

While WeWork had to withdraw its IPO plans in the face of industry-wide ridicule for its outrageously unwarranted valuation in the private equity space, Uber's tryst with the public market was met with a tepid response. So why did Son continue to supply such obscene amounts of funds to companies that were clearly losing massive sums of money? Many explain it by citing the "Greater Fool Theory": flushing a firm with funds and driving up its valuation in the hope that some greater fool will pay an even higher amount to buy out that stake. A lot of it also has to do with SoftBank's move to get a dominant role in corporate decision-making, and to guide their portfolio companies into making synergistic collaborations that are likely to benefit their principal investor.

If there is any good news that can come out of this entire scenario, it is that Son seems to have modified his messaging to companies that he cuts big cheques for, at least publicly. He seems to have made the shift in September 2019, following the WeWork disaster. At a meeting of company leaders that month, he told them that they would have to strive for profitability soon, and focus on better corporate governance. Whether or not Son plans to enforce this warning remains to be seen, but it seems to be a good start towards breaking from his frankly toxic tendency of fuelling loss-making enterprises.

CEOs Gone Rogue

The startup scene is peppered with tales of CEOs gone rogue: leaders who said goodbye to good sense and gave in to poor decisions that came back to haunt them beyond the balance sheets of their businesses.

In a New York Times op-ed, Dan Lyons writes about such CEOs, mostly entitled young men helming promising new ventures. He brings up the omnipresent "bro culture" in many Silicon Valley startups, where their cool young CEOs foster a debauched and disorderly work culture rife with innuendos and inappropriate actions within the workplace. The consequence of this is often a wanton disregard for all good business sense and actions that reflect poorly on the company itself.

From sexual misconduct to wasting company money to fund personal flights of fancy, all is fair game to these troublemaking CEOs.

While there are several contenders to take the title in this category, Uber's former leader Travis Kalanick seems to stand out. While holding the position, he encouraged a bizarre and toxic work culture, had a sexual harassment charge levelled against him by a former employee, swore at an Uber driver on camera, accompanied coworkers to an escort bar at Seoul and had the personnel department brush allegations under the carpet to the best of their ability.

With him at helm, a top executive at Uber allegedly mishandled evidence from the rape kit of a woman in India after Uber faced complaints of sexual assault. Kalanick did little to stop any of it, even though he was reportedly shown the evidence himself, and continued to fuel the frat house energy that characterised the workplace at the time. He also had a murky approach to dealing with regulators, and openly asserted that regulators only tried to come up with tactics to thwart disruptive businesses like his. His constant tiff with regulators, on-camera meltdown, a company-wide disintegration of work ethic were all reasons why investors finally moved to have him step down. 

Even though Kalanick is long gone, from Uber at least, his unfortunate legacy lives on in many startup environments even today. For example, even Adam Neumann, the freshly ousted CEO of WeWork, has faced several charges of behaviour that is less than exemplary. From smoking marijuana in the private jet he bought with company money to adopting discriminatory practices against pregnant employees, Neumann seems to have followed in Kalanick's footsteps. Even though he was not accused of sexual harassment himself, WeWork under him did have to contend with a lawsuit for having poor grievance redressal policies for sexual assault at the workplace. 

Narcissistic Founders and their Politics

I am a staunch proponent of supporting the founder's vision in building a business. But what happens when the founder himself turns out to be a narcissistic, egomaniacal control freak?

Often, a controlling founder acts on fantastical whims and turns corporate governance on its head, ultimately taking reckless decisions and wasting company money with little sense or sensibility.

A prime example of this can be seen in the disgraced former CEO of WeWork, Adam Neumann, who I have already mentioned for his irresponsible habits. If you thought his weed-smoking, gender-biased ways were bad, wait till you hear about the iron grip he liked to maintain on his erstwhile company! Neumann exercised a massive amount of influence on WeWork, cashed out at whim (once he took out a whopping $700 million), charged his own company a large sum for the "We" trademark, and threw lavish parties in the Gulfstream private jet that cost the company upward of $600 million. 

Moreover, to maintain a strong control over WeWork, Neumann implemented a multi-class voting structure. He maintained what is often called "super voting stock". Per share, he had 20 votes, while regular stakeholders only had one. At the time, most CEOs holding these highly valuable stocks enjoyed just half his voting rights: that is, 10 votes per share. If that wasn't enough, his wife Rebekah Paltrow was also given the right to choose a successor if her husband was unable to serve as CEO owing to ill health or death. As WeWork steadily approached a state of decline, Paltrow's power was waived off, and his voting rights were curtailed and brought down to 10 per share, and eventually 3. However, in the long time that he held these massively influential voting stocks, he was known to take questionable decisions that could not be justified by the company's financials.

This culture of over centralisation bred a poor governance structure that investors in the public market were simply not willing to bet their money on. Neumann's fall bears further testimony to how much havoc can be wrecked by troublemaking founders: especially those that like to control everything themselves.

Leaders that Lost their Head

As we have already established before, fantastic or flawed, investors are a major part of the startup ecosystem. Wilfully getting on their bad side, and disparaging them can only result in the erosion of a firm's goodwill.

Unfortunately, some leaders tend to lose their way and do just that: test the patience of investors through indiscipline and insult. Perhaps an appropriate example of such a leader would be Rahul Yadav, the controversial man who once led the real estate portal, one of the OG startups in India.

While his leadership was initially successful, he soon started making poor decisions that turned into a loss-making business, bleeding 60 crores or more in rupees every month. At this time, instead of focusing on fixing his business, he opted for threatening investors instead. In an infamous email to Shailendra Singh, MD of Sequoia Capital India, he wrote:

“If you don’t stop messing around with me, directly or even indirectly, I will vacate the best of your firm. Also, this marks the beginning of the end of Sequoia Cap in India”

This email was shared with employees of the startup, which naturally soured many of their minds about the nature of the leadership they had. He also resorted to publicly shaming a fellow entrepreneur, calling Games2Win founder Alok Kejriwal "dumb". His erratic behaviour and bizarre comments on social media added fuel to the fire, and his decision to mislead the members of the media when asked about the prospect of acquisition by Quikr, further eroded his already fragile credibility.

The VCs ultimately ousted him in a public coup, calling him out for his behavioural issues and poor leadership. The situation was bad enough for the police to be called as an anticipatory measure in case he threw a tantrum after being forced to step down. Even while leaving, he continued to be disrespectful to investors who had backed his company, writing:

“I don’t think you guys are intellectually capable enough to have any sensible discussion anymore.”

Clearly, he had lost all grips on a sense of social niceties or professional politeness, which definitely did not help the soup he had already landed the company in.

These troublemakers of the startup space are important to remember, not because their antics are great fodder for corporate gossip, but because of what we can learn from their inconsistencies and indecisions. Of late, I have been wondering if Ritesh Agarwal of Oyo is also planning to follow in the footsteps of any of these men, and I can only hope, for the sake of the Indian startup community, that the young unicorn founder sees sense and adopts a more cautious approach to building his business. His company has already made a small attempt to diversify board membership, which can help it move away from the domineering control SoftBank (its major investor) is known for. Oyo still has many problems to fix and governance issues to take care of, and one can only hope that the ecosystem's tryst with troublemakers will serve as a cautionary tale for Agarwal and the likes of him!



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