PE investors in a spot as founders quit

Rifts between promoters & investors reason behind their exodus

Private equity (PE) investors who had jumped on the e-commerce bandwagon are now finding themselves in a spot, as a growing number of founders leave PE-backed e-commerce sites. Increasing rifts between promoters and investors are said to be behind the founders’ exodus.

Last month, Abhishek Shah quit as chief executive of Fetise Retail, which ran men’s fashion apparel e-shop Fetise.com. Last year, the husband-wife duo of Gaurav Kachru and Pearl Uppal had quit Smile Group’s deal site Dealsandyou.com and flash sales site Fashionandyou.com, respectively. In January 2012, Fetise had raised $5 million in its first round of funding from Seedfund. In November 2011, Fashionandyou.com, an invitation-only shopping site, had raised $40 million (Rs 201 crore) from a group of investors led by Norwest Venture Partners and Intel Capital.

Mahesh Murthy, co-founder, Seedfund, said, “Some promoter exits are because of incompatibility of vision with investors. Some are for personal reasons. Others are because of integrity-related reasons. In each of these cases, it is essential the company outlive the promoter; it is essential customers continue to be served and employees continue to be led to perform — a smooth management change is a good way to do it.”

Last month, Karandeep Singh quit as chief financial officer of India’s largest e-commerce firm Flipkart Online Services, after just a year with the company. Last November, Jiby Thomas quit online classified venture Quikr.com. Founded in 2008, the site raised $50 million from investors Warburg Pincus, Norwest Venture Partners, Matrix Partners India, Nokia Growth Partners and Omidyar Network. As a reflection of the diminishing investor interest, the average size of PE investments in e-commerce fell from $410 million in 2011 to $339 million in 2012, an 18 per cent decline, according to data from VCCEdge.

Sumant Kasliwal, founder and chief executive, 20dresses.com, said, “Founders jumping the ship mid-way is a clear sign of trouble in the company. As the company scales up, founders do make way for professional management, but such scenarios are always planned. In early-stage businesses, an unplanned exit is a clear sign either the business is faltering or there are serious differences between the promoters and investors.”

Experts say it is difficult to replace founders with professionals at an early-stage venture. “PE guys can only replace the founders with professionals. Of course, they would not, and should not, attempt to run the business. It’s not easy to replace founders, especially if the business is in an early stage, as the team and processes are built more on individual relationships,” said Kasliwal.

“No VC (venture capital) or PE fund likes the idea of a promoter exit. We are prepared for the unfortunate, but possible reality of a promoter exit. In such cases, we work to ensure there is minimum disruption to the business’ customers and employees. And, we work to effect a smooth management change,” Murthy said.

Investors say e-commerce is not the only sector seeing churn. Prashanth Prakash, partner at Accel India, said, “Founder exits happen occasionally in all start-ups or venture-funded companies. There is no specific e-commerce angle to this. Most VCs insist on a founder vesting schedule that protects both the investor and the founder, who continue to run the company.”

In the last five years, the e-commerce industry in India recorded 155 deals worth $950 million.

During the same period, only 16 exits worth $87 million were recorded.