by Mihir Dalal
In January 2012, Sujeet got married. As was his wont, he invited ‘half of Flipkart’. The baraat lasted for hours; the dancing wouldn’t stop. Sachin, Binny and many Flipkart employees came together to participate in the revelries. This was a rare moment of camaraderie in a year that would eventually see its demise.
12
NO RESPITE
Flipkart had received significant media coverage by 2012, and almost all of it had been favourable. Business dailies, magazines and TV channels had named the company one of India’s most promising startups. But beyond the obvious facts, internet businesses like Flipkart and the accompanying venture capital space weren’t well understood. One reporter took it upon himself to change this in spectacular fashion.
Earlier that year, Flipkart was approached by Forbes for a cover story on the company. The Forbes reporter, Rohin Dharmakumar, was on friendly terms with Flipkart’s newly appointed communications head, Karthik Srinivasan. Rohin had made an unusual entry into journalism. An engineer with a business degree from IIM Ahmedabad, he had worked as a business analyst at a consulting firm and made partner at the public relations firm Genesis Burson-Marsteller.1 In 2008, he joined Forbes, which was entering India through a partnership with the local media group Network18, to write on technology, media and telecoms. In India, Forbes had acquired a reputation for publishing well-researched, hard-hitting stories. Rohin persuaded Karthik to give him access to Flipkart, promising an extensive profile of the company.
Karthik, a genial, energetic PR executive, was excited by the prospect of the Forbes story. He thought it would be a nice way for him to begin his stint at Flipkart – a splash on the cover of a respected magazine. He convinced Sachin and Binny to grant full access to Rohin. Initially, the interviews went well. Over a few weeks, Rohin met Flipkart leaders including Mekin Maheshwari, Ravi Vora and the company’s CFO, Karandeep Singh. They declined to disclose exact details about Flipkart’s valuation, revenues and losses, as private companies do, but the interviews still covered a wide range of topics. When Rohin met Sachin, the line of questioning took a different turn altogether. Rohin challenged the Flipkart CEO about the company’s accounting practices, its exclusionary corporate culture, and the disproportionate influence of Sachin’s IIT Delhi mates. His interrogation would make it seem as if a litany of problems assailed Flipkart and the way it was run. Another meeting was arranged, this time between Rohin and Binny, who was accompanied by Karandeep Singh. That didn’t go well either. At the end of the interview, Karan told a colleague, ‘This guy has an agenda. He wasn’t interested in hearing out what [Binny] had to say.’
‘Can Flipkart Deliver?’ hit the stands in June 2012.2 The story turned out to be so outrageous that it shocked the Flipkart executives even though they had anticipated by now that it wouldn’t be an enitrely flattering piece. The article presented Flipkart as a sinister, unethical workplace run by a coterie of scheming IIT Delhi graduates. It painted the Bansals as megalomaniacal entrepreneurs for believing they could build a large e-commerce business in India in record time. Their ‘hubris and foolhardiness’ might drive the company to ruin, the article prophesied. It declared that Tiger Global’s investment practices were unscrupulous, its strategy dubious. It even implied that Flipkart was cooking its books. The photograph accompanying the piece showed four Flipkart executives sitting in a delivery van wearing grim, almost angry expressions. Forbes had taken several photographs; its final choice was revealing. Sachin was enraged. ‘Yeh kya bakwas hai! What the hell is this!’ he said to Karthik.
The story spread quickly on social media. Like a good conspiracy theory, it showed enough ‘research’ and ‘evidence’ to sound compelling. It was the talk of India’s startup world for months. Ironically, for a piece that later turned out to be laughably unrealistic, it was one of the last stories by a business magazine in India that would leave a profound impact on the subject it had covered.
At Flipkart, the entire senior management team got together to figure out how to respond. Ravi Vora, who was on vacation in Singapore, had to get on a conference call with his colleagues in Bangalore. Mostly, they vented their anger at the hatchet job. But the immediate danger facing Flipkart was that the story would put off the dozens of senior and middle managers that the company was in the process of hiring. Later, in an unusual move, Karthik convinced Sachin to fire off a long email to the Forbes editor protesting that Flipkart had been misrepresented. The email alleged that Forbes had published the piece because Homeshop18, a rival of Flipkart, was owned by Forbes’ parent firm. Sachin had requested that his email be published on the Forbes website, which the magazine did, followed by a rejoinder by the Forbes editor.3 The candidates Flipkart wanted to hire came to their interviews with the Forbes issue in hand, demanding to know why they should join a company with a tarnished name. Flipkart executives pointed to Sachin’s email on the Forbes website and the messages of support on social media from customers who continued to believe in the company. Despite their misgivings, many of these candidates agreed to join.
The company had averted immediate disaster, but the story would leave a deep scar. Flipkart, having only received positive coverage until that point, was in a state of shock for weeks. Flipkart leaders were forced to conduct all-employee meetings to restore calm. They pointed to the glowing customer reviews that were posted apparently in response to the company’s negative portrayal. It was a non-sequitur – problems related to corporate culture, business models and accounting have no direct link with customer satisfaction – but Flipkart needed its workforce to regain composure. For nearly eighteen months, its leaders had to field questions about its work culture from the candidates they interviewed. Several talented executives abided by Forbes’ portrait of Flipkart and refrained from joining the company.
BY THE MIDDLE of 2012, Flipkart decided to raise its next round of funds. Despite the General Atlantic setback, Flipkart’s sales had continued to rise rapidly. The company had launched many new categories such as fashion, large electronics and beauty products. But the emergency funds from Tiger Global and Accel Partners now needed to be supplemented. The next round of capital would have to be supplied by new investors – Tiger and Accel had invested far more than they had anticipated. Besides, Flipkart would need more cash injections in the future. It was essential to gather a consortium of investors.
Lee Fixel had introduced Sachin to Naspers, a South African media and internet conglomerate. Naspers had invested in internet companies in Africa, Asia, Europe and Latin America. Its best-known holding was Tencent, a large Chinese messaging and gaming startup. Lee was familiar with Naspers’ executives; the company had bought into a few Tiger Global-held companies such as Allegro, a Polish e-commerce business, and Mail.ru, a Russian internet conglomerate. Naspers also had some presence in India already. It owned an online travel company called Ibibo and another e-retail company, Tradus. It was eager to fund more startups in the country. (In 2008, when Flipkart was just a few months old, Ashish Kashyap, a Naspers representative, had met the Bansals in order to explore an investment. But after just one meeting, Naspers had decided against pursuing a deal at that time.)
Lee also introduced Sachin to Masayoshi Son, the founder and CEO of the Japanese multinational conglomerate SoftBank Group. Son, a Japanese citizen of Korean descent, was well known in Asia’s technology sector; he was once hailed Japan’s ‘answer to Bill Gates’.4 When Sachin wrote to him asking for a meeting, he told the Flipkart co-founder that he was leaving for a holiday but would be keen to meet on his return. While this meeting didn’t take place, in less than a month, after just a few discussions, Naspers was ready to invest in Flipkart. Within a few years, Flipkart had established itself as the preeminent internet startup in India. Its business was doubling every six months or so. The Bansals and their leadership team seemed exceptionally bright. To Naspers, investing in Flipkart was almost a no-brainer.
Naspers funded Flipkart in August 2012, after an audit that lasted a few weeks. Iconiq Capi
tal, another firm that Lee had introduced to the Bansals, participated in the funding round. In all, the two investors put $150 million into Flipkart, enhancing its value to nearly $900 million.5 Not long after its survival had been called into question by a cash crunch, and just a few weeks after a damaging article had dented the company’s morale, Flipkart had secured the firepower to pursue its objective of taking e-commerce to the masses.
But Sachin continued to feel unsatisfied – Flipkart’s valuation had fallen short of his magic number: $1 billion. Still, he was now a wealthy man, and so was Binny, each boasting a net worth higher than $100 million.
Earlier that year, Tiger Global and Accel Partners, whose holdings had multiplied in value, had rewarded the Bansals and some senior employees for their stellar performance. More than a dozen such employees, including Sujeet Kumar and Mekin Maheswari, received crores of rupees in bonuses, as part of the company’s stock option scheme.
It was unprecedented in Indian business for such a young company to share wealth with its employees. It was also one of the first instances of ESOPs turning out to have real value. Infosys was considered a benchmark in the aspect of awarding generous amounts of shares to its staff. The employees would, however, have to wait nearly two decades before they could encash these benefits. Flipkart’s first cash payout for employees, on the other hand, happened less than five years after the company had been founded. As more Indian startups prospered in the coming years, Flipkart’s example became a norm.
It was through such gestures that Flipkart reinforced belief in the idea of internet entrepreneurship. By 2012, Flipkart had not only become the biggest internet startup in India, it was also the ‘too big to fail’6 firm. One by one, Flipkart continued to defy the sceptics, who had overwhelmingly outnumbered the believers. As it came closer and closer to fulfilling its vision, the company uplifted the entire startup ecosystem. The belief – among other entrepreneurs, investors, startup employees, as well as those who had chosen to stay out – that India could sustain a thriving startup scene grew stronger.
The Flipkart executives weren’t shy about displaying their wealth. Sachin, who had been driving a Chevrolet, bought a Mercedes, while Binny’s Hyundai i20 was replaced by a BMW. Both Sachin and Binny also bought new homes in Koramangala. In 2012, even Sujeet bought a Mercedes.
AFTER THE CAPITAL infusion from Naspers, Flipkart’s investors demanded that the company fix its finances and accounting systems. It would also have to adopt a new legal structure to ensure it didn’t violate India’s investment rules. Its current arrangement was too risky. While the entity that owned the Flipkart website and WS Retail were separate on paper, the Bansals were owners and directors of both. Even a casual observer would have spotted the sham. BusinessWorld had informed the company that it was working on a story about the questionable legal structures of e-commerce firms including Flipkart. It was time to devise a new legal ploy to skirt the country’s investment rules. And all of this had to be done while the company grew rapidly. In the internet business, current valuations are determined primarily on the basis of estimated future sales growth – one of the costs of accepting venture capital. Flipkart’s valuation had swung from less than $5 million to $900 million in just three years based on the hope that its business would continue to fly. If its growth slowed, the company would be in serious trouble, its ability to attract more capital would diminish.
After consulting lawyers, Flipkart finalized a new legal structure. In 2011, it had moved its holding company from India to Singapore.7 Apart from avoiding regulatory trouble, Flipkart also wanted to prepare for a public listing abroad. Indian stock markets did not allow loss-making companies to list their shares. And neither did India have a specialized ecosystem of analysts and investors that understood how internet companies were valued.
As part of the new structure, Flipkart created several new entities under its Singapore holding company. Separate units were created for the marketplace platform that owned the Flipkart website, the logistics operation and a new payments business. The biggest change was at WS Retail, the entity that was purportedly a third-party seller for Flipkart. Sachin and Binny along with Sachin’s relative, B. K. Bansal, who were directors of WS Retail, would need to end their association with the entity.8 Tapas Rudrapatna, who was already an employee and director of WS Retail, would be joined by a Flipkart colleague. It was decided that WS Retail would have to be padded up; it would be given ownership of Flipkart’s logistics unit to pretend that it wasn’t a shell company.
For a Flipkart employee to move to WS Retail would be dangerous – if regulators ever looked into Flipkart’s relationship with WS Retail, executives at the latter would certainly be investigated. The risk wasn’t restricted to financial penalties; it possibly involved jail time. Sujeet Kumar, the most powerful leader at the company after the Bansals, volunteered to move to WS Retail. In the second half of 2012, Sujeet’s transfer and the simultaneous exit of the Bansals from WS Retail were finalized.9 At least at that time, Sujeet’s brave move would not affect his position at Flipkart.
The changes in Flipkart’s legal structure came just in time. In September 2012, India’s commerce ministry made it explicitly clear that foreign investment was prohibited in direct online retail or inventory businesses; only marketplaces were permitted to receive foreign capital. Again, there was no defensible rationale for such a distinction. What mattered was that retail was a politically charged space in India; both right-wing and left-wing parties had opposed the infusion of foreign capital in Indian retail.
A few days later, in October, BusinessWorld published its article on how e-commerce firms were violating Indian laws. ‘FDI Escapades’ detailed the dodgy legal ruses adopted by online retailers to bypass foreign investment laws.10 It proved that most e-commerce companies, including Flipkart, Myntra and Rocket Internet, were in fact running inventory businesses rather than marketplace platforms. Holding stock was essential to ensure that customers received original, first-hand products in a speedy manner. Without the inventory model, there would be no consistency in service, which would translate to low sales growth and insignificant valuations. Since the inventory model was prohibited, e-commerce firms pretended to be marketplace platforms, claimed the BusinessWorld piece. It was an indictment of the regulatory failure in the e-commerce space. This would soon change.
Towards the end of 2012, Flipkart and many other e-commerce companies were hit by a shocker. The Enforcement Directorate, the feared regulator in charge of enforcing foreign investment laws and investigating related violations, had sent them notices.11
The ED was inquiring about their legal structures. The regulator was out to prove that the online retailers were operating under the inventory model. While many e-commerce companies received notices, it was clear that the primary target of the ED’s inquiry was Flipkart. This was hardly a surprise: Flipkart had raised more capital than all other internet companies combined.
THE ED INQUIRY came at a troubled time for Flipkart. Three worrying trends had endured at the company since the middle of 2012. It was losing more money with every passing month. While this was expected, what made it a cause for concern was the second trend: Flipkart’s sales growth had nearly stalled for the first time since its inception in 2007. In June 2012, it was generating about ₹100 crore in monthly gross sales. By December 2012, this number had inched up by less than ten per cent.12 Even worse, customer complaints about its service had multiplied. Altogether, these trends established beyond doubt that Flipkart was suddenly in a proper crisis. It was an unusual experience for the company where most employees had only known good times.
The crisis at Flipkart was of its own making. The company had grown overconfident. It had launched many new product categories all at once, believing that it could force its way through any barriers. But categories such as large electrical appliances required logistical expertise that could only be accumulated after several months of trial and error. Others necessitated specialized sourci
ng and logistics mechanisms. Stretched in too many areas, the company’s sales function was in disorder. Ankit Nagori, who was now at its helm, could not exert his authority the way he had when leading the books and media categories.
There were other problems as well. The company’s new supply chain software, Flo, was found to have flaws that resulted in increased expenditure and troubles with vendors. A new accounting process was introduced with haste, and this caused further disruptions with vendors. Flipkart had also lost many talented senior employees who had suddenly fallen out of favour; executives who had replaced them needed time to acclimatize. Within a year, the company had nearly tripled in size to about 5,000 employees. Older employees were wary of newer colleagues; camaraderie had been replaced with self-interest. Flipkart struggled to impose a uniform corporate culture. In the second half of 2012, the company failed to measure up.
What Flipkart missed the most at this time was the decisive leadership of Sachin Bansal. After the General Atlantic talks fell through, Sachin had loosened his grip on the company. He seemed distant to his colleagues. The Forbes story had also made him less trustful of people. The Core Team had not been meeting frequently. Flipkart’s business and staff had grown at a pace that had made centralization impractical, futile even. But the Core Team meetings were still important. These had been a weekly fixture, a ritual that had helped the management exercise some control over what was becoming an increasingly chaotic environment. At that time, when the company desperately needed direction, the diminished influence of its management team and Sachin’s withdrawal only worsened the situation.
Sachin and Binny finally took action in December. In a sweeping restructuring exercise, they announced a new hierarchy. Mekin Maheshwari was given a new role in Flipkart’s digital products and services unit; Amod Malviya replaced him as the head of engineering. Ankit Nagori was told that his role had been cancelled. He was to now head the company’s fashion category, a far smaller responsibility compared with his earlier position as the leader of all categories. It was a hard fall for him, especially painful as it happened soon after he returned to work from a two-week-long break to get married.