A few days ago, online food delivery platform Zomato acquired quick-commerce grocery delivery platform Blinkit (earlier Grofers) for Rs4,447 crore (about US$568mn—million), in an all-stock deal. The deal has raised many eyebrows. For one, Zomato has just about Rs1,250 crore on its balance sheet and is badly haemorrhaging, losing Rs750 crore of cash from its operations, in 2021-22 alone. Second, the acquisition comes at a time when Zomato’s own future is cloudy. Last year, it reported a loss of almost Rs1,100 crore and, under the current business model, there is no chance that it will make a profit soon. If so, its own existence is in doubt, unless it can find new cash to carry on. Third, there are various conflicts of interest in the Blinkit deal.
It appears that the chief executive officer (CEO) of Blinkit, Albinder Dhindsa, is an ex-chief financial officer (CFO) of Zomato and spouse of Zomato co-founder, Akriti Chopra. Zomato owned more than a 9% equity in Blinkit.
Zomato founder and CEO Deepinder Goyal was himself a 10% shareholder of Blinkit until last year, before selling it to Tiger Global. Finally, the valuation seems to be based on just two months of unaudited results, when even a small-time valuer insists on audited results to even start the valuation work.
Now, none of this would matter if Zomato were unlisted. Unlisted companies are free to do what their boards agree with—invest in loss-making companies where they see competitive advantages or continue with a business model where they lose boatloads of money. They are judged by metrics, that their private equity investors set for them—the main one being customer acquisition and revenue growth at any cost.
The fixation with growth is so overpowering that some over-ambitious founders and their backers have even been known to fudge their books. The end objective is to somehow grow the business to a certain size so that it can be publicly listed. In that process, charismatic founders, creating 10x growth while losing money like water, get an easy pass.
Consider this story of unlisted Ola. According to a report by Moneycontrol, between December 2018 and January 2019, Bhavish Aggarwal, founder and CEO of Ola, purchased a 92.5% stake in Ola Electric for Rs92,500 or US$1,500. The rest was held by Ola in return for permitting the use of its brand name.
A month later, Ola Electric raised Rs300 crore (US$42.2 million) from Matrix Partners, Ratan Tata and Tiger Global at an undisclosed valuation. Five months later, in July, Ola Electric announced that it had raised US$250mn from SoftBank at a valuation of US$1bn (billion), the fastest unicorn in India.
Today, both Ola and Ola Electric are valued at about $5bn, following the launch of electric scooters. Mr Aggarwal owns 5% of Ola but about 32% of Ola Electric.
One may wonder why Ola investors allowed Mr Aggarwal to walk away with such a large stake in Ola Electric. But then, it is their internal matter. The point is, if Ola were publicly listed, this would have been seen as brazen self-dealing by Mr Aggarwal.
Unfortunately, start-up founders do not seem mindful of the fact that, once listed, every corporate action will be judged from the point of view of its fairness to retail or minority shareholders.
As in the case of Ola and Zomato, self-dealing starts with the structure of ownership.
Take the case of Paytm, which got listed last year, in which founder Vijay Shekhar Sharma holds around 15%. He also holds 51% of Paytm Payments Bank, which is unlisted. Paytm pays Rs900 crore annually to the unlisted Paytm Payments Bank, majority-owned by the founder. It is one of the best examples of conflict of interest and self-serving related-party transactions. Again, this would have been up to the investors of the two entities when they were both unlisted. Since Paytm is listed, such conflicts have to be resolved.
The second source of self-dealing in start-ups is their scandalous pricing of initial public offering (IPO). As long as they are unlisted, the valuation of start-ups is completely driven by an approach that can be characterised by ‘growth at any cost’.
In the la-la land inhabited by visionary founders, backed by deep-pocketed adventurous investors, it is alright for a Blinkit to lose Rs637 crore to earn a revenue of Rs177 crore, because they would ultimately dump it on the public market. When they do their IPOs, start-ups continue to value their business as if it is another round of mad-money fund-raising.
This is why Paytm, the largest-ever IPO in the Indian markets, priced at Rs2,150 a share, opened for trading 9% down on 18th November. It then dropped vertically, ending the day 27.6% down at the lower circuit. A few days after the issue, the chief financial officer (CFO) of Paytm claimed, “We could have priced the IPO much higher but we decided not to. We wanted to leave value for investors.”
Last Friday, it closed at Rs657, down 70% from the issue price. As I said, it was another round of mad-money for Paytm and the CFO perhaps expected the price to soar further.
Start-ups do not care that mad-money funding comes to a hard stop after an IPO. Shareholders of listed companies believe in a different approach to valuation; it must be based on profitability and cash-flows, and all eyes will be on corporate governance standards. As a listed entity, corporate actions have to take the interests of all shareholders into account, especially minority shareholders. So far, we are not seeing any sign of it.