The Fall of
The House of Cards. How Founders Burnt Millions and Razed Zilingo to the Ground
#suprioghatak
#zilingo #startups #sequoia
Introduction
Zilingo, a play on the word
"zillion," was established in 2015 by CEO Ankiti Bose and cofounder Dhruv
Kapoor. The idea came when Bose, holidaying in Bangkok, noticed many small and
medium-sized shops without online presence.
In 2015 Bose left Sequoia Capital where she was
an investment analyst and launched her own company, Zilingo. At twenty-three
she founded Zilingo, an e-commerce platform that offers B2B focused services.
She moved to Singapore in 2016, where she developed Zilingo software and supply
chain solutions.
From building solar
panels and games to an e-commerce unicorn, that’s the journey of Zilingo’s
Dhruv Kapoor. An IIT-Guwahati alumni, now heading a 100-odd team, he structures
work for engineering, UX design, product management, data analytics, data
science, and multiple other teams regularly. He worked at Yahoo for a couple of
years till 2013. As co-founder and
Chief Technology and Product Officer at Zilingo, Dhruv is excited
by the possibility of shaping the future of supply chains.
Zilingo has developed a proprietary suite of
applications which allows fashion merchants to access manufacturers around
Asia.
Businesses include a business-to-consumer (B2C)
and business-to-business (B2B) marketplace, private label as a service, an
e-pos and inventory management service, trend forecasting and fintech services.
Why a VC
like Sequoia bought in
Sequoia Capital is an American venture capital (VC)
firm owned by Doug Leone and Michael Moritz headquartered in Menlo Park,
California which mainly focuses on the technology industry. It was the most
active VC fund company in India in 2019.
Zilingo said it has raised $226 M in its latest
funding round from existing backers such as VC Sequoia Capital, with
Singapore’s Temasek Holdings joining as a new investor in 2019.
Sequoia Capital is among the top VC firms
globally, investing in startups at the growth stage and above. In 2018, they
launched Surge for early-stage startups based on–or building for–India and
Southeast Asia. It has funded 11 SEA startups in 2019, making it the 4th most
active VC in Southeast Asia.
What’s
Happening Now
A bitter clash of vision between founders
Ankiti Bose and Dhruv Kapoor is threatening to swallow Zilingo.
The capital-intensive B2C vertical and lack of
a tech platform for B2B operations initially led to overspending on marketing,
employees emptying cash and much more.
Ankiti Bose is suspended and has initiated
legal action and exploring a lawsuit against Dhruv Kapoor and likes to buy back
Sequoia’s 26% stake in Zilingo.
How did the circumstances
turn so threatening for Zilingo?
Ankiti Bose and Zilingo’s life has taken a turn
since inception. It searched for growth in 2018.
The idea that came out would change the trajectory
of Zilingo forever. It solved the challenge with scaling up and signing vendors
and suppliers very fast.
But involved operations and deep discounting
that would straighten out the startup, one of the biggest success stories from
Southeast Asia and Singapore.
In 2021, another massive shift — more significant
than planned. It was a clash between Bose and Sequoia, the company’s earliest
and most consistent institutional investor.
It was not professional fallout, but something personal
between the two over the direction of the company, the cash burn and no road to
profitability, all dating back to the focus on rampant growth from 2018. This happened
even as tensions between Bose and Dhruv Kapoor continued to escalate.
Kapoor and other senior employees at the
company buried complaints of sexual harassment.
How did
things get so bad?
A house of cards, riddled with ideas missing in
the initial years, and overspending to market and promote the B2C fashion
vertical meant Zilingo burnt millions. The founders clashed over ideas and
alleged patterns of sexual harassment in the company.
Was there Willful
Fraud
There was willful fraud. We don’t know what it was,
how it happened and how it evaded notice of the board and investors.
This escalated from mismanagement, millions of
dollars burnt to a massive controversy threatening to swallow the entire company.
What will happen to the 500+ employees? Why the VCs are neglecting corporate
governance processes and not pushing for transparency are all million-dollar questions.
The operations initially were in a complete
mess owing to a lack of a working tech platform to onboard clients. Processes
and sales reporting were manually done like traditional supply chain
businesses. Sales and procurement teams worked without any direction or
targets.
Valuation
Built On GMV
The only focus to maximize GMV led to a
no-holds-barred approach to sales and unethical behaviour from the sales team.
Sales personnel striking cash-based deals with
vendors, overbilling purchases and under-invoicing sales. And the buyer and
seller were the same or related entities.
Emails sent from fake email IDs to Zilingo’s
auditors in Singapore containing documents confirming outstanding amounts owed
by some vendors.
It is still unclear if the dues were recovered
or they were actually outstanding.
Zilingo has not filed its financials in
Singapore since FY2019.
Its latest audited financial performance shows losses
of $236.5 M in FY2019. Net cash flow from operating activities was a negative
$95 M, with a high debt-to-equity ratio of -1.60.
Zilingo has completely shut its B2C operations
— it only contributed 0.5% to the net revenue in FY2021, and is not accounted
for in FY2022 projections.
Over the past three financial years
(2019-2021), the cumulative loss for the company was over $430 M, while the
total net income over these years is just $285 M. However, the company is
claiming positive contribution margins in FY2021 of $4.1 M.
Zilingo
Mismanaged Millions
Its expansion did not stop with zero planning.
It issued $14 M in loans from books to suppliers in India and Indonesia. No
risk assessment was conducted and the entire amount written off as bad.
Zilingo paid more than 2X just seven months
later after Bose showed desperation to acquire nCinga.
Bose expensed personal spending to the
company’s accounts.
The current scenario and suspension of Ankiti
Bose is not about cash burn or GMV boosting, which Zilingo did, but willful
misconduct and fraud, the nature and the perpetrator of which are still a
mystery.
Ankiti Bose
Vs Dhruv Kapoor
Kapoor had been at odds with Bose on a number
of matters.
He was disappointed with the nCinga acquisition.
Promises made by Bose were not kept. And then there was more tension to follow in
2020.
After laying off employees in 2020, Zilingo
entered the personal protective equipment (PPEs) space. Kapoor opposed this as
it was not Zilingo’s strength. Despite Bose’s assurances it signed contracts
with German and Indian governments and brought on suppliers.
The Indian government is in a legal battle for failure
to deliver 10 M KN95 masks. The contract value was $22.5 M. Zilingo claims the
Indian government did not give the mandatory 30% of total invoice value as bank
guarantee. This is pending in the Delhi High Court.
Despite being cofounders and having substantial
stake, Kapoor and Bose seemed to lead different companies. Kapoor was into tech and product development, while Bose
led the sales, marketing and administrative responsibilities. Such a split is
common, but what is not is one not knowing what the other’s doing. This is a
serious lapse in judgement and leadership apathy for critical areas of the
business. Kapoor is equally responsible for upholding best practices, and
calling out problems or issues. But alas these were two different Zilingos,
culturally and organisationally. And this is what completely derailed Zilingo
after years of burning cash became a problem.
Sequoia’s
Shailendra Singh Vs Ankiti Bose
There was a change in dynamics between Bose, key
investor Sequoia Capital India and Shailendra Singh, a managing director at the
VC firm. The fallout began in January 2021.
These two objectives — profitability and
fundraising — seemed diametrically opposite and the CEO was uncertain on
whether this slow-burn strategy would pay off.
Bose believed Zilingo had enough to push for
growth and raise a new round, but this line of thinking was clashing with
Sequoia’s goals.
At one point, Sequoia had suggested former
Myntra CEO Ananth Narayanan, as a successor. But constant decline from Ankiti’s
side as she thought Sequoia has never pushed other founders from its portfolio
in this way.
Who Watches
The Celebrity Founder?
Investors asking for profitability is nothing
new, but the duo’s relationship is said to have deteriorated when Bose accused
Sequoia of selectively targetting her.
In the aftermath of CEO Bose’s suspension and
the stepping down of Sequoia’s Shailendra Singh from Zilingo’s board, the VC
firm released a post on its blog talking about corporate governance, willful
fraud and misconduct by its founders. The suspension comes after a
whistleblower allegation against fraud in Zilingo.
Can investors claim ignorance for all practices
at Zilingo? How has the board, which includes Sequoia, other prominent investors,
not looked into the books or financials for two years, having had a full-time
CFO?
And if they were examined, how did wilful fraud
escape notice?
What Next for
Zilingo?
A parallel lie in BharatPe and Zilingo — one of
the cofounders has been suspended for irregularities, while the focus is on
mudslinging and digging up old accusations.
Sexual harassment complaints were raised
against a senior employee, who is there since 2019 and now heading the
company’s primary revenue source. These were buried by the management.
From 900 employees in early 2020, workforce has
reduced to 500 after many rounds of layoffs.
Even if it raises funds at a less than
satisfactory valuation, the pressure to grow and show profits will remain. The other
option is distress sale at a lower valuation, impacting employees, as transformation
of people post acquisitions is a big challenge. Zilingo will be having a new
CEO in the near future.
Ankiti Bose is a huge part of the company — a
brand in her own right and the face of Zilingo — but her days might be
numbered, unless her legal steps yield results. But with a new leader or with Bose
as CEO, will it matter? Can Zilingo and its founders climb out of the hole they
have dug?
What will
happen in the near future?
Ankiti Bose is exploring
buyback option ahead of board meeting and has begun talks with new investors to
buy out a majority stake, including the 25% equity owned by Sequoia Capital.
Zilingo is one of
Sequoia Capital India’s key investments in the South East Asia region, and the
start-up entered the unicorn club when it raised a $226 M Series D round in
April 2019. Bose who is at the helm of the company since its inception in 2015
is facing allegations of financial irregularities, with the board accusing her
of inflating revenues.
The allegations
against Bose emerged after the start-up began the internal process to raise
$200 M in funding led by Goldman Sachs Group which has now been discontinued. Zilingo
submitted all key financial statements for a due diligence process for the $200
M funding. The company currently has enough cash in the bank for the next 15-18
months. The $200 M talks for funding were paused without her consent, accounting
practices and financial investigation was launched on March 31 and she was
immediately suspended from her role as CEO. The investigation was prompted by
Zilingo’s auditor raising questions about its accounting during the due
diligence process
Zilingo has appointed
Deloitte to probe the harassment charges filed by cofounder Ankiti Bose against
the company after her suspension as confirmed by the board on 2nd
May. The decision to suspend her was a joint decision by the board and the
relevant shareholders.
After the
suspension, Sequoia India MD Shailendra Singh vacated his seat on Zilingo's board, in an ongoing exodus that has seen representatives from Temasek and
Burda Principal quit.
The startup has
raised more than $308 M to date, with Germany’s Burda and Sofina Capital being
its other major investors. The entire situation at Zilingo unfolded while it
was in talks for raising a funding round worth $150-200 M.
To be continued
(Inspired by Nikhil Subramaniam)