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)
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