The bloodletting in the Indian startup ecosystem continues with hotel-booking app RoomsTonite shutting shop on the heels of the Stayzilla fiasco, which is still playing out in the media. I have previously said that the startup space in India is safe because of its self-correcting nature. However, I did not expect that startups that failed to raise venture capital will start raising “vendor capital”.

What is vendor capital? It is the money that unsuspecting vendors, suppliers and professionals are owed for services that the startup has consumed, in order to provide its product or service to customers. There is a temporary float between consumption, billing and the payment due to the vendor. A startup that utilises this float for keeping its operations afloat (pun so not intended), with the knowledge that the business is in a death spiral, has raised “vendor capital”.

Startups like ZoRooms, AskMe and Stayzilla are among the many that can be classified as having raised vendor capital — when they went bust, they left in their path a host of companies that could not expand, pay their employees and, in some cases, even put two square meals on the table for their families.

I am particularly critical of companies that have raised millions of dollars in venture capital because they have people who are paid by the company (such as the CFO and his team) and by the investors (the analysts, associates, partners, internal/external auditors and independent valuers) to figure out how much time they have before they run out of money.

These well-qualified and well-paid individuals had to know that the company was running on fumes, and reinvesting the operational cash flows was going to lead to a situation where the company wouldn’t be able to meet its contractual obligations. That information is presented to the CEO or directly to the board, and a decision is taken on how to continue operations. If the founders and funders want us to believe otherwise, then the joke is on them!

As an angel investor and mentor, I have seen my fair share of startups go through tough times, pivot from the brink of disaster and even shut shop, but the entrepreneurs I have the highest regard for are those who devised a plan to: complete customer obligations; pay their employees; take care of vendor debts; and prepare for shutdown/turnaround.

What is interesting is that most of these founders were running startups that were either self-funded or angel-funded (i.e., they hadn’t raised inordinate amounts of venture capital), but were led and mentored by responsible business-owners and investors who understood what was at stake for those investors in the company who didn’t own equity capital (i.e., vendors, customers and employees). All this, when neither the bills ran into crores of rupees, nor the equity raised was in millions.

In fact, the moral compass of VC-driven companies was at full display when Stayzilla co-founder Yogendra Vasupal wrote in his Medium blog:

“I don’t personally owe anybody money and I am wondering how can they get confused on such a basic matter as this was a clear civil case. “

Or defended his non-payment by saying:

“I also pointed out that my company is also owed close to [Rs] 7 crore from various debtors, but I am not going around filing false criminal cases against them.”

I would like to tell Mr Vasupal that the founder/chief executive is, beyond doubt, responsible for the debts of his companies — to convince these vendors, you or a person under your direct instruction personally met them to gain their confidence. To take cover under the law in such a situation shows there is something seriously wrong that no amount of venture capital can fix. In fact, if Vasupal had sought repayment of the money owed to him with the same vigour as his social media outreach, this situation would not have occurred.

Those who are supporting Vasupal in this episode of moral turpitude should defend Mr Vijay Mallya as well — after all it wasn’t he who went bankrupt, Kingfisher Airlines did. So what if it took down its lenders and employees with it, and burnt a gaping hole in the pockets of the government. The law does not change whether the amount is a few crore rupees or a few thousand crores.

But what founders like Vasupal have done, besides burning vendor capital, is hurt vendors’ confidence in startups. They have made it infinitely more difficult for founders starting up today to gain the confidence of vendors, and convince them to extend services to them. They have made it difficult for startups to trust other startups and do business with them. They have made it difficult for employees to leave the security of their “secure” jobs with MNCs or Indian companies to risk their livelihood.

The long-drawn court proceedings and certain provisions in the law might protect such founders for the time being, but the hurt they have caused their vendors, and the startup community in general, will be felt for years to come. To those who support such founders, there is a quote from Ken Ham that best describes how I feel about this.

“If you destroy the foundations of anything, the structure will collapse. If you want to destroy any building, you are guaranteed early success if you destroy the foundations.”

We cannot build a Startup India campaign on the carcasses of old business that have been the foundation of our economy. And nor can such founders — who don’t know when their business will run out of money or how to collect on their debts, and don’t take personal responsibility for the destruction they’ve caused — be the guardians of this edifice.

Note: Artha India Ventures’ investments include Hotels Around You, Roadhouse Hostels, Vista Rooms and OYO Rooms, companies that happened to be Stayzilla’s competitors

Originally published at techcircle.vccircle.com on March 20, 2017