Is the Karvy scam the knockout punch to the fintech boom?

Waking up to the unearthing of a 2,000 crore scam at Karvy Stock Broking was precisely the sort of news fintech entrepreneurs and investors did not need. Ironically, this news would flash within a few hours of Andreessen Horowitz’s Anish Acharya and Seema Amble publishing a brilliant discussion on Does Zero Fee Trading Pay Off. Seema and Anish share their views on the impact that a start-up like Robinhood brought to an age-old business-like Chares Schwab and whether zero-fee trading can make money, or will it eventually lead to the demise of the incumbent.
To give you some context:
On October 1st, Charles Schwab announced that they would no longer charge any trading fees or commissions to their customers. On the day of the announcement, their stock fell 15% as the news spooked investors as to how the move would affect profitability. However, the investors had their fears allayed as a mid-November article said that the brokerage saw a surge in new account openings. The news led to a stunning rebound in the stock as it surged almost 50% from the bottom!
The incumbent’s response to a disruptor was to copy their strategy and transform their own business! It led to a win-win situation for them as Schwab earned new business, increased assets under management, revenues, and their investors have become more prosperous. The incumbent’s move to recognize that way of doing business had changed speaks volumes to the sort of culture that must exist at the upper echelons of Schwab.

Unfortunately, I cannot say the same for the business houses in India. Their shady business tactics, lack of ethics, and underhand dealings have cast a shadow on their industries and as a result of that, on the newcomers.

It is a known fact that the IL&FS fiasco cast doubt on the entire NBFC space and led to an exodus of top-tier professionals. The pressure intensified as a host of top-tier NBFCs defaulted on their obligations leading to an almost blanket freeze in lending or investing to companies in this sector – including start-ups, which were the hardest hit.
Now, this Karvy fiasco will cast doubts in the minds of customers of start-ups like Groww, PayTM Money, and many others that are attempting to disrupt the investment space. I estimate that we are a few months away from the same freeze in funding investing tech that was witnessed in lending tech this year.  All I can tell fintech founders is that they must conserve resources. A cold hard winter is setting in on their space.

Only the fittest will survive, but they must endure.

When is the Best Time to Reveal that Your Cofounder is Related to You?

It is important that founding teams declare if two of the co-founders are married to each other, blood relatives or cousins. The team can choose to reveal that after the pitch, but I prefer if the team takes the bull by the horns and reveals the full extent of the relationship before they start the pitch. Investors that have apprehensions about investing in founding teams where the members are related, should decide if they will be willing to look over those issues before the pitch, not after.
Unfortunately, many founding teams are advised to withhold such information or to mislead investors by playing around with the last names to avoid detection, but such sneaky tactics only reinforce the fear that the founding team with familial ties drown out the ethical voice that should discourage actions that shake investor confidence.
To allay the fear of those investors that have the first-hand experience of watching their investment value destroyed due to factors like, family feuds, withholding important information or the family member opening a competing venture, founding teams should be as communicative as possible so that these fears aren’t allowed to fester.
The investor may still decide not to invest in the company but at least the founding team does not lose face when investors find out that the founding team used diversionary tactics to slip one by them!

Founders: Lawyers aren't your Moral Compass

One of our investee companies made a significant change to their cap table without any proper intimation or disclosure to the existing investors. Not only did they make the change, but also went ahead to complete the transaction, keeping the remaining investor pool in the dark. What the founder failed to consider is that these things cannot remain in the dark for long. So, when the news came to light, I was upset at the way the entire transaction had taken place. A couple of days later, I had a face to face meeting with the founder to understand why such a crucial mistake had been made.
During the meeting, the founder admitted that he had made a mistake by not informing the investor pool about the changes. However, instead of owning up to his mistake, he retorted, “my lawyer told me it was okay.” After hearing this, I asked him if he genuinely thought his decision was morally or ethically correct and his reaction said it all. He couldn’t even look me in the eye or deny his lack of responsibility.
As human beings, knowing the difference between right and wrong is our basic instinct. Therefore, we should not rely on the shoulders of service providers (read: lawyers) to defend our actions (or as in this case, inaction). The critical trust between a founder and an investor is not based on the paper that is signed. The paper only defines what the individuals have agreed to do in the worst-case scenario of a complete breakdown in communication.
Thus, I believe that it is my responsibility to go above and beyond the minimum standards that I have committed to in the investment documents. Hiding behind the cloak of a legal professional’s advice is a smoking gun and founders that do so simply weaken the trust their investors have in them.
For the record, the advice given by the lawyer was incorrect so legally speaking we can sue the company for violating the investment agreement. Not only that, but the founder has also lost all credibility among the investors & what price can you really put on that?
All of this could have been avoided if only the founder had openly communicated what he/she was doing. If you, as a founder are reading this post, remember that communicating with the investors about both, the good and the bad things going on with your company, help to build trust.
In fact, I would go a step further in suggesting that you communicate the bad news quicker if not as quickly as the good. Not only will this help reduce the damage that it can cause but it is also just the right way to do business. Nothing harms your business’ growth like the loss of an investors’ trust.

What is the Importance of Ethics in a Successful Startup?

I have cancelled two previous trips to the North East due to last minute emergencies but this week I finally fulfilled my wish to make it there, this time as a panellist of Tripura’s first startup conclave, Startup Tripura held at Agartala. My co-panelists included the Health & IT minister, Shri Sudip Roy Burman, Deepak Daftari, Anil Joshi, Mohit Gulati and Binod Kumar Homgai.
During a panel, there was a question from the audience that should have been a panel discussion topic in of itself viz “What is the importance of ethics in a successful startup?” I did not get a chance to answer that question due to time constraints but I would have said the following if I did.
Ethics are extremely important for a business but what is even more important is how you define ethics for a business/venture. The definition of what are ethics or ethical actions for a business has evolved.
But a business/venture has two primary duties

  1. Make a profit for its shareholders
  2. Make a net positive impact on society

Actions taken by a business that are in congruence with both these objectives are ethical and important.
Actions that achieve just one (or none) of both those objectives are unethical.