The Funding Story-Jai Ho!
Lokesh with a brilliant academic track record from an Ivy league institute and Gopal also a rank holder in IIT had both put in about 15 years each with a multinational in India. Both were in a well-paying jobs with reputed MNCs organisations with high salaries and employee stock options.
But there was heartburn… a hunger to create to do something…. There was so much happening in the ecommerce space, in the dotcom space in India that both wanted to pursue the entrepreneurship bandwagon. So after several long sessions of discussions and long chai sessions, long old monk sessions they finally decided to call it a day from their cream jobs and stepped out of their jet setting jobs to create a start-up. The lure of creating a start up the start-up bug had bitten them. They floated a company “LOGO” (Lokesh and Gopal) with an aim to be the next big thing in the app space, to be the next WhatsApp like app in the tech enabled space. Wow what a dream inspiration…
They also were able to influence Ramgopal and Amar who were also 10-15 years experienced with large MNCs and also earning huge packages and to chuck their paying jobs and be founding members of LOGO.
They quickly got together. They had all the right ingredients to get them the first round of funding with “idea.com". The first thing they did was to create a mobile app using their tech skills and business skills.
Four IIT/IIMs with a tenure of 12-15 years with MNCs and all who quit highly paying jobs.
An android, IoS app with a brilliant sounding, very convincing idea a wonderful story in mind
Perfect ingredients of what a VC had been waiting for.
The dream combination
Four IIT’ians, a mobile app and a mobile app combined with a dotcom idea. Just the sort of thing that Lion Global VC or a Global VC would want to Invest in. So here comes Lion Global with two other investors and put in a Rs 10 Cr investment based on their business plan for 1 year. The sum consideration for 10% stake or equity is Rs 10 Crore.
This is where the story starts. Lokesh and Gopal company is now valued at Rs 100 Crore and how-If 10% fetches 10 Crore than the balance 90 is worth 90 Crore!!! Yes perfect, overnight they move from a shared business center to a swank office and within weeks hire a huge team of sales executives. The intent-how to spend the 10 Crores in a span of 6-8 months and await for the next round of funding.
And true to it, to promote the app they hire event managers, television ads, full page ads in leading publications, radio ads all media coverage et all . In addition freebies for downloading the app across all eateries, free voucher per download across bars pubs etc, they hire large sales teams to sell the concept to merchants retail establishments all over and finally within a span of 6-8 months they have ensured that the funding is compulsorily spent. 10 Crore rupees spent in a span of 6-8 months.
Investment of founders
Development of application software and creation of base idea and platform. Total investment in hard currency is maximum Rs 5-10Lacs made by the founders. Now the valuation of the company has become 100 crores. The calculation is very simple –if 10% equals 10 Cr then balance 90% equals 90 crore. Wow what a money spinner!!! But the funds have dried up…in 6-7 months and they still need to pay salaries, vendors etc and they are nowhere close to a break even with a committed monthly outflow for about 50 employees on board whose salaries need to be paid.
In the following weeks they go to Lion Global VC and say that in case they do not get more funding they will have to close the shop and send all the 50 employees home and go back to their jobs. It is their 5-10 Lacs of investment versus the investors 10 Cr. Obviously the VCs are now in a distress mode to protect their investment.
Over the next few days Lion Global VC the other investors come towards an understanding-together decide that the investors will fund to the extent of expenses for the next 3 months operating expenses and within that if they are able to find another investor or buyer for the business then they will sell off the business and proposition to interested parties do so such that their investments are protected. Else, they will close down the business in the event they are unable to find the buyer. Now all the concerned parties Lokesh, Gopal, Lion Global and the other investors have come together with one common goal and that is is to find another bigger buyer for the entity.
Together with the help of the investment advisor at Lion Global Finance and other co-investors they approach bigger fish – Retailking who are also in the same boat but at a 100x scale amounting to investments of about Rs 2000 crore…. Remember now the team has grown stronger not only does Lokesh and Gopal have 2 additional partners but also backed by a reputed global investment firm Lion Global and two other reputed names venture in the market for a sell out.
The potential buyer - The bigger fish Retailking in order to increase their valuation decide to buy out “Limbo” for 100 Crores valuation with a down payment of Rs 1Cr and the rest 99 Cr in stocks of Retailking. Mind you - stock of Retailking that is not publicly listed or publicly traded stock. Media is alerted, all over there is press coverage “Retailking buys Limbo for an undisclosed amount” say the headlines (same article says intelligence reports peg the figure somewhere at Rs 100 Cr) and the mention of a share swap is mentioned somewhere down below in the article. By now Lokesh and Gopal and Gopal have become sort of mini national icons and successful entrepreneurs.
The deal is very simple that they (Retailking) will pay a down payment of Rs 1cr to the founders of Limbo and balance 99 crore will be paid by swapping equity of Limbo with the equity of Retailking with a 2-4 year lock-in period as well as a milestone based employment agreement whose tenure is anywhere between2 to 4 years.. Retail king valuation is Rs 2000 Cr arrived based on the same principles of funding of which they will pay 99 Cr worth of equity to Limbo founders. Since it is a private equity both valuations are based upon speculation and perceived potential than hard numbers of monthly/quarterly sales or profitability. This 2000 Cr has happened in the same way that the valuation of Limbo has happened for 100 Crore. Like to like…birds of a feather flock together. They merge with this understanding of 99% sale through equity swap.
Now they are all one big fat Indian family-Retailking plus Limbo waiting to find another super Retailking. The sage continues. Both are hugely negative on balance sheet and immensely bleeding but the funds never dry up. Because to save 10 Crore they merged with another 2000 Cr company and the saga continues. There are enough bankers and backers…The bubble has become bigger to save 2000 Cr there will be enough to put another 2000 Cr. Meanwhile Lokesh and Gopal are now employees of Retailking and continue to have ESOPS apart from their monthly salaries. They are ready for the next venture ……Jai HO!