So, we all know that Info Edge (the operating Company of Naukri.com and others) has written off its 29.3 crore investment in e-commerce Company 99labels.com.
(In case you were busy driving the Mars Rover on Mars and didn’t know, this is what has happened while you were out, enjoying outer space.)
Now, there is a serious lesson to be learnt from this write off.
Nope, it’s not a lesson about how to run e-commerce businesses and where they are headed (For my views on e-com (which I fondly call ‘e-gone’), click here) .
This is a very serious post about the PERILS of being invested by an Operating, Listed entity and how it can affect a startup.
Info Edge invested 29.3 crores in 99labels.com in 2 stages. It put some 24 crores in May 2011 and another 5 crores in Sept 2012.
Suddenly, on 14th of March 2013, Info Edge decided to inform the Indian Stock Market that it is WRITING OFF its entire investment. It indirectly told its shareholders (via the note to the stock market) – “Boys and Girls, we invested 29.3 crores in this e-com thingy and we are errrrrr…. cough.. cough.. (where is the Vicks for the khich-khich??) … pained to tell you that the entire investment has been wiped out. It’s gone. It’s Khatam. IT’S KHALAAS.
Why is Info Edge making this announcement, now, at this time and stage?
I have publicly stated the Naukri.com is the most successful Internet Company India has ever produced; and by that logic its promoters – Sanjeev and Hitesh remain (in my opinion) the most successful Indian Internet entrepreneurs ever.
Info Edge is an OPERATING, publicly listed Company that is measured Quarter on Quarter on its financial performance.
Let’s look at the ROCKSTAR financial results of Infoedge for the year ended March 2012:
– If you notice, there are clearly 2 heads of PAT (Profits after Tax) – TOTAL PAT and Operating PAT (from the direct business) and both are better than last year’s results.
– Notice the JFM (Jan-Feb-March) quarter. It’s a solid quarter and contributes healthily to the overall results.
Now, let’s examine WHY Infoedge is writing off its 29.3 crore investment in 99labels.com this quarter (since it’s made the announcement on 14th March 2013)
• The last investment it made in 99labels was in September ’12. That’s the current financial year.
• ASSUMING that the 99labels.com business has gone DEAD (not surprising given the radiation exposures the e-commerce business suffer), Info Edge is taking a SHORT TERM CAPITAL LOSS [defined as loss incurred in stocks (held in 99labels) in less than 1 year on investment]
• What is the benefit of a Short Term loss?
I assume it will be set off against other profits booked (under the same head of income) that comprises the non-operating income of Info Edge. Any reduction in such profits means it reduces the outgoing tax of the year also. Even if there are no profits to set this off, the loss can be carried forward. Remember that Info Edge is investing in a lot of dot coms (Zomato, Meritnation etc) and startups and this loss can be well used when equity of those investments is sold.
• Logically, since 5 crores is in the same company (99labels.com) that Info Edge earlier invested 24 crores in (May 2011), it’s only sensible accounting that the entire investment of 29.3 crores is written off all together.
• The 24 crores will be a long term capital loss (since it’s been held for over 1 year) by Infoedge.
I also have a nagging doubt that the 99labels.com management either have run into a difference of opinion with the Infoedge management about the course of the Company or just cannot convince them about their ability to be a ‘going concern’. (‘Going concern’ is accounting lingo that simply means that a firm is capable of continuing to be in business.)
By making this abrupt and brutal announcement at this stage, Infoedge has come out on top.
Why?
Looking forward, this is what will happen mid May 2013:
Info Edge will stun the world with its March 2013 quarter results, book this loss, reduce its non-operating profits (and taxes) burp slightly and move on. Since the market would have learnt and forgotten this mini-tragedy (via the March 14th announcement), the investor public will not care. They will celebrate Info Edge’s great results in May and order fresh Alphonsos as a treat.
Long live Infoedge and the solid corporate governance it teaches us.
Now, let’s examine life at the 99labels.com end.
I don’t know those guys. Have never met them. Probably never will. Happy to meet them if they want. In any case, I wish them best of luck.
Couple of scenarios:
– If they had raised 29.3 crores from a VC, they would never have faced a PUBLIC announcement that their Company is considered a complete write off – a la it’s ‘finished’.
VCs are NOT operating companies and they are usually not listed. They are investment structures and they report periodically to their investors – a la LPs or Limited Partners, strategic investors, etc.
VCs are used to Companies going through really bad stages and in situations like 99labels.com, they stop lending (investing) further money in them. That’s the worst it can get. When other VCs in the market are interested and think of investing in such Companies, the original VC lends moral support! The existing investors meet the new incoming investors and tell them good things about the management (assuming there are good things to say) and SUPPORT the Company in raising money. This is the done thing!
NO VC will ever send a Press Release to the Stock Market in the middle of a month stating that their investment in a Company is a ‘write off’.
But when you get invested by an operating, highly profitable and highly watched company like Infoedge, then that’s the PRICE YOU PAY to be invested by a listed entity that has its own Q on Q (Qayamat se Qayamat tak) moments to deal with!!
– Given the public announcement made by the PRINCIPAL investor of 99labels, it’s going to be a very steep climb uphill.
Since the lead and sole investor has written off the entire money, it’s signaling to the market that the Company is worthless. Probably if 99labels.com has taken debt (creditors unpaid, stocks bought in advance) it actually becomes a negative net worth Company.
Who will PAY ANYTHING (investment or acquisition) to 99labels.com in this situation?
Most Companies in distress merge or get ‘asset clumped’ into a larger player who at least has the cash to pay salaries and the office electricity bills of the failed entity.
If I were that large player and 99labels.com came to me:
– I would be open to a bit more kindness if 99labels.com was invested by a large VC. I would do a stock swap with them and probably ‘give a little and take a little’, in case I wanted that deal.
The team, the setup, etc could be ‘kindly valued’ and a couple of % of equity thrown in just to keep everyone happy. I mean, as a long term entrepreneur, if this was say an Accel invested Company, I would pay a bit more (remember it’s just equity) to even earn some loyalty points from Accel (and redeem those points in the long run).
To take it further, if Sanjeev Bikhchandani called and said, “Alok, support these guys, they need your help”, I would gladly do so, just to earn some good karma with Sanjeev. But in this case, Sanjeev has already stamped them “Toxic”!
Given that 99labels.com is an Info Edge invested Company that is officially ‘written off’, I would be as ruthless with them as a Roman Emperor hosting gladiator matches as his Sunday timepass. My opening dialog with 99labels.com would be, “If your investors think you are ‘worthless’, why should I value you at all?”
Lessons from this tragic drama:
If you are a startup that would require multiple rounds of investments, etc to find your feet, get invested by Operating Companies only if:
1. They are in your line of business! If 99labels.com was in the recruitment business, naukri.com could have easily absorbed them!
2. Get invested at a stage in which the money adds value in terms of expanding your reach, your horizons and your reputation – NOT to pay salaries and bills!
3. Make sure that you have ALSO have a financial investor plugged-in who could take the brunt of the strategic co-investor and help out in the mess (I had the SAME situation in Mobile2win China in which Siemens was the strategic investor – but the money that could have been potentially lost was too small for Siemens to ‘report’ on the Frankfurt DAX and the other co-investor was Softbank who helped out!!)
So, all we can do is wish 99labels.com best of luck. You need all our wishes.
Salute Info Edge. You actually make a shining example of what Indian Internet can achieve and what it takes to run a solid, operating, listed Indian entity with great governance and guidance in place!!
*****************************************************************************
EDITOR’S NOTE: Sanjeev Bikhchandani (yes, he’s a rodinhooder!) has responded to this post in the comments below. Adding his response and academic exchange with Alok here for everyone to read.
20th march 2013
07:45am
Reply by Sanjeev Bikhchandani
1. Short term capital losses may only be used to offset capital gains (whether short term or long term). They may not be used to offset gains from any other source. Our treasury income is mostly interest and dividend and so does not constitute capital gains. Info Edge will not get a tax break this year from this write off. The only circumstance that Info Edge will get a tax break on this will be if we exit any of our other investee companies at a gain some time in the future (both the occurence and the time horizon for this to happen is uncertain), or if we buy shares in the stock market and make a gain (this is against our treasury policy and we do not invest in the stock market) or if we sell some land at a profit (again not happening this year). A tax write off is not and in fact it cannot be our motive for making this announcement.
2. Good corporate governance encompasses true and fair accounting and appropriate disclosures at the right time. True and fair accounting means that if an asset has been impaired that impairment needs to be recognised at the time when it has occured. Appropriate disclosure means that you tell those people whom you have taken money from, or who are your shareholders or who are perhaps contemplating becoming your shareholders about any and every significant and relevant event when it happens. An asset impairment of this size is an event that would fall into this category. You would not wait till the end of the quarter before making the announcement. In the past when we have made an investment above a certain size we have announced it immediately. We have not waited till the end of the quarter. Likewise for significant asset impairments. Yes we could have contemplated a forced merger or a consolidation with another failing ecommerce company perhaps against the wishes of the management and with not very positive outcomes eventually and hidden this impairment but in our considered view that would not have constituted good corporate governance (true and fair accounting and appropriate disclosure). It would have been smoke and mirrors to kick the can down the road. Fundamentally good governance is about recognizing and telling the truth. And that is what we do – we tell the truth as best as we know it when we find out about it even if it is bad news.
3. This announcement was agreed with the management of 99labels before it was made. In fact it helps the company because it permits them to raise money from Angels at a far lower valuation (since our valuation would not be a hurdle) and it gives the company an opportunity to rejig the cap table and reinvent itself and get a second life. And that is what the management is currently trying to do. We are helping them in this process.
4. Yes if we had not been listed we would not have had to make such a disclosure publicly. However there are several other benefits that our investee companies get from us that financial investors do not provide :
– We are entrepreneurs ourselves and therefore we perhaps better understand other entrepreneurs, their motivations, feelings, what drives them, their goals, their apprehensions, their conflicts, their challenges, their loneliness, their fears etc. And this makes for a really good working relationship. We are not into stupid ‘ungalbazi’. We understand what drives the business and we support the entrepreneur and give him independence and time.
– We have done it ourselves and can give practical, grounded operating advice should the entrepreneur need it. We open out all the departments of our company for the entrepreneur to come and observe and emulate and seek advice from
– We don’t have an exit time horizon / pressure and therefore there isn’t a list in five years or else sell to someone else type of situation ever. This allows entrepreneurs to build their companies out over an appropriate time horizon.
It would be instructive for you to talk to some of the entrepreneurs we have invested behind and hear what they have to say.
****
Reply by Alok ‘Rodinhood’ Kejriwal
Thanks Sanjeev for this special effort you made to respond and clarify this otherwise fuzzy issue.
This helps a lot in explaining the internal truth behind harsh steps, and what better than it coming from you.
Alok.
*****
Reply by Sanjeev Bikhchandani
Yes Alok – a decision to not fund an investee company further when it needs money is a difficult one. And a company that has built up head count and expenses of a certain order of magnitude goes through pain when there is a fund crunch.
And being entrepreneurs we understand that well.
After our first round of investment we supported the company with two bridge rounds of 5crs each that enabled it to carry on this far but were unable to provide more.
A difficult decision that I personally agonised over a lot but we have a fiduciary responsibilty to our shareholders as well.
Finally I take responsibility for this decision and the subsequent disclosure.
****
Reply by Alok ‘Rodinhood’ Kejriwal
Sanjeev, just an academic question:
Does it therefore make sense to route investments into start ups from operating companies like yours via a Company owned ‘investment fund’?
Where the fund is held wholly by the operating company and can report its own P&L and Balance Sheet?
But, given that ‘true and fair’ is the essence of good accounting, would that fund’s operating statements also need to follow the same rules as the operating company that holds it?
I’m curious because some operators have fund structures..
Maybe the reason is also so that the ‘fund’ itself can be sold/refinanced/ etc and therefore the need to have it?
Thanks again for the effort you have put in here!
********************
Karan Pandhi
I wish I can get even 1 percent of that amount to start off, with my resto 🙁
No doubt its quite a steel heart of the management of Infoedge to write off such a huge amount in one shot, and claim to the world, that the money which was there is now in the air, search it find it but you can’t have it.
All the best 99labels.com good luck.
Karan Vazirani
Superb insight. Thanks…
Sugandha Dubey
I was waiting for this post. Read it slowly and tried to absorb.
I have understood some parts and some I haven’t followed. … hmm.. Will need to read again ..
Mohul Ghosh
I shared this news with everyone I knew in my office. All are surprised. They all knew about this website. And almost 70% of them had bought something in the last 2 years. They all are asking.. Why is the management doing this?
Semil Shah '@semshah143'
as per my observations 99labels started shifting towards core retail eCommerce model with its sister site 9rasa.com 5 6 months back, I was suspicious that time but cant gather some concrete reasons why they are doing that. Still I am not so confident that 9rasa is by 99labels, if anyone could help me on that.
Rahul Krishan Ahuja
very insightful. Thanks for this Alok.
Sanjeev Bikhchandani
1. Short term capital losses may only be used to offset capital gains (whether short term or long term). They may not be used to offset gains from any other source. Our treasury income is mostly interest and dividend and so does not constitute capital gains. Info Edge will not get a tax break this year from this write off. The only circumstance that Info Edge will get a tax break on this will be if we exit any of our other investee companies at a gain some time in the future (both the occurence and the time horizon for this to happen is uncertain), or if we buy shares in the stock market and make a gain (this is against our treasury policy and we do not invest in the stock market) or if we sell some land at a profit (again not happening this year). A tax write off is not and in fact it cannot be our motive for making this announcement.
2. Good corporate governance encompasses true and fair accounting and appropriate disclosures at the right time. True and fair accounting means that if an asset has been impaired that impairment needs to be recognised at the time when it has occured. Appropriate disclosure means that you tell those people whom you have taken money from, or who are your shareholders or who are perhaps contemplating becoming your shareholders about any and every significant and relevant event when it happens. An asset impairment of this size is an event that would fall into this category. You would not wait till the end of the quarter before making the announcement. In the past when we have made an investment above a certain size we have announced it immediately. We have not waited till the end of the quarter. Likewise for significant asset impairments. Yes we could have contemplated a forced merger or a consolidation with another failing ecommerce company perhaps against the wishes of the management and with not very positive outcomes eventually and hidden this impairment but in our considered view that would not have constituted good corporate governance (true and fair accounting and appropriate disclosure). It would have been smoke and mirrors to kick the can down the road. Fundamentally good governance is about recognizing and telling the truth. And that is what we do – we tell the truth as best as we know it when we find out about it even if it is bad news.
3. This announcement was agreed with the management of 99labels before it was made. In fact it helps the company because it permits them to raise money from Angels at a far lower valuation (since our valuation would not be a hurdle) and it gives the company an opportunity to rejig the cap table and reinvent itself and get a second life. And that is what the management is currently trying to do. We are helping them in this process.
4. Yes if we had not been listed we would not have had to make such a disclosure publicly. However there are several other benefits that our investee companies get from us that financial investors do not provide :
– We are entrepreneurs ourselves and therefore we perhaps better understand other entrepreneurs, their motivations, feelings, what drives them, their goals, their apprehensions, their conflicts, their challenges, their loneliness, their fears etc. And this makes for a really good working relationship. We are not into stupid ‘ungalbazi’. We understand what drives the business and we support the entrepreneur and give him independence and time.
– We have done it ourselves and can give practical, grounded operating advice should the entrepreneur need it. We open out all the departments of our company for the entrepreneur to come and observe and emulate and seek advice from
– We don’t have an exit time horizon / pressure and therefore there isn’t a list in five years or else sell to someone else type of situation ever. This allows entrepreneurs to build their companies out over an appropriate time horizon.
It would be instructive for you to talk to some of the entrepreneurs we have invested behind and hear what they have to say.
Alok Rodinhood Kejriwal
Thanks Sanjeev for this special effort you made to respond and clarify this otherwise fuzzy issue.
This helps a lot in explaining the internal truth behind harsh steps, and what better than it coming from you.
Alok.
Sanjeev Bikhchandani
Yes Alok – a decision to not fund an investee company further when it needs money is a difficult one. And a company that has built up head count and expenses of a certain order of magnitude goes through pain when there is a fund crunch.
And being entrepreneurs we understand that well.
After our first round of investment we supported the company with two bridge rounds of 5crs each that enabled it to carry on this far but were unable to provide more.
A difficult decision that I personally agonised over a lot but we have a fiduciary responsibilty to our shareholders as well.
Finally I take responsibility for this decision and the subsequent disclosure.
Alok Rodinhood Kejriwal
Sanjeev, just an academic question:
Does it therefore make sense to route investments into start ups from operating companies like yours via a Company owned ‘investment fund’?
Where the fund is held wholly by the operating company and can report its own P&L and Balance Sheet?
But, given that ‘true and fair’ is the essence of good accounting, would that fund’s operating statements also need to follow the same rules as the operating company that holds it?
I’m curious because some operators have fund structures..
Maybe the reason is also so that the ‘fund’ itself can be sold/refinanced/ etc and therefore the need to have it?
Thanks again for the effort you have put in here!
Sanjeev Bikhchandani
We have discussed this more than once at our Board but have thus far not gone down that route for several reasons – the most important being that you add complexity to your corporate structure with the only gain being that you don’t have to disclose every quarter – you need to disclose every year. This isn’t very friendly to our shareholders who would prefer more frequent disclosures and greater transparency.
Also lack of obligation to disclose does not change the reality. If an investee company is doing well it is doing well. If it isn’t it isn’t. It is far better to focus on improving the reality rather than managing the perception.
Our investment goals are strategic. When we go in we do not have an exit intent. Therefore if the company does well we want to be there a long long time and perhaps invest more and more. Therefore creating a fund and then selling it or raising other people’s money into an investment fund does not fit in to our scheme of things
Alok Rodinhood Kejriwal
Thanks Sanjeev. This is really valuable. Truly appreciate the expert opinion!
Sugandha Dubey
@ Sanjeev, after reading Alok’s post yesterday, I did feel a bit of ambiguity, specially as it was important to know why Infoedge did what it did.
You have articulated very well, the corporate governance that your operating company follows & the logic of doing what you did. Now it makes perfect sense.
As for 99labels founders, brainstorm, re-invent.
I as an entrepreneur can say its easier said than done. Having said that just go back in time. Introspect.
” Why did you start this business ?
” What could have gone wrong ?”
” What would you rather not do if rewind happened?”
Trust your instinct. Pick up from Sanjeev’s list ” their motivations, feelings, what drives them, their goals, their apprehensions, their conflicts, their challenges, their loneliness, their fears etc.”
Re-write. You have to get back !
Sugandha Dubey
Alok, This is one of the most refreshing conversations in a long time ! Sanjeev’s perspective and your straight questions ! Much much better than the rubbish on the Business News channels. !!
What a way to start my day !
Karan Pandhi
Alok Sir and Sanjeev Sir,
I thank you for the inputs, in regards to the system of corporate governance, and being strong enough to take such a bold step, I will be re reading your replies to understand more properly as to what should not be done loose out on such a money.
I would be glad if I feel if any of my doubt could be addressed, if I have any, as I feel Alok Sir will clearly ask those questions which will be impacting us (Start-up venture’s) .
Sanjeev Sir thank you for the insight as why you had to write off such a huge amount.
Gurpreet Singh Tikku
WOW!!! This is what EXACTLY they don’t teach at Harward University.
Can be Learnt only from “Gurus Who Love to share” like Sanjeev Sir and Alok Sir.
Sanjeev Sir……..Reading the entire discussion……. Respect for you have gone many many notches Above.
“”It is far better to focus on improving the reality rather than managing the perception”” WOW!!
Roshan
Hi Sanjeev
How is your investment in mydala doing? have you written that off as well.?
asha chaudhry
roshan, i don’t think this is the place to ask about mydala. let’s stick to the topic. sanjeev has clarified everyone’s doubts through his thorough response. so let’s not waste anyone’s time by diverting from the discussion on hand.
asha
(editor)
Rahul Krishan Ahuja
If even 50% Indian internet companies learn a lesson from this we will add silicon to the silicon valley investors.
Roshan
i am just curious! and i think the question is relevant as it is another p[portfolio investment by infoedge. So i just asked here 🙂
asha chaudhry
roshan,
you may have added a smiley to your second comment right now.
in my view, your question about mydala wasn’t asked in good taste.
like i said, let’s not waste everyone’s time.
Sanjeev Bikhchandani
Actually mydala is doing quite well. Quietly, silently they have been scaling up revenue and cutting burn.
Abhishek Verma
Thanks Sanjeev and Alok for the great insights and teaching us about Corporate Governance, Transparency and Integrity. It is heartening to know the high standards in our Indian firms apart from the fact that the reasons you support a start-up is based on intangible values. Your not looking for a time horizon for an exit is just a case-in-point.
I had a small question, If you look at Berkshire Hathaway, it is a holding company with stakes in Amex, GS, Wells Fargo, Coca Cola, GEICO and recently Heinz spanning across industries. The way they report in the quarterly statements is not how these companies are faring individually but how their investments are doing on a whole as an industry. For e.g. Insurance, Railroad, Financial Services, etc.
One reason i think of is that they have a minority stake in these companies so perhaps a complete audited statement on their P&L is not required, unless it is a fully owned subsidiary. Another reason can be that the holdings they have in different companies (particularly public holding companies) can serve as an indicator to the general public as a testimony of good investment.
So, coming back to my question, Is a disclosure by line item of investments required by the SEC or SEBI if you have an investment fund or a holding company?
Thanks again, for your effort and great stuff..!!
Regards
Khizar
Respect to you guys.
Never could have learnt about these things had it not been through Rodinhood.
Feels awesome to be part of such amazing group.
And guys keep rocking and keep inspiring. May we have lot many game changing entrepreneurs like you guys 🙂
Vivek Kundnani
This kind of corporate governance and transparency is extremely rare in India. Thank you Sanjeev and Infoedge for leading from the front. You’ll are pioneers in every respect. Hope corporate India takes notice.
I had the privilege of meeting Hitesh at your offices. Unfortunately for me, you were traveling then. But it would have been an honor.
Alok – TheRodinhoods keeps getting richer and insightful because of your hard-work and efforts. Great inspiration, learnings and nuggets of wisdom for us lesser mortals. Thank you for this.
Sanjeev Bikhchandani
Thank You
Roshan
nice to know that sanjeev. i was one of the early users of mydala .
Deepak Shenoy
Sanjeev, FWIW I believe you’ve done a great job with this announcement. No one else does anything close to this (Most public cos choose to hide these facts until they “restructure” and do some random demergers to get rid of the gangrenous parts).
I used to wonder what you would do with that money you were raising a few years back, and I must admit that participating as a VC is a great use of that money, and hopefully you’ll merge them back into InfoEdge instead of just remaining investors, as our market values holding companies at lower valuations 🙂
Sanjeev Bikhchandani
Thanks
Sanjeev Bikhchandani
I have not studied the Berkshire Hathaway model in detail however if they are largely investing in the stocks of listed entities then I suspect that they do not need to do any disclosure about those companies other than the number of shares they hold and the value. These companies will be publishing their results independently.
Ash Gairola
Sanjeev – This whole discussion was really very insightful and fully justifies the action taken by Infoedge…also just a input with most of the sites like mydala are using DELHI NCR as one location rather then delhi, gurgaon, noida, gaziabad, faridabad seprately. I strongly feel mydala can take a lead and correct this anamoly, more details below if you think appropriate
https://www.therodinhoods.com/forum/topics/groupon-delhi-ncr-really?xg_source=activity
Sanchita Dutta
i feel invitations only type of businesses or sites could never work in india.
india is about masses and volumes. value for money is something even merc owners are looking for all the times.
sad that 99labels.com is not doing as well as it could have been. i feel bad more for those employees who must have been working hard but are stuck due to business failure and reasons not in their hands…
did check out http://www.9rasa.com too. looks dull n v similar to many others. striking similarity to http://www.limeroad.com. if there is no USP, wonder how it would survive …
times are surely not good for e-commerce ventures. but nice to see new efforts being made everyday from starry eyed entrepreneurs ( add me too in it 🙂 ) . never know one of them might strike rich and be the next amazon of india after flipkart!!
Alok Rodinhood Kejriwal
Sanchita, when was the last time you did business in india?
Sanchita Dutta
today