Apr 11, 2017

Yogi Vasupal gets bail; court describes case as ‘purely a dispute between businessmen’. Wasn’t it always?

The Stayzilla founder's month-long incarceration shows the ugly underbelly of #StartupIndia and #MakeinIndia

BYPankaj Mishra

While granting bail to Stayzilla founder Yogi Vasupal, who has spent 28 days in jail over a financial dispute, Judge S Baskaran is reported to have said that the case is “purely a dispute between two businessmen” in what sounds like quite a lightbulb moment. That’s exactly what Yogi’s lawyers and his family have been trying to convince police and courts of since his arrest on March 14, including during at least two failed attempts to get him out on bail (on March 23, and then again on March 28, both of which were rejected).
Yogi’s friends from the startup community, who even formed a website to drum up support for Yogi, have been screaming themselves hoarse questioning the rationale behind incarcerating a man with no known previous police record for non-payment of dues. It’s unusual, to say the least.
And the situation continues to bear more than its fair share of irony because finally, it seems, justice has prevailed and the powers that be have realised that this was merely a dispute between two businessmen.
So why did it take so long for Yogi to get bail?
Could it be just a matter of semantics? Complainant Jigsaw’s lawyers raised questions over Yogi’s intentions to settle dues since he had “closed StayZilla, which made us apprehensive”, whereas Yogi and his co-founders have been saying that they are not “closing” Stayzilla but are “rebooting” operations. It’s probably an indication of the newness of the startup industry and a lack of understanding of the startup business model (and its financial intricacies) that has led to a misunderstanding over the owners’ intentions.
The biggest concern of Stayzilla’s backers and founders over the past month has been that the police filed a criminal case against Yogi for what’s usually considered a civil case. The reason, at least according to some entrepreneurs and volunteers leading the charge, was that the Indian law enforcement machinery has little understanding of how startups or the venture capital industry work, and was therefore easy to mislead.

It is probably an indication of the newness of the startup industry and a lack of understanding of the startup business model (and its financial intricacies) that has led to this misunderstanding over the owners’ intentions.

“It’s easy to confuse by diversionary statements around startups/funding/business models as they aren’t up to speed with new business models,” said Vijay Rayapati, founder CEO of Minjar, a startup offering intelligent software to businesses looking to manage applications in the cloud who has been an active participant  in the ‘Free Yogi’ campaign. “There’s lack of understanding around pivots and business model changes. For instance, despite not closing down the company, the police and public prosecutor are arguing that the company was closed down without informing vendors, which is a violation of the law,” he added.
“We don’t know the details of the specific case barring hearsay, but speaking in general, the justice system needs a radical overhaul; ie the laws, the police system, the procedures, and the courts. How can anyone be placed in jail without bail for such a case without a court deciding the matter at the earliest?” said Sanjay Anandram, a startup mentor and investor based in Bengaluru.
“It will create a very bad perception about India’s image as a startup-friendly place. In my interactions in the Valley, most are amazed that a founder can be jailed for weeks for a disputed invoice. This is just unthinkable that side of the globe,” argued Rayapati.
The Stayzilla founders have alleged misuse of political influence by an advertising agency owner to harass them for non-payment of dues, which the company believes are not legal. Jigsaw, an advertising agency in Chennai has accused Stayzilla and its founders of not paying the dues amounting Rs 1.7 crore for its services.
The founders of the company allege that the services for the said invoice of Rs 1.7 crore were never delivered, and have alleged harassment by Jigsaw owner Aditya CS. They have published recordings of intimidating and abusive phone calls allegedly made by Aditya.
His release now, at a guarantee of Rs 40 lakh, must come as a relief to his family and friends, including his wife, Rupal Yogendra, one of the co-founders of Stayzilla, and Sachit Singhi, the other co-founder.

How safe is it to build a startup in India, and to kill it?

One of the most important aspects of startups, in general, is the freedom to fail. It gives founders the license to try new ideas and theories. India, one of the fastest growing markets for startups — and a country bursting with opportunities to modernize — is in the midst of startup turmoil.
The Stayzilla case raises questions about how India’s legal and regulatory frameworks can be manipulated to suit those with powerful connections.
For almost a month, Yogi was behind bars for not paying one of his vendors. While the vendor had been accusing the Stayzilla founders of siphoning out money and not settling his dues on priority basis, the plot goes far beyond that.
For those looking at the incident from outside India, and wondering what it really means, it underscores two things. First, India’s abysmal 130 rank on World Bank’s Doing Business survey, is not by accident. There is clearly plenty of scope for improvement. Secondly, despite being the fastest growing startup ecosystem with over 4,000 startups, the country fails on delivering the most important thing a startup needs beyond an idea and funding: the ability to fail fast, kill it, and move on to the next venture.
“While there is a clear intent at the top to make it easier to do business in India, unfortunately, on the ground, things change much more slowly. I really think one of the biggest challenge we face as a nation, as individuals and businesses, is the weakness of the rule of law,” said Ravi Venkatesan, former chairman of Microsoft India, and one of the board members at India’s second biggest IT company, Infosys.
“India is one of the worst countries when it comes to enforcing contracts, in the time taken to get judicial verdicts and  the judicial costs involved in long, drawn battles. Fixing this is absolutely foundational to all progress,” Venkatesan said.
When Yogi announced plans to “reboot” operations and pivot to a new business model in a blog post on February 23 this year, it was supposed to end like most startup stories do. “I am at a crossroads. I am looking at this as a clean start to get back to the roots I am comfortable with. I know there are a lot of other founders at the same juncture,” he wrote in the post.
After all, Stayzilla wasn’t the first startup to make a pivot or shutdown existing operations in the past year. Since August last year for instance, a startup deadpool list of already dead Indian startups, or the ones about to die, was in circulation. The list contained some 400 names. Stayzilla could have been just one of them.

But that’s not how it played out.

As Stayzilla and its founders were busy winding down the startup’s consumer facing homestay business, a disgruntled vendor came knocking on the doors and triggered what turned out to be a nightmare for them.
The vendor, an advertising agency called Jigsaw, accused the Stayzilla founders of fraud and non-payment of legitimate dues. On their part, the Stayzilla founders maintained that Jigsaw did not deliver advertising hoardings as promised, so they withheld payment.
On the morning of March 11, one of the Stayzilla founders, Sachit Singhi, received a voodoo doll with his son’s picture at his apartment in Bengaluru. Scared out of his wits, Singhi relocated to his co-founder’s (Yogi’s) house with his family.
Over the weekend, Yogi decided to get to Chennai where this advertising agency was based, and find ways to deal with the threats and potential legal battle.

The reason, at least according to some entrepreneurs and volunteers leading the charge, is that Indian law enforcement machinery has little understanding of how startups or venture capital industry works.  

On Tuesday, March 14, Yogi was picked up by the cops based on a complaint from the advertising agency in Chennai. By evening, he was locked up on charges of cheating, fraud and intimidation. (Also read: A week in hell: Inside the Stayzilla founders’ agonising wait).
“He was under pressure from the cops to confess, and he didn’t give in,” Yogi’s wife and Stayzilla’s COO Rupal Yogendra told me over phone a few weeks ago. The couple have a seven-year-old daughter and a six-year-old son.
“I believe as a modern country, we cannot let muscle power decide who gets what, I like standing up to bullies who abuse others — hence my stand,” said Rayapati.
It’s a story that has gripped both existing and would-be entrepreneurs in India, where a generation of young startup founders are now anxious about their startup journeys. Support for Vasupal is forthcoming from a wide range of places. Everyone from the founders of startup unicorns such as Flipkart’s Sachin Bansal, Alibaba-backed Paytm’s Vijay Shekhar Sharma and Kunal Bahl of Softbank-funded Snapdeal, to the country’s think-tanks such as iSpirt, were leading the charge to free Yogi from jail.
Over 1000 startup founders and several industry associations got behind an awareness campaign on Twitter #freeYogi, including the website www.HelpYogi.com
But the incident has touched an emotional chord among Indian startup founders for more reasons — it also became quite “creepy”, at least for Stayzilla founders. The founders claim that they have faced life threats, rape threats and even something as unsettling as voodoo dolls with their kids’ pictures, as we wrote a few weeks ago.
Stayzilla was created as an Airbnb-style service for connecting homestay owners with potential tenants. It had raised $34 million since launching in 2005, with top VC firms Matrix Partners and Nexus Venture Partners among its bench of investors. In February, Stayzilla said would “reboot” its operations. That decision came after intense, cutthroat rivalry from Softbank-backed Oyo Rooms, which pioneered the concept of a network of budget hotels, and growth of Airbnb itself in India.

Shutting down a startup or pivoting to a new business model is tough at the best of time, and it’s especially challenging in an emerging market like India. In the country, for instance, it takes over a dozen regulatory filings and steps and up to three years on an average for any voluntary shutdown of a startup.
It can get particularly cumbersome because a founding team must also submit a “no objection certificate” from the startups’ creditors before a formal shutdown process can be triggered.
“Startups are prone to all kinds of financial vulnerabilities like any other business, and such examples of criminal proceedings against startups create fear in the minds of aspiring entrepreneurs,” said S “Kris” Gopalakrishnan, cofounder of India’s most iconic software startup, Infosys and the chairman of CII’s (The Confederation of Indian Industries) startup council.

It can get particularly cumbersome because a founding team must also submit a “no objection certificate” from the startups’ creditors before a formal shutdown process can be triggered.  

“The question is not how this will affect entrepreneurship today, but how young Indians looking to become entrepreneurs in the future will give up even before starting up,” said a letter signed by over 1000 top Indian entrepreneurs, copies of which were submitted to the country’s ministers and bureaucrats.
“As a founder, you already have enough battlefronts — from acquiring customers to funding growth and ensuring the startup doesn’t die. You add a disgruntled vendor using position of power and influential network to make you go through hell, and suddenly, it becomes a battle lost,” the letter said.

Will the Stayzilla episode affect India’s positioning as a startup hub?

Investors and ecosystem mentors such as Anandram disagree.
“How would I feel sitting anywhere else in the world? Well, it depends on the way the story is presented: sensationalist? Playing to the worst stereotypes? Or, presenting data about a few bad apples in the large and growing basket? How does it compare with the goings-on elsewhere?” he said citing examples of the Uber’s Susan Fowler story.
“I don’t believe this should impact India’s positioning. It however will, if it gets relentless negative coverage by media. Especially influential foreign media. Stereotypes sell and India has been victim of that for decades! Please don’t write another such piece. StayZilla is one example out of hundreds,” he said.
Others feel the case could create a negative image. “This could destroy the Indian startup ecosystem. This is why good bankruptcy laws are essential–startups need to be allowed to fail. If they commit fraud, founders should go to jail, but it has to be through due process of law,” said American technology entrepreneur and academic Vivek Wadhwa.

Was Stayzilla really at fault?

There’s an alternative narrative too, by the way. A company insider told me requesting anonymity that the Stayzilla founders and top executives were partying and gave an impression that all was well until a month before the “rebooting” blog came out.
This curation of social media stories by startup grapevine site, OfficeChai, seems to suggest that too.
Ajit Narayanan, founder of autism support app Avaz, asked some questions about Indian startup ecosystem’s “blind support” for Stayzilla. In a Quora post, Narayanan said he also sympathised with Stayzilla’s unpaid vendors because he faced similar challenges as a startup.
“Sorry, Yogi. In this case, my sympathies are with the real underdog: a start-up with a good business plan, with traction of at least 1.7 crores in revenue, run by a promising entrepreneur, whom you took to the brink of bankruptcy with your irresponsibility,” Narayanan said in the Quora post.
Questions around the timing of Stayzilla’s pivot notwithstanding, India could surely do better in ensuring a far better infrastructure for startup failures and pivots.

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Pankaj Mishra is a writer of FactorDaily.