BluSmart jolt sums up startup blues
Commuters in the National Capital Region and Bengaluru were in for a rude shock earlier this month when popular electric vehicle (EV)-based taxi-hailing startup BluSmart suddenly shut operations. This followed a stern directive from the Securities and Exchange Board of India (SEBI) to parent company Gensol Engineering, barring its founders from accessing the securities market or holding any directorial or key managerial roles. The market regulator’s actions were the result of a probe that revealed serious governance lapses, including the absence of any manufacturing activity at the company’s Pune plant.
The SEBI order also laid bare other startling facts, including diversion of loans meant to buy EVs into the founders’ personal coffers. These were then used to purchase luxury goods and real estate. Though Gensol and BluSmart are separate entities, some of the founders are the same and the former leased EVs to the ride-hailing platform.
The developments have sparked a debate over the credibility of rising stars in India’s startup ecosystem. The collapse of BluSmart comes less than a year after another spectacular failure, Byju’s, which had once reached celebrity status as a decacorn. Financial mismanagement lay at the core of the famous edtech firm’s debacle. It did not involve personal malfeasance, though many clients of the former decacorn sought to have the founder, Byju Raveendran, removed from the firm. In the Gensol case, however, SEBI discovered that the Jaggi brothers, who were co-founders, diverted funds for their personal use, leading to the abrupt closure of BluSmart and leaving left thousands of employees in the lurch.
The BluSmart saga is being cited as evidence of the dismal state of startups in this country. Such conclusions may be hasty as studies show that even globally, 90 per cent of the startups are failures. There have been several big fiascos, including the Theranos scam. It was projected as a new healthcare system offering a device to carry out blood tests. This turned out to be fake and the founder is now in jail. WeWork, a startup that offered a revolutionary new way to look at office space was valued at $47 billion in 2020 but had to fold up for reasons such as overly aggressive growth, erratic leadership and governance issues. Among the other names of big startup debacles are Quibi and Jawbone, while tech websites regularly publish the list of failed startups every year.
Thus, setbacks in the startup world are not a peculiarly Indian phenomenon. On the other hand, there have been a spate of highly successful ventures in this country. India ranks third in the number of unicorn startups in the world, trailing only the US and China. These are way ahead with 1,024 and 286 unicorns, respectively, compared to 116 here, according to Traxcn. Still, India’s tally is higher than that of both the UK and Germany, which are at fourth and fifth positions, respectively.
Among the well-known startup brands are Flipkart, which is a fierce competitor to global giant Amazon. Similarly, Ola has been competing with international transport disrupter Uber, and boAt is now among the top five audio systems manufacturers globally. Others in the finance space are RazorPay, Cred and Instamojo, along with Groww, a stockbroking startup that provides financial education. Little-known unicorns with a big impact include Vernacular.ai, which is AI-enabled and provides multilingual chatbots in most local languages. One must not forget Skyroot Aerospace in the space sector, which has built a rocket engine and manufactured three launch vehicles. Swiggy and Zepto may be in the food delivery space, but innovation and pivoting to quick commerce have made them stand out.
While lack of success in the startup ecosystem is part of the game, it has also become a learning curve for many who have graduated from unprofitable ventures to highly successful ones. In this context, it must be recognised that startups face red tape in the same proportion as other investors and endure the same bureaucratic complexities that bog down other new enterprises. Commerce Minister Piyush Goyal had to hear stories of these harsh realities after criticising startup founders recently for not investing in high-tech areas. Many Indians even base their ventures abroad simply because of easier procedures.
To be fair, there has been considerable progress in the ease of doing business as steps are being taken to cut regulatory processes. This has even led to some startups relocating back to India. PhonePe, for instance, shifted from Singapore back to this country in order to be listed on local stock exchanges.
Even so, policymakers need to look inwards as many hurdles faced by startups emanate from the labyrinth of rules and regulations that still remain in force. This is certainly not the only reason for startups to fail, but it remains a significant factor. Prolonged delay in decision-making, for instance, can quite literally kill a project.
Yet, startup founders cannot get away from the fact that governance of their newly minted enterprises must remain on the straight and narrow path. Some like Paytm have been admonished by SEBI for careless financial practices but have learnt from their mistakes and are gradually coming back on track. The case of Gensol and BluSmart falls in a different category of fund misuse and is not likely to be condoned by the market regulator. It is even more unfortunate since the business model was an appealing one and ticked all the boxes in terms of sustainability and reliability while providing consumer satisfaction.
Clearly, SEBI may now take a closer look at governance issues in startups, even those with a successful veneer like BluSmart. This is unavoidable as public funds must not be allowed to be misused with impunity. One can only hope, however, that the startup ecosystem is able to overcome the present turbulence and retain its vibrant buoyancy.
Sushma Ramachandran is a senior financial journalist.
