VG Siddhartha\'s death: Lessons company promoters, investors can learn
Archana Khosla (L) and Sohini Mandal (R)

"Sometimes life is going to hit you in the head with a brick. Don’t lose faith." — Steve Jobs

The morning of July 30 and 31 proved to be quite disarraying for the nation as news broke about the suicide of VG Siddhartha, founder of Coffee Day Enterprises Ltd.

One could not have ever imagined that the man who built the largest coffee chain in the country would go through such a downfall and finally take his own life.

An entrepreneur’s first reaction to the incident would perhaps be fear. This incident draws attention to the labyrinth of issues that entrepreneurs go through till they reach a breaking point and to a growing trend of over-burdened entrepreneurs who are constantly worried about failing. The fact that some entrepreneurs might have never known failure does not make it any easier.

Siddhartha’s suicide brings many issues to the forefront, primarily with respect to the various challenges entrepreneurs and investors face today.

From a founder’s perspective, the growth story is almost always about the futuristic capabilities of the product or service their business focuses upon. Business plans, therefore, tend to be overly optimistic in order to showcase value to prospective investors.

Although we have a somewhat stable economy where vanity metrics seem to have been replaced with real value creation, yet valuations in many sectors could sometimes be quite artificial. The valuations heavily depend on the success of a product or service, estimated returns on the basis of the underlying intellectual property and gaining market share.

The challenge is that the markets have also been rewarding vanity metrics. Reality hits when founders struggle to bridge the gap between projected value propositions and actual results. These could be very different due to various macro and micro socio-economic factors such as lack of resources or regulatory changes that alter business models.

Therefore, a business plan must factor in these challenges and not make high promises that may put undue stress on founders. It is always prudent to under-promise and over-deliver.

As a corollary, founders and investors must pragmatically address issues such as exit obligations, timelines and minimum returns at the time of investment.

If investors add clauses in shareholder agreements to deter management from financial misconduct, fraud or negligence, founders must put in place necessary checks and balances in terms of corporate governance to showcase good faith and to protect themselves.

This becomes all the more important since such default provisions could potentially be linked to promoter put options in many cases.

If nothing else, this incident surely points to a need for entrepreneurs to not stretch themselves thin by borrowing or dipping into personal assets in order to provide an exit to institutional investors. Too much expansion across many sectors could also lead to added stress, especially in case of sole promoters.

This incident also raises a question the promoters need to address constantly, not only at the time of starting their venture but at every stage.

There is a need for introspection by promoters on whether their entrepreneurial model focuses on fast-paced growth, outgrowing the peers and defying market factors, or whether it focuses on models which ensure sustainable growth.

Certainly, there is no straight-jacket formula available for addressing this. However, promoters will always have to be mindful of this question and open to changing their strategy. Getting all the stakeholders on board for the course correction will pose a challenge. However, the founders’ conviction for their venture will certainly ease the way forward.

One cannot also look away from the fact that investors, especially institutional investors, have their own pain points. They have to operate within the realms of commitments made to their contributors, fund life and stretched fund life, and the stress of bringing in returns for their contributors.

It may be easy to look at a forced exit situation from a target’s perspective. But an institutional investor would have no other choice if it decides to trigger a forced exit, that too one which puts a direct onus on an individual shareholder. The impact that such an incident could potentially have on the brand value of an institutional investor and its investment ethos could be enormous.

More than anything else, it disrupts the trust factor in the entire ecosystem as promoters become more skeptical about undertaking obligations to ensure smooth running of their companies.

It remains to be seen how the whole affair unfolds and how the law takes its course. However, for the evolving entrepreneurial ecosystem in India, this is definitely a lesson and an eye opener in many ways.

Archana Khosla is the founder partner and Sohini Mandal is an associate partner at law firm Vertices Partners.

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