by RV Raman
‘I think it’s on the aggressive side, especially the projections of revenue growth and margins. But we can argue that out with MyMagicHat when we get into the transaction.’
‘So the returns are unlikely to justify a steep valuation, right?’ Nigel asked.
‘The investors of the first few rounds of funding – Series A to D, certainly – will make handsome returns for sure. This is now Series H, the eighth round of funding, where the valuation has already soared. Those who invest now won’t make nearly as much as the early investors. They run the risk of being left holding the bag when saner valuations return to the industry.’
‘A classic “Greater Fool” situation, isn’t it?’ Nigel remarked, laughing good-humouredly.
Puneet grinned back and cast a quick glance at Vikram’s sullen face. The size of Jason’s face on the TV screen was too small to reveal his mood.
‘It is. If we are to make money on this transaction, we must exit before the crash. We must find someone – a “greater fool” – to buy our stake.’
‘That’s clear,’ Nigel concluded, signalling an end to Puneet’s presentation. ‘Any other points?’
‘One final point – a fundamental shift that has taken place in the past year or so. Focus has shifted from growth to profitability. This has changed the way investors view the e-tailing sector and how valuations are computed. Consequently, the risk for new investors has increased substantially, as their ability to exit at favourable valuations has been eroded.
‘In summary, I will say this: the current valuations are built on momentum and hype and have begun to slow considerably. The valuations of some e-tailers may already have peaked. All it will take for them to collapse is a change in investor sentiment. The day that sentiment changes, this sector could begin unravelling faster than a snagged sweater. We’re already hearing rumours of down rounds. Some investors have already marked down Flipkart’s valuation.’
‘Thank you, Puneet. We’ll reach out to you if we have any further questions.’
Puneet rose and went to the door, Vikram’s smouldering gaze following his retreating figure. As soon as the door closed, Nigel chuckled.
‘You’ve got to give it to the young fella,’ he said. ‘He knows that his boss is keen on this transaction. Yet he speaks his mind.’
‘Speaking his mind is fine, Nigel, but what new insights have we gained from the assessment?’ Vikram asked. ‘We already knew the risks. What is the point in raising known red flags?’
‘Come on, Vikram. His point about market share is worth considering, as is the response he anticipates from physical retailers. And the point about Google potentially entering the space is scary. His reworked forecasts are also worth considering. I think he has done a good job – my eyes have been opened a little wider. I understand the risks better now.’
‘Okay, then.’ Vikram’s tone was impatient. ‘What is our call on MyMagicHat?’
‘I suggest we proceed to the next stage of discussions. The risks notwithstanding, we must take exposure to the e-tailing sector. It is clear that our investors want us to. However, Puneet is right. I’d rather invest in an e-tailer that has the backing of an established retail chain – a company like MyMagicHat.’
‘That’s settled, then.’ Vikram seemed visibly relieved. ‘I agree with your proposal. Arnav, Jason, any counterpoints?’ Observing both of them shake their heads, he shut his notebook and put away his pen. ‘I will speak to Sashikant and get it going. We’ve lost enough time.’
When the video conference was over, Vikram turned to Arnav and spoke softly.
‘In your next feedback session with Puneet, tell him that he needs to be more sensitive to the positions and viewpoints held by others. Also, have it recorded in his appraisal. Being a bull in a china shop won’t get him very far in his career.’
■
Dhruvi sat still for a minute after Arnav had finished, mulling over what she had just heard. So there was some disagreement between Puneet and Vikram. But it didn’t seem to be serious enough to have anything to do with the young man’s disappearance. In any case, Vikram had eventually got his way and Kantoff was on the verge of investing in the unicorn.
‘If Vikram was not happy with Puneet,’ she asked, ‘how did he end up in the due-diligence team?’
‘Nigel wanted him. After all, Puneet is our retail industry specialist. Having understood MyMagicHat and the e-tailing sector, he was in a good position to do the DD. I agreed with that too and Vikram acquiesced.’
‘Thank you, Mr Mazumdar. If I may ask you another question… I believe Puneet has a girlfriend?’
‘Mamata? A nice girl. What about her?’
‘Is there any angle I need to probe there?’
‘I don’t think so. There is nothing you will achieve other than upsetting the poor girl. She may already be wondering why she hasn’t heard from Puneet for two days. Let’s spare her the anguish for as long as we can.’
Chapter 9
As a freshly-minted computer science graduate from a renowned engineering college, Nilay had snared the highest paying job on campus as a trainee product manager in an e-commerce start-up. He had taken to the nascent e-commerce industry as if it were designed for him, flourishing in an environment that encouraged ideas and experimentation.
Within the first year, he had revealed a flair for coming up with products and features that went down well with customers. Already proficient with software and algorithms, he had used his college training to give life to his ideas by constructing working prototypes. Beta customers loved his products as much as his supervisors did and, before long, he was singled out as a star in his company.
His bosses dissuaded him from pursuing an MBA after working for two years, as had been his original plan. Two years was a long time in a fast-paced e-commerce industry, they had said. Being away from the action for so long would make him lose several opportunities. It would be far better for him to learn on the job. On their part, they would put him on the fast track.
But after four years of a meteoric rise, they couldn’t hold him back any longer. Nilay’s ambition, which would come to influence his behaviour in later years, had been stoked; he had set his eyes on the burgeoning e-tailing industry. When a hyper-funded e-tailer offered him a lucrative opportunity, he had seized it.
Driven by a single-minded determination to compete and succeed, he continued to excel there too, as he moved into marketing. Two years later, his ambition began encountering headwinds when he reached a level above which sat the founders of the company and their loyalists. Rising further would not take place at a pace rapid enough to satisfy his ambition. Besides, there were other issues that bothered him.
His next jump was to MyMagicHat as a senior VP and marketing head, where he was virtually the Number Two.
Now, having spent two years here, he was on the lookout for an opportunity to become the CEO of a big-league e-tailer, preferably with a large chunk of stock options. Some of the pioneers of the e-tailing industry were relinquishing their executive roles in favour of mentorships. This, he figured, was creating opportunities at the top of the heap.
At thirty-two, he was an example of a successful young man who had made the right moves. He looked it too. Suave, clean-shaven and well-groomed, he carried himself with a carefully cultivated air of confidence and nonchalance. He understood the importance of appearing undaunted in the face of relentless pressure.
Now, as he returned home from work, the mask of nonchalance was nowhere in evidence. The matter of the bugs and Puneet’s disappearance had unnerved him. He had just entered his house when his mobile rang. It was Moin.
‘Hi, Nilay. Looks like I missed you at the office. Are you back home?’
‘Yeah. Just back. What’s up?’
‘I checked out the transactions, as Gautam wanted me to do. Looks like they’re okay.’
‘No double counting or other errors?’
‘I checked about 500 extracted transactions with the original sal
es data. All fields check out. No errors. I also checked for duplicates. Looks like they’re clean.’
Nilay dropped his bag on the sofa and began taking his shoes off as he held his mobile between his cheek and left shoulder.
‘How about hash totals?’ he asked.
Hash totals were totals of several data fields, which were used to ensure accuracy of processed data.
‘I also ran half a dozen queries on the database, summing up different fields. They check out. No issues there. The transaction extraction routine is working fine.’
‘Then we are none the wiser, Moin. At least, as far as the sudden bleeding of cash is concerned. We still don’t know why the losses increased so sharply and why we didn’t see it coming.’
‘That’s what I wanted to speak to you about.’ Moin’s voice had dropped. ‘I ran some other queries. I’ve found something that I can’t understand. I need to bounce it off you. Maybe you can make sense of it.’
‘Shoot.’ Nilay picked up his shoes and put them in the shoe cupboard.
‘I compared last month’s sales with the detailed budget. I wanted to zoom in on where we were losing money and to see if these losses added up –’
‘Hang on, Moin. Are you still in the office?’
A stray thought had just flashed across Nilay’s mind, which was never far from the bugs that had been discovered so recently. What if there still were some passive bugs in the office?
‘Yes,’ Moin replied. ‘I’m in my cabin. Why?’
‘Let’s not talk about this over the phone. Can you come over to my place? Sorry, I’m totally pooped today. I can’t come out.’
‘Sure, I can. But I don’t want to be a kabab mein haddi on a Saturday evening.’
‘No more Saturdays or Sundays for us till we fix this cash crunch and the snooping issue, Moin. Each day is like any other. Tell you what. We’re ordering in dinner tonight. Why don’t you join us? I’ll order for you too.’
‘You sure, Nilay? Vibha…’
Nilay glanced at his wife, who thought for a moment and shrugged.
‘It’s fine, Moin. Come over.’
‘Okay. Will be there in half an hour.’
Forty-five minutes later, Moin was comfortably seated in a chair, with an aerated drink in his hand.
‘Sorry to barge in like this, Vibha, I –’
‘Don’t worry.’ Vibha dismissed his apology with a wave and a smile. Her chubby arm brushed back a stray lock of hair to expose a dimple on her cherubic face. ‘We were not planning to go out, anyway. And I’m too tired to cook.’ She dismissed the topic with another wave of the hand. ‘But what’s with the Puraria companies? Everyone seems to be working late almost every day.’
Vibha worked at another of the Puraria Group’s companies – the group’s Bengaluru data centre that hosted MyMagicHat’s systems, among others. She and her team of two other database administrators were the ones who kept the terabytes of data safe and clean, and the myriad databases finely tuned.
‘Darshan makes you slog, eh?’ Moin grinned.
‘Boy, does he! But to be fair, he works harder than any of us. He’s alone at the data centre so often – apart from the night-shift operators, that is.’
‘Yeah, he’s always been like that. Says he gets a lot accomplished when there’s nobody around to disturb him.’
Moin’s phone rang.
‘Excuse me,’ he said and answered the call.
His face grew serious as he listened to the caller. He walked away and returned a few minutes later. There was a resigned look on his face.
‘What does religion have to do with social work?’ he asked, resuming his seat. ‘Why do people have a problem with our making our kids computer literate? Why does it always come down to one religion against another?’
‘What happened? Vibha asked.
‘People from the adjacent colony are taking exception to the computer class we’re launching on Friday. They don’t like us holding it in a mosque, where kids from other faiths are reluctant to come. They’re threatening to disrupt it.’
‘What nonsense!’ Vibha snorted. ‘Don’t they have programmes at their temples and churches?’
‘They do. And our own kids are too afraid to go there.’
‘So what are you going to do?’ Nilay asked.
‘We’ll deal with it as it comes. I’ve asked my friend to talk to a police officer who is kind to us. You guys don’t worry about it. I came here to talk about something else.’
Moin paused, seemingly unsure about how to proceed. Seeing him hesitate, Nilay chuckled.
‘You can speak freely before Vibha,’ he said. ‘She knows everything that goes on in my life. I have to unburden myself to someone, you know.’
‘And let off steam too,’ Vibha grinned, her short, chubby frame shaking with suppressed mirth. She pushed her thick-rimmed spectacles up her nose and focussed on what their visitor had to say.
‘Okay.’ Moin put his glass down on the table beside him and began. ‘Our losses have shot up in the last month or two. To understand why, I pulled out our sales figures for the last month and compared them with the detailed budget – the one with category-wise, geography-wise details. In addition to the GMV and the actual sales amounts, I compared discounts, commissions, gap-funding, expenses, etcetera.’
‘GMV has risen steadily, hasn’t it?’ Nilay asked. ‘I track it every day. That’s what the marketing guys live by.’
‘That’s right. GMV has been rising steadily. Better than planned, actually. Interestingly, the actual sales – the sum of the post-discount sales invoice values – has hardly risen.’
Nilay nodded. ‘That’s because our discounts have been deeper – that’s what Sundar said.’
‘Right. And as Sundar also said, expenses have risen sharply due to higher incentives and larger gaps to be funded. But he was unable to drill down further in his finance system. So I went to the sales data to analyze the last four months’ sales on different parameters – category, geography, customer type and so on.
‘In one of the comparisons, I found an interesting trend: both GMV and actual sales have been rising rapidly in some categories and falling rapidly in some others.’
‘It happens every month, Moin. That, by itself, isn’t new.’
‘I know. But in a few categories – refrigerators, for example – the rise has been very steep, almost thrice the average. Even four times. And in some other categories, like computer accessories, the fall has been drastic.’
‘As I said, it varies every month –’
‘Hang on, Nilay. Since these things change every month, how do we determine if what I saw was unusual or not? To answer that, I plotted category-wise sales and discounts for the past 18 months. I also computed the 90-day moving average and plotted trend lines.’
Moin pulled out his laptop and opened a PowerPoint presentation with a number of graphs.
‘See this,’ he said, pointing to the first graph that showed the sales of refrigerators for the past 18 months. ‘See how the GMV has spiked since July? The 90-day moving average also takes off in August-September.’ He hit a key and a set of green lines appeared. ‘The red lines were for refrigerators. The green ones are the average across categories. See the difference?’
He rapidly went through a few more slides. ‘We see the same thing with air conditioners…kitchen appliances…and two more categories,’ he pointed out. ‘Why are air conditioners selling so much just before winter? And fridges?’
‘Okay, that’s a bit odd,’ Nilay said. ‘So what?’
‘Do you see anything common among these five categories – the ones that seem to have done exceptionally well? Do you see a pattern?
Nilay racked his brains, but to no avail. There were several common sellers, but he was sure that Moin was not referring to that. He shook his head.
‘What is common?’ he asked. ‘Apart from the obvious commonality in sellers and manufacturers?
‘I asked Sundar the same questio
n and he immediately saw a pattern. Refrigerators, air conditioners, appliances – these are the categories that bleed us! This is where we lose money, hand-over-fist, because of deep discounts. Where a seller is not willing to go as low as we want, we are funding the additional discount. This is where our gap-funding is the highest.’
‘You sure, Moin?’ Nilay rasped. He suddenly felt a shortness of breath.
‘Absolutely sure.’
Nilay stared at him as comprehension dawned. As the marketing lead, his mandate was to grow GMV. He had been told explicitly not to worry about discounts or cash flow. He had done exactly as mandated and his marketing campaigns and pricing strategy had worked better – far better – than he had dared to hope. GMV had shot up.
But nobody had looked at the downside. With their deep discounts, these categories were sucking money out of the company. As their sales doubled, tripled and quadrupled, so did the cash haemorrhage.
‘That’s not all,’ Moin continued. ‘I also found that our sales have stagnated or fallen in our most profitable categories – electronics, apparel, shoes, computer peripherals. You already know this, but may not have looked at what it means from a financial viewpoint.
‘The price war our competition is waging has made us drop price by 20 per cent to 40 per cent in some categories in the past three months. But each time we drop price, so does competition. It looks like we are losing in the price war. Competition is hurting itself, but is hurting us more.’
Moin was right. Looking at it from a financial perspective, MyMagicHat was selling more loss-making products and fewer profit-making ones. While the former was sucking money out of MyMagicHat, the latter was reducing cash that came in. They were getting hit on both fronts! No wonder they were in a cash crunch! The budget had assumed an unchanging sales mix, but it had taken a turn for the worse. That was why they hadn’t seen it coming.
But why had this happened? How? It was not that MyMagicHat was pushing refrigerators more than electronics. Nilay knew that! He was the marketing head. He pulled out his laptop and switched it on.
‘Let me make one correction,’ Moin said. ‘We are not losing money on every refrigerator we sell. Some models bleed us more than others. Similarly, with the other categories. We seem to be selling more loss-making models than profit-making ones.’
