Housing saga: Why picking money because it’s available isn’t a good thing

India is going through an exuberant phase. Venture capitalists pumped in US$2.46 billion into Indian startups this calendar year, compared to US$2.34 billion in the whole of 2014. Most startups are raising money when not required and gravelly more than needed. In the process, many founders have significantly diluted their stakes, resulting in them having little say in raising their baby.

Housing is a classic case of just that. The company secured US$90 million in funding led by Japanese telco SoftBank in December last year at a valuation of US$235 million, taking the total funds raised to US$121 million. According to Advitiya Sharma, co-founder of Housing, it was SoftBank which had approached the company, and the deal was finalized in just a 20-minute chat over coffee. He also said that the company was raising funds not because there was a need for it, but simply because it was available.

According to reports, SoftBank owns about 32 per cent in Housing and Nexus Venture about 19 per cent. Helion Ventures and Falcon Edge own about 10 per cent each while the rest is owned by the founders (less than 10 percent) and angel investors. The company has reserved a very small pool for its employee stock ownership plan (ESOP) too. In fact, investors in Housing were earlier considering a proposal to return about one million shares to the company to increase the pool of employee shares to attract top talent.

However, after a series of controversies including verbal abuse by Housing CEO Rahul Yadav towards Sequoia’s managing director Shailendra Singh and Times of India journalists, SoftBank formed an executive committee led by Jonathan Bullock which took control of the finances and operations of the company. All top employees now report to Bullock.

Today, SoftBank has initiated talks with potential acquirer Quikr, which has been looking to strengthen its newly launched property sales vertical QuikrHomes through inorganic expansion. It appears that SoftBank had not communicated to Housing’s founders of its supposed move to sell the company until yesterday when they were slapped with a term sheet.

“Housing is what happens when investors leave founders with little skin in the game,” said Deepinder Goyal, founder of Zomato on Twitter.

Meanwhile, Housing’s investors have also been looking to replace its CEO Rahul Yadav following disagreements over strategy. The startup has recently changed it logo and ramped up its site and app. It is also heavily investing in advertisements to increase traffic.

“When availability of capital increases, and some startups end up raising more money than needed, a strong treasure chest does add to firepower. But when you raise more money, you need to achieve that much more traction in order to win. And that is often difficult in a short period,” Ajeet Khurana, a serial entrepreneur and angel investor, tells Tech in Asia. “The ‘overfunded’ startups end up taking the most non-creative approach: spend pots of money on advertising. While this often creates a blip in their key metrics, it is unsustainable. This could end up imploding the enterprise. So, while more revenues and profits might always be great, more fundraise may not be,” he adds.

Last year, Housing reported a US$8 million loss on revenue of just US$300,000 for the fiscal year ended March 31, 2014. We have asked the company for the latest numbers and will update the post when we hear from them.

In December last year, Housing said that it aims to map over 40 million houses across 300 cities in India. The startup also planned to add on-off buttons to reactivate its curated database of houses when they’re again available in the market. It hasn’t launched this yet.

(Disclosure: TechinAsia raised funding from SoftBank. See our ethics page for more information.)