Stayzilla Case: Should Start-Ups Be Treated Differently?

Stayzilla, an Indian start-up which offered homestays, like AirBnB, is in the news, for wrong reasons. That Stayzilla decided to down shutters would have made it to the trade press, and further, would have signalled to the start-up community that the age of easy investor money is well and truly over. However, the reason why Stayzilla is making national headlines though is because one of its founders has been arrested by the police, for unpaid bills to one of its vendors, and the big ticket start-up entrepreneurs have requested for intervention from the Central Government as this indicates 'India is no place for start-ups'. In the meantime, evidence emerged that the Stayzilla founders threatened the aggrieved vendors with 'dire consequences' if they pursue them and the Court has refused bail to the accused, creating a bigger furore. (See story here)

There are always many sides of stories such as these, and it is best not to hazard guesses about what really happened. However, there are two things which one can comment on, without regard to the different allegations that are flying around (that Stayzilla founders syphoned money out or the vendor in question is using its political muscle). These two questions relate to the wider significance of the story:

1. Some well-known names in Indian start-up community has argued that the non-payment of bills is a 'civil offence' and not a criminal one. The police should not have got involved in the first place. 

2. The Stayzilla episode may indicate India is no place for a start-up.

These are complex questions, but facts about these are rather clear. Stayzilla used an advertising service and ran up a $250,000 bill, which they did not pay. Then, Stayzilla announced that they are closing, but did not go into administration. This is indeed fraud, because, one would suspect that while Stayzilla were using advertising services, the managers and the investors were aware - even if they did not want to accept it - that Stayzilla is not making money. It would have been, one could say, trading insolvently. Now, 'closing the business' means the investors were positioning themselves for tax losses, but without regard to the suppliers' - who in this case is another equally entrepreneurial business, but without the glamour and glitz of VC money - unpaid bills. This could indeed be a criminal offence.

As for the second question, would India be considered a place for start-ups if the big and powerful start-ups - those with financial muscle - can operate with impunity and effectively defraud the entrepreneurial businesses that trade with them? In fact, India is not a place for start-ups precisely for this reason, that big and powerful have all the advantages, and the entrepreneurs have to face all the obstacles. Just imagine what would happen if a small business did not pay Stayzilla: An army of lawyers, police and even perhaps Ministers come knocking at its door. It is shameful that some of the Indian start-up founders are trying to meddle into this case, something that perhaps indicates, as the CEO of the advertising company suing Stayzilla has maintained, that they are afraid that their companies would be next. The Stayzilla case indeed point to growing problems in the space, but these CEOs, through their intervention that made this a headline news, have attracted undue attention to this issue.

The Stayzilla case may be an one-off, or a start of a trend that the private valuation bubble is bursting. However, whatever the consequence, one must not miss the bigger question that this case raises: Can Vc-funded start-ups operate outside the acceptable norms and rules of the society? For example, is it okay not to pay the suppliers, or its employees, as some Indian start-ups have done, when financial trouble hits? Most of these people have no upside - they are basically being arm-twisted in making sacrifices because the 'company is in trouble'. In an earlier age, this would have been the entrepreneur's responsibility. But now, after the shift of focus to 'shareholder value', the other stakeholders don't seem to matter. A company would happily ask everyone else to make sacrifices to keep the company going - which is essentially equivalent to trading insolvently - in order to protect the shareholders (the alternative would have been to issue low-priced shares, equivalent to the interest on delayed payment, to anyone who is being made to sacrifice). Once the Start-ups understand these obligations, and learn to behave responsibly towards others who make them possible, they would earn the right to talk about changing the world for better.


Benedict G said…
My contention is from a Branding POV. There is a serious problem here. A startup that has raised $34M in 4 Rounds from 4 Investors and is in the lifestyle business has done a shoddy job of building a brand. Its entrusted or dealt with a company that is not have the reputation of building brands. So there is something amiss out there. The fact that the founder has been booked for non payment would mean that there is something more to it which obviously is hidden from our view.

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