In mid-2015, the top brass of Tiger Global, a venture capital firm known for its aggression, was in Bengaluru to meet the promoters of CommonFloor. It was one of India’s largest real estate portals and had received an investment of $30 million from Tiger the previous year. The relationship dated back to 2012, when Tiger first invested and since then had taken part in every round of funding, with this being the fourth.
The discussion was smooth till Tiger dropped the bombshell. The VC firm, along with Sweden’s AB Kinnevik and Hong Kong-based Steadview Capital, had freshly invested $150 million in Quikr, an online classifieds platform. This had resulted in Quikr turning a unicorn and Tiger was understandably enthusiastic. To the horror of CommonFloor, a company set up in 2007, Tiger said it was not keen on investing in two companies operating in real estate. The diktat, as a former official recalls, was to get acquired by Quikr. “It was a forced marriage,” he says.
The process moved swiftly and in January 2016, the official announcement was made. It would be a $200-million deal with almost all of it by way of stock in Quikr. At that time, CommonFloor had revenue of around Rs.400 million and was well set for growth, according to industry trackers. Thus, the deal with Quikr raised a few eyebrows. The online-classified player was in the midst of a rather ambitious diversification strategy by getting into areas such as cars, jobs, beauty and wellness, apart from real estate. Since then, Quikr has struggled, points out the same ex-CommonFloor official. Last year, Quikr had revenue of Rs.1.89 billion accompanied by a loss of Rs.1.87 billion. From once being a unicorn, Quikr is now valued at $569 million with a serious job on its hands.
Getting off the ground
It was in 2008 when Pranay Chulet teamed up with Jiby Thomas, his former colleague at eBay, to set up Quikr. With a chemical engineering degree from IIT Delhi followed by an MBA from IIM Calcutta, Chulet had the right pedigree. His work experience included consulting stints in the US. In 2015, Quikr (having started life as Kijiji India in 2005) was still a Rs.530 million organisation with losses close to Rs.4.50 billion. Funding in excess of $350 million had already come in from the likes of Omidyar, Matrix Partners, Norwest Venture Partners, Warburg Pincus, Nokia Growth Partners and most recently from Tiger Global (See: Buying time). Nothing much was made of Quikr being in the red and the rationale given was that the company was still in the growth phase.
By then, Chulet was the acknowledged poster boy of online classifieds, with his face splashed liberally in the media. His online classifieds model was deemed a big success and a unique idea. The relentless focus at the company was increasing the number of transactions, which could then drive up valuation. The higher that number, greater was the chance of valuation rocketing and, consequently, it would get easier to get more marquee investors. So far, that strategy had worked remarkably well for Quikr.
Mid-2015, the mood changed. Company insiders reveal that pressure from investors began to build, and valuation would now be benchmarked against total revenue and not transaction volume. This was right after the $150-million fund infusion led by Tiger Global. “Higher transactions were not translating into higher revenue. So, Chulet decided the only way to boost revenue was through acquisitions,” one of the former officials says.
Investors bought into the idea of a vertical play that Chulet sold. His logic was that Quikr would be the parent brand, under which various companies/verticals would exist. The investor could choose the business he wanted to be in — real estate or jobs, for instance. Each business would flourish under the Quikr brand, which would increase in value as well.
The nod was given. In 2016 alone, Quikr bought out seven companies across four verticals — real estate and rentals, beauty and wellness, auto services and jobs. In addition to CommonFloor, it included Grabhouse, Salosa, ZapLuk, Stepni and Babajob. Two earlier acquisitions, both in real estate and rentals, were done in 2015 and there would be six more between 2017 and 2019, taking the total number of verticals to six. The investors continued to pitch in money wholeheartedly.
Sure, many other companies follow the acquisition strategy. But, increasing user base comes with increasing costs. While these buyouts boosted revenue modestly, Quikr’s losses continued unabated. For FY15, it was a whopping Rs.4.46 billion and rose to Rs.5.34 billion in the following fiscal (See: Bleeding red). The company responded by reducing expenses from Rs.6.20 billion in FY16 to Rs.3.63 billion in FY18, largely by cutting back on advertising and promotion. “We knew it was a potentially dangerous situation if revenue growth did not take place,” the insider adds. Meanwhile, its closest competitor Olx India, a player globally owned by Naspers, is a profitable entity. Last fiscal, Olx made Rs.220 million on revenue of just under Rs.4 billion.
The only source of revenue for Quikr then was advertising and, later in 2014, paid listings. According to the company insider, of the Rs.940 million in revenue for FY16, the year when the acquisition spree started, a little over Rs.400 million came from advertising. Since then, that revenue has fallen marginally, from 57% in FY16 to 55% in FY19.
The investors, who were indulgent of Chulet, were constantly carried away by his citing Craigslist as an example and how large it grew. Deepak Shahdadpuri, founder and managing director of DSG Consumer Partners gives a simple explanation for this kind of investor behaviour. “India is seen as a sizeable market offering huge potential for investors. There is a large element of FOMO in the VC and PE community,” he says.
And it became bumpy
With its ambition, Quikr grew unwieldy. While Olx focused its attention on classifieds and looked for different business segments there, Quikr, through its verticalisation approach, created a large number of individual businesses with each vertical operated by a separate company. According to another company insider, each of the businesses had its own call centre and that only inflated costs. Also, Quikr overestimated the market for online classifieds in India, which at best is Rs.10 billion, as per data from Statista. In this market, it would be up against the largest players with clear specialisation in each of the businesses.
Take for instance, real estate, which comes under QuikrHomes. Though it had CommonFloor, matching up to 99acres, owned by Info Edge or MagicBricks, promoted by the Times Group, was not a walk in the park. “Both these players raised money and, with aggressive sales teams, took over the market,” he says. Likewise, in the case of used cars, the rivals for QuikrCars were CarDekho and Cars24 among others. “As businesses like second-hand cars become more organised, potential buyers prefer to look at specialised companies. The question then was ‘what did Quikr stand for?’” asks Satish Meena, senior forecast analyst at Forrester. Citing the buyouts in beauty and wellness (Salosa, ZapLuk and Stayglad being the companies acquired), he says there was no correlation with Quikr’s existing business. “It was attempting a transformation from a technological platform to becoming a services company. That’s anything but easy,” explains Meena.
That’s not all. In most of the acquisitions, the founder members did not stay back. Take the case of CommonFloor, Quikr’s most high-profile buyout. The original team was out within a year. Rumour has it, they moved out because they had no clear role to play. Chulet is said to have earlier assured the team at CommonFloor that there would be no job losses, but an estimated 90% of its 600-member strong workforce was out barely 10 months later. “Quikr was and is run by people who are Pranay’s classmates or friends. It is a very ‘comfortable arrangement’,” says someone who worked at both CommonFloor and later Quikr. Outlook Business reached out to Quikr and its major investors with a detailed questionnaire, but received no response, except from AB Kinnevik, which stated: “As we are currently in blackout ahead of our Q1 report we have no comments”.
The pattern followed with almost every acquisition. Today, Quikr has shown the door to over 2,000 employees across verticals, from a total of around 3,500. The founders of every acquired company were “disappointed” by Quikr’s culture, leading to them either moving out or facing the unpleasant situation of being asked to leave. One of those founders narrates how Chulet and his A-team would come to him every evening asking for updates on revenue generated. The acquired start-ups had techies who looked forward to monetary incentives, but the new leadership didn’t pay much attention to that. “Pranay’s buddies had already made their money,” he says.
In terms of deal structuring, all were primarily stock transactions with the seller getting shares in Quikr. At the negotiation stage, Chulet and his team would wax eloquence on how Quikr would go public at a huge valuation. “They were extremely convincing and forceful,” says a company insider. Once acquired, interests of employees and owners of the smaller company became secondary (if not ignored) since they held a small stake in a large organisation.
Where is the money?
Finally, after years of mismanagement, Kinnevik marked down its own valuation in Quikr, this February. It was a sharp drop from $175.3 million to $96.9 million for its 17% holding at the end of the December quarter. Worryingly, all this was attributed to “certain dealers and vendors within the managed rentals and cars segments having placed fictitious or misrepresented transactions on its platform.” Basically, deals for homes were struck with non-existent landlords only to boost revenue. Media reports have said that the fraud has taken a toll on at least three verticals — real estate, jobs and cars. In FY19, paid listing for real estate contributed approximately 30% to Quikr’s revenue, while services, jobs and cars together accounted for 15%. The scam is said to have been orchestrated by mid-level employees at Grabhouse, a company acquired during the 2016 spree.
None of the people Outlook Business spoke to seemed surprised about this development and maintained that the “obsession for growth” led to no control over processes. “Quikr did not understand the magnitude of running a more complicated organisation,” is the view of the founders who sold out. With valuation taking a hit, raising money will not be easy. In fact, the last time Quikr received funding from any investor, existing or new, was in 2015. A founder of one of the companies who sold out to Quikr points out that in the past couple of years, unicorns such as Byju’s managed to raise substantial sums of money. “All this was done at the peak of the funding cycle and nothing came Quikr’s way,” he adds. Shahdadpuri says, “Investors become worried and risk averse when they come out of a crisis. Valuations at that stage of the cycle tend to be more conservative.” Between late 2018 and mid-2019, Quikr raised debt in two tranches totaling Rs.750 million from Innoven and Trifecta.
The story doing the rounds is how a couple of interested sellers met Quikr’s top brass as recently as late 2019 for a deal. Surprisingly, the once enthusiastic team at Quikr was a lot more cautious and told them any potential deal would lead to higher losses. “There was a clear change in mood. Aggression to close a deal was missing,” says a person privy to the conversations. All this was a few weeks before Kinnevik broke the bad news.
Forrester’s Meena thinks raising money after what has transpired will be difficult. “We are speaking of a key investor writing down the valuation. Trust has taken a huge beating,” he says. The road ahead looks bumpy and Quikr does not have the luxury of time. The company plans to open 100 stores with the intention of increasing the topline but no one knows how that will fare. Perhaps Quikr needs to ‘slowr’ down, before rolling down the path of excess again.