Why Stayzilla's investors did not bail CEO out by settlement with vendor

Stayzilla founder Yogendra Vasupal

Paying off Stayzilla’s vendor Jigsaw Advertising, the alleged dues worth Rs 1.7 crore, just to 'settle the issue' would have given a wrong message, since it was a disputed invoice, said Avnish Bajaj, managing director of Matrix Partners in an exclusive interaction with Moneycontrol.

Matrix was one of the early investors of Stayzilla. It had invested close to USD 31 million along with another investor Nexus Venture Partners in the company.

"We had supported Yogi and the family saying if you guys want to settle you should settle (it with Jigsaw) but Yogi (Yogendra Vasupal) was very clear that this was a disputed invoice...an extortion, that there was mal-intention. The question was - did we want to encourage such a behaviour? As far as we are concerned, we were supporting Yogi's stand on it," said Bajaj.

Vasupal, the founder of Stayzilla was taken into custody by Chennai’s police commissioner after advertising firm Jigsaw slapped charges of fraud against the company early this year.

The issue became public in March when an emergency SOS email by co-founder Sachit Singhi was shot to investors Nexus Venture Partners and Matrix Partners asking for ‘help’. The email was made public on social media on March 14, even as the police detained Vasupal, the same day.

On whether or not Matrix Partners itself could have bailed out the CEO by settling the claimed amount to Jigsaw, Bajaj said it was a matter of principle. "This was not the question of dues, but a disputed invoice. Secondly, it is not my money it is run by a fund which makes equity investments and the logic of putting in more after a 100 percent loss is very tenuous – how can an equity investor lose more than 100 percent? But the point is that you are saying it was Rs.1.5-2 crore, it is not about the amount – what if it was Rs 20 crore, by that logic it would never stop (in such disputes)," he said.

According to Bajaj, this was a civil case and the way it was treated, there clearly was a political influence. Vasupal, who had shut Chennai-based Stayzilla in February, was arrested in the Tamil Nadu capital on March 14.

"It was a civil case, there should have been no criminal jurisdiction. Until you go to a fast track court and there is an investigation process as part of that. Let us say that in the investigation process, it was discovered that what the complainant is alleging is correct if it is a case of cheating it is the case of cheating...but first civil and then criminal," he said.

Vasupal was released 28 days later. About 400 CEOs and founders had signed a letter asking for his release, including Bajaj.

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"The problem is this was a state subject. And from what we understand, it was highly managed with political influence," he added.

While the Central Government has not made any public comments on the issue so far, according to Bajaj, people in the government machinery have condemned the incidence.

"As far as the Central Government is concerned, I do believe they have taken cognizance of this and they want to do something about strengthening the laws," he said.

Stayzilla last raised over USD 13 million in a Series C round of funding from Matrix Partners and Nexus Ventures in three tranches spread across November 2016 to February 2017.

The funding round was the last ditch effort of the existing investors to keep the company afloat.

However, it wasn't that simple claims Bajaj. The company failed to get new investors on board.

"We kept investing in Stayzilla as we believed in the model and Yogi. We were looking for new investors but kept failing. The company was trying to cut its burn rate and managed to reduce it to some level. But these are businesses which continue to lose money. If new investments do not arrive, ultimately the company will run out of money," Bajaj said adding that as existing investors they had a limit on how much they could put in.

"It reached a stage where it wasn't happening. Even Yogi started saying this is not going in the right direction. You have to cut your losses at some stage. In February, we had a discussion that this model in its present form is not working and then we told Yogi that we are going to write this off," he added.

Stayzilla has currently stopped operations and is expected to be working on a different business model.

Also read: Stayzilla founder Yogendra Vasupal says dues unpaid as bills were forged