Conflict of interest, harsh deal terms: More skeletons tumble out of SphitiCap

Last month, Moneycontrol reported that SphitiCap, a Noida-based venture capital fund, had promised to invest about $50 million in eight startups but has failed to transfer even a single penny in 13 months. The move triggered widespread outrage in the Indian startup ecosystem.

Since then, many people have reached out to share their experiences with SphitiCap and its partners Mayank Mehra and Pallav Kumar Singh. From conflict of interest to unusual deal terms and on the personal front, outstanding loans, the web gets more complex for this little-known VC firm, which claims its limited partners are primarily from West Asia and the APAC region.

Conflict of interest

One instance of the conflict of interest involves the VC firm’s investment in PayVeda. In October 2022, SphitiCap publicly announced that it invested $11.5 million in PayVeda, which the VC firm said is a “fintech giant” and is “IPO bound.”

However, regulatory filings from Tofler showed that PayVeda hasn’t started generating revenue yet. PayVeda’s has had zero revenue from operations for the past three financial years (FY21-FY23) and its losses have widened: Rs 6,598 in FY21, Rs 3.57 lakh in FY22 and Rs 28.27 lakh in FY23.

Investing in a loss-making startup is neither unusual nor prohibited. But what if the startup has links to the founder of the venture fund? At least four people told Moneycontrol that PayVeda founder Prateek Vohra is a cousin of Mehra. While Mehra runs the company, Vohra is the face, the people said.

“Prateek Vohra and I are not cousins but old associates… We had the necessary approvals and procedures in place to go ahead with the transaction before we documented the deal and the transaction is not a red flag," Mehra of SphitiCap said in response to Moneycontrol’s queries.

SphitiCap and PayVeda also have the same registered address in Noida, according to regulatory filings.

Vohra said the addresses matched because PayVeda had to vacate its coworking space in Noida and Mehra was “kind enough to let PayVeda use SphitiCap’s address for goods and services tax (GST) purposes.”

Asked about the valuation PayVeda commanded while raising funds from SphitiCap, given that it was yet to earn money from sales, Vohra said, “My math is weak, but we gave 20 percent of the company in exchange for $11.5 million, you please do the calculation.”

Considering those figures, SphitiCap valued PayVeda at about $58 million even after having no clarity on when the company will start generating revenue.

“FY24 is also going to be a year with no revenue and we’re okay not generating revenue for another 2-3 years also, but will not launch a half-baked product,” Vohra said in response to Moneycontrol’s queries.

The connection between SphitiCap and PayVeda will not augur well for the VC firm in the future if it chooses to invest in the fintech space.

“There are numerous reasons why this arrangement is not OK. One is because it is a clear conflict of interest, next a founder from the same sector (fintech) will never engage with SphitiCap because there will be concerns about the confidential information being leaked. The arrangement throws SphitiCap’s entire thesis out of the window,” a partner at a venture capital firm explained.

The overlaps did not end there. Until FY21, PayVeda had Gitesh Sharma & Associates as its auditor, but from FY22, the firm brought in Geeta Narang, who runs Geeta & Company as its auditor, regulatory filings showed. Geeta & Company is the auditor of Mehra’s other firms, Ultiwise Ventures and Corpzo. Corpzo also employs Vohra as a director and chief business officer, as per filings and LinkedIn.

While it is common to appoint one of the Big Four as an auditor to all related firms, the partner still changes in most cases. Having a small or mid-level auditor for at least three companies, especially in this case, is generally frowned upon. Mehra dismissed these concerns.

“We moved to Geeta & Company because she is good and is cost-efficient,” he said.

Déjà vu

If there are conflict of interest concerns swirling around Mehra, partner Pallav Singh’s presence has stirred unpleasant memories for other reasons.

In 2019, Singh along with Sudhakar Kumar, Dushyant Chauhan and Aliya Hasan ran Draconis Capital Future Fund (DCFF).

DCFF was in a similar situation as SphitiCap is today. According to media reports in 2019, DCFF said it had raised $100 million to deploy in at least five startups but awaited the final approval from the Securities and Exchange Board of India to operate as a Category I alternative investment fund (AIF). The result? Empty promises and the eventual dissolution of DCFF.

“DCFF never happened and in the process, even Singh was asked to leave after the management and he (Pallav Singh) had personal differences,” one person said. Two others confirmed this to Moneycontrol.

Sudhakar Kumar, a partner at DCFF, confirmed that DCFF was dissolved “because its limited partners went rogue and the $100 million target could never be reached.” However, he refused to shed light on what led to Singh’s departure.

Singh denied that he was asked to leave.

"I parted ways with DCFF after a mutually agreed separation. The assertion that I was asked to leave DCFF is therefore factually incorrect. Dissolution of DCFF took place after my departure. Therefore, I am not in a position to comment on the same," Singh said.

After DCFF, Singh set up SphitiCap with Mehra. While the VC firm awaits SEBI’s approval to start disbursing its planned $50 million, the going hasn’t been easy for Singh in his individual capacity.

Singh had borrowed Rs 50 lakh from his Lucknow school friend, Ayush Singhal. While Singh had initially returned just Rs 10 lakh, the majority of the loan still remains due.

Bounced cheques

The cheques that Singh gave Singhal were returned by the bank due to insufficient funds in the accounts, as per Singhal’s complaint filed in the Vikas Nagar police station in Lucknow, a copy of which Moneycontrol has reviewed.

After the initial payment of Rs 10 lakh, Singh paid another Rs 4 lakh to Singhal but the rest, Rs 36 lakh, remains due even after over a year. Singhal confirmed the developments to Moneycontrol.

Bank statements reviewed by Moneycontrol showed that Singhal paid Rs 50 lakh to Singh via five transactions between April 2022 and December 2022. The final amount of Rs 9 lakh was transferred from Singhal’s company, Singhal Eco Energy’s bank account to Singh on December 14, 2022.

In a letter that Singh wrote and signed, which Moneycontrol accessed, he promised to pay Singhal back by October-December 2022 and acknowledged having given cheques that had bounced. He promised to pay the remaining amount on or before September 5, 2023, failing which he would be ready to bear the legal and other consequences.

However, Singh now denies having written any such letter. Singh also asked for additional time to respond to Moneycontrol’s queries because he was sourcing certain court documents but failed to provide the same. Moneycontrol had sent questions on November 22 and received replies on November 28.

Several people have alleged to Moneycontrol that Singh’s outstanding personal dues amount to at least Rs 2 crore, including Rs 50 lakh from Singhal.

"The amount mentioned here is factually incorrect, and is an absolute conjecture. Majority of my private debts have already been repaid…There were some delays due to certain unforeseen circumstances, and the entire amount will be cleared in the next 30-45 days," Singh said, likely pinning hopes on SphitiCap receiving SEBI approval by then.

Demand for equity

SphitiCap had earlier told Moneycontrol that it has a pipeline of $50 million across eight startups. While the exact number of term sheets that SphitiCap has signed is not known, a majority of the founders who received a term sheet objected to a clause that was common for all of them.

"2 percent on post-investment basis shares of the company to be transferred to SphitiCap by the founders at the face value,” the VC firm said in the term sheets, a copy of which Moneycontrol has seen.

SphitiCap told the startup founders that this clause was similar to sweat equity. But the clause was considered a deal breaker by many founders, especially because it was demanded from them after the investment was complete.

Sweat equity is given as ownership in the company and is non-monetary in nature. It is typically the result of the work put in by people/employees who have helped in increasing the value of the firm.

“SphitiCap would say it needs an added incentive to work for the company it is funding,” a founder who received a term sheet from SphitiCap told Moneycontrol. The VC firm agreed that it has been following this procedure.

"SphitiCap takes additional equity for the strategic advisory role it plays to help scale the portfolio company. This is a standard practice among several existing early-stage funds. All SphitiCap deals have been executed in consensus and full-agreement with existing portfolio companies," Singh said in response to queries.

Moneycontrol spoke to two other venture capitalists who said that demanding equity on a post-investment basis is not a standard practice at all.

While SphitiCap did not reveal more details about the arrangement of the additional shares, SEBI, in a recently published consultation paper, said if the details of such transactions are not revealed to fund sponsors, it may lead to a conflict of interest.

“The sponsor and manager of the Alternative Investment Fund (AIF) shall act in a fiduciary capacity towards its investors and shall disclose to the investors, all conflicts of interests as and when they arise or seem likely to arise,” SEBI said in its paper.

These developments come to light when SphitiCap hopes to get SEBI approval this month and will close its first fund of $500 million, or in the words of the company, the ‘largest maiden VC fund’ that ‘India has ever seen’.

The developments are key because the Indian startup ecosystem has grown to become the third-largest in the world and any wrongdoing could derail the growth of the past years.

Best practices

“The Indian startup ecosystem has been maturing. There is a lot more due diligence now and founders are being grilled on fundamentals to ensure there are no leaks later. That is especially the case of companies in the early-stage and since they’re smaller, they are more vulnerable, which is why it is important to select the right set of investors and have the best practices early on,” said Siddarth Pai, founding partner at 3one4 Capital and co-chair of the regulatory affairs committee at Indian Venture and Alternate Capital Association (IVCA). “In the past, we’ve seen some really good companies go down because their cap tables were messy.”

Governance lapses across startups and VC funds are surfacing when the new economy is becoming integral to the India growth story.

Since 2015, Indian startups have raised more than $140 billion, as per Tracxn, a private markets data provider. With over 100,000 registered startups in the country, the government’s Economic Survey 2023 highlighted that direct jobs created by young companies jumped 36 percent to 269,000 last year.

The number of jobs created by startups in the past five years has crossed 900,000. The ecosystem is poised to grow as venture capitalists cumulatively have more than $10 billion in capital waiting to be deployed in India, as reported earlier.