What explains Urban Ladder’s fire sale?

Venture capital funding and ballooning valuation is no proof of a startup’s success. And that was very evident, earlier this week, when Asia’s richest man Mukesh Ambani bought furniture retailer Urban Ladder, which has been bankrolled by marquee investors. Ambani’s Reliance Retail Ventures Ltd (RRVL) bought a 96% stake in Urban Ladder Home Decor Solutions for ₹182.12 crore (approximately $24.5 million), nearly five times lower than the total funding that the Bengaluru-based company raised during its eight-year journey.

Urban Ladder raised a total of $114.9 million in funding over nine rounds from investors, touting big names such as Steadview Capital, Sequoia Capital India, Kalaari Capital, and others, according to data from Crunchbase. The last funding round was in November 2019 for about ₹15 crore. The furniture retailer saw its valuation surge to over ₹1,200 crore during its fund raising in early 2018. However, it dropped to about ₹750 crore last year.

But over the last one year, analysts have expressed concerns over the company’s valuation plunging “drastically," as Urban Ladder's business started to stutter. Then it was hit by the pandemic. As salary cuts and job losses were the order of the day across industries, Urban Ladder began to lose out, as the furniture that it sold sported fancy price tags, which wasn't attractive anymore to the consumers.

The company, founded in 2012 by Ashish Goel and Rajiv Srivatsa, had started off as a pure-play online furniture retailer and had quickly caught the fancy of India’s affluent urban population. Their contemporary, sleek, solid-wood furniture pieces virtually became conversation starters. However, given how unorganised the furniture market is, and competition from many small retailers, Urban Ladder too had no option but to pivot to an omni-channel model. Soon it was compelled to bring out large-format brick-and-mortar stores across metro cities, pushing its operating costs further north.

And it may have worked. Even though the company had incurred losses ₹118.66 crore and ₹457.97 crore in FY18 and FY17, respectively, it had turned the bend. It reported a profit of ₹49.41 crore on a revenue of ₹434 crore in FY19. So the looming question still remains: what explains the company's dramatic fall in sale price—a fire sale as many are now terming it?

“Entrepreneurs in India, especially those running tech and internet-based startups have focused on valuation as the metric of defining success,” says e-commerce industry veteran K. Vaitheeswaran. “This is a problem because it allows founders to be profligate, since there is no pressure to build sustainable ventures,” adds Vaitheeswaran, now the co-founder of Again Drinks, a ready-to-drink beverages firm. In 2012, Vaitheeswaran had co-founded IndiaPlaza, among India’s first e-commerce platforms. “A profitable [business], but hardly any venture capitalists (VCs) were interested in the narrative,” he recalls. The venture ran out of cash and was under severe financial distress, forcing Vaitheeswaran to eventually shut down Indiaplaza in 2013.

“I believe VCs encourage startups to raise-spend, raise-spend, in a non-virtuous cycle. The startups then become a lottery ticket instead of a business,” he says. “If lucky, the startup gets acquired for high valuations, mostly they will get acquired in distress deals and many will shut down because there's nothing known as an endless supply of venture capital,” he adds.

K. Ganesh, serial entrepreneur and promoter of e-commerce ventures such as BigBasket, HomeLane, and Portea, argues that there’s been too much of a hue and cry from various segments on the Urban Ladder sale. “There are no losers here,” says Ganesh vehemently. “The VCs, anyway, are not hurting. This is risk capital—2 out of 10 investments give mega returns and define the success of a fund.” Of course, in the VC world it’s natural to lose money on others. But there have been outliers in the past.

According to Tracxn data, in the last decade, the top five acquisitions in the Indian startup space include Flipkart (acquired by Walmart for $16 billion in 2018), Myntra (acquired by Flipkart for $330 million in 2014), WhiteHat Jr. (acquired by Byju’s for $300 million in 2020), TaxiForSure (acquired by Ola for $200 million in 2015), and CommonFloor (acquired by Quikr for $200 million in 2015.)

That said, Ganesh says, the deal gives RRVL a platform to build on it, “and take it from 1 to 100, while the founders have done this from 0 to 1.” Despite Goel and Srivatsa having had a rumoured fallout, with Srivasta exiting from Urban Ladder last year, the founders built a business from scratch, executed in an extremely tough category, creating a brand, created employment, and satisfied the needs of customers, which Ganesh says, must be commemorated in the true spirit of entrepreneurship.

Even Vani Kola, managing director, Kalaari Capital, and one of the key investors in Urban Ladder congratulated the founders on Twitter. “Ashish, you, Rajiv and the team at Urban ladder have done a lot of good work, and broken many barriers in design thinking and customer service. Wish you and your team the best in the next leg of your journey,” Kola tweeted on Wednesday.

While RRVL has an option of acquiring the balance residual 4% stake in Urban Ladder, it has announced that it would make an investment of up to ₹75 crore in the company by December 2023.

Ganesh sums up the deal quite succinctly. “Employees, vendors, suppliers—all get continuity with Reliance.”