Inside story of how a turnaround CEO tried to repair Housing for its sale

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Indian real estate portal Housing.com got acquired last week by another online property marketplace PropTiger. It was a distress sale at a valuation of US$70-75 million for the SoftBank-backed startup, which had raised US$160 million in funding since its inception in 2012.

Barely a month before the sale, I met the man who had been put in charge of nursing the startup back to health: Jason Kothari, earlier credited with the turnaround of Valiant Entertainment in New York. The beleaguered startup was in a freefall after its co-founder and CEO Rahul Yadav was sacked following a public spat with the board.

The backers – SoftBank, Helion Venture Partners, Nexus Venture Partners, and Qualcomm Ventures – wanted to salvage what they could of their investment. The stock-swap deal with PropTiger at least gives them another shot at getting some tangible returns in the future.

See: Why is a turnaround expert joining Snapdeal?

Damage control

Jason’s first task was damage control. “The reputation was at rock-bottom,” he told Tech in Asia in an exclusive interview.

The founder of a company being sacked by its own board of directors had made Rahul Yadav the Steve Jobs of India in the eyes of many. Jason had to combat that. He reached out to all the participants of the fiasco – employees, investors, and even media – to clear the air.

“I went to every business head, every investor, and journalists, to just talk to them. Re-building relationships was crucial to bring back lost reputation,” Jason says.

But Housing needed much more than PR to get out of its swamp.

The company had been touted as a disruptor of the highly unorganized real estate sector, with a technology-backed model to make house-hunting easier. In 2014, SoftBank pumped US$90 million into Housing at a valuation of US$250 million.

The company was ahead of its competitors. There was no reason to hurry.

But the group of 11 friends from IIT Bombay helming the startup seemed to get carried away and faltered in utilizing the funding judiciously. The company spent a whopping US$20 million of the SoftBank funding on a single marketing campaign. Mind you, Housing wasn’t making large sums of money at that time.

Here’s how much cash it was burning: at the end of March 2015, the startup reported losses of over US$40 million, on a revenue of just around US$2 million. The company’s expenses were out of control. Employee cost at the end of March 2015 had jumped four-fold to US$13 million, and annual marketing costs had increased almost 10-fold to US$18 million. The investors objected, Rahul responded with animosity, and eventually he was sacked by July.

The problem with Housing was its leadership, Jason says. “An entrepreneur who has seen multiple markets and challenges would realize the importance of judicious expenditure. Housing’s founders probably didn’t have that exposure.”

The company tried to create too many things at once, and none were monetizing meaningfully.

The company tried to create too many things at once – hostels, renting, land buying, commercials, luxury, and so on – and “none were doing well, or monetizing meaningfully.”

“My advice would have been to slow down. The company was already ahead of its competitors. There was no real reason to hurry,” Jason says. With good investors backing the company, it was a chance to put systems in place and consolidate.

But prudence was the last thing on the founders’ mind. Housing, declared its expansion to 10 cities in 2013, when just two weeks earlier the plan was to run a pilot program in Pune. “There was no team to manage expansion at that scale, there were no systems to handle it,” points out Jason.

The team grew from a 100-member team to a 1,000-member team in a matter of months. At one point in 2014, the team grew to 2,500.

The turnaround man: former Housing CEO Jason Kothari. Photo credit: Snapdeal.

Dressed up for a sale

Ultimately, when mounting expenses went out of hand, the company had to let go of close to 900 people in two rounds of layoffs. But reducing cash burn alone wouldn’t cut it. To make the company attractive for a buyout, Jason needed to dress up its revenues too.

The solution was shutting the rentals business, and to focus all resources on buying and selling property. Rentals accounted for almost 80 percent of Housing’s business. It brings high volumes of business, but on low margins. Buying and selling, on the other hand, is where the company made most of its money as it offers high margins.

We visited China, studied their market, and compared it to our market.

The changes flowed from a study of what other companies were doing right in different markets. “To start with, we visited China, studied their market, and compared it to our market,” says Jason.

The idea that emerged was to build a full-service company, which would help users discover property online for buying and selling, and then close the deal offline through partner brokers. Housing decided to partner brokers, because having them in-house would drain margins, Jason says.

The market for housing online was just about US$200 million in 2016. The mostly-offline brokerage market, on the other hand, is valued at US$4 billion. “There is a huge market if we tap the offline brokerage market. It’s largely unorganized, and we can make inroads,” says Jason.

These plans had to be revisited after India’s recent demonetization. The real estate sector operated largely in cash transactions, and it would take time for a new structure to emerge. Until then, property sales would slow down.

Housing had to return to its roots and announce a renewal of its rentals business last month. The sale to PropTiger followed soon afterward, and Jason Kothari quit Housing to join ecommerce site Snapdeal, which also belongs to the SoftBank portfolio in India.

(Left to right) Housing cofounders Advitiya Sharma Sharma and Rahul Yadav in good times. Rahul Yadav was fired as CEO of Housing in 2015. Photo credit: Housing.com.

See: Consolidation in real estate: Quikr and CommonFloor merge to kill Housing

Time of reckoning

Housing’s investors live to fight another day for returns on their investments. They do have equity in the merged entity, albeit at little over one-third of the startup’s peak valuation. It came almost exactly after a similar takeover of Housing’s main tech rival CommonFloor with classifieds portal Quikr, which Tech in Asia had warned was a death knell for Housing.

Still, the Housing’s takeover by PropTiger was probably a better outcome than fashion portal Jabong being sold to Flipkart for just US$70 million in cash. The Rocket Internet-backed startup once held high hopes of a US$1 billion valuation.

A professional CEO taking over the troubled Housing before its sale has a parallel with what’s happening at India’s biggest unicorn. Kalyan Krishnamurthy re-joined Flipkart from Tiger Global to clean house after a series of devaluations in a losing battle with Amazon. We’ll probably know in a year’s time if this leads to a turnaround, an IPO, or a distress sale.

See: 25 failed startups in 2016 and what we can learn from them

This post Inside story of how a turnaround CEO tried to repair Housing for its sale appeared first on Tech in Asia.

from Tech in Asia https://www.techinasia.com/why-housing-failed
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