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Published on 18/07/2019 10:14:52 AM | Source: HT Media

Opinion | The IndiGo war reveals the problems of co-promoters

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The ongoing feud between the two founders of InterGlobe Aviation Ltd that runs India’s largest airline IndiGo over issues that many others could have resolved over a glass of Chianti may be a cue for budding entrepreneurs to re-examine the idea of co-promoting new ventures. Conventional wisdom, of course, suggests that what you need when starting up is a team with complementary skills, and every venture capitalist and angel investor has since endorsed that. But a look at co-promoted ventures over the years reveals that co-promoters falling out with each other is a fairly common occurrence, and as the destruction of shareholder wealth in IndiGo shows, it can spell disaster for shareholders.

According to Noam Wasserman, Harvard Business School professor and author of The Founder’s Dilemma, 65% of high-potential startups fail due to co-founders falling out. The reasons range from differences over money, business strategy and leadership style. But equally, the differences get compounded by the very nature of such partnerships. Thus, Rakesh Gangwal is an honourable man and we have no reason to believe Rahul Bhatia is any less. Yet, the very construct of their initial agreement which gave special rights to a company controlled by Bhatia despite both holding almost equal proportions of the airline’s equity sowed the seeds of future discord.

It is a story that has been repeated very often. At software services company Mindtree Ltd, which was recently acquired by Larsen and Toubro (L&T) after a bitter takeover battle, V.G. Siddhartha, who invested $8 million when the company was formed in 1999, took a back seat for the next two decades, happy to let other promoters call the shots. But, driven by his business compulsions last year, he abruptly sold his 20% stake in the company to L&T, bringing to an end not just the business relationship forged in good times but also sealing the fate of the founders. Never having envisaged a scenario where one of their own would bail out on them, they had not provisioned for the kind of share structure that would have enabled them to save their company.


Even companies being run by siblings as partners often end up with fierce internecine struggles. The Singh brothers of Ranbaxy come instantly to mind, while the messy tussle between Raymond group chairman Gautam Singhania and his father Vijaypat Singhania who founded the company shows that a blood relationship is no guarantee against the pulls and pressures of business. At Yes Bank, even though the two founding partners Rana Kapoor and the late Ashok Kapur had family ties, the latter’s tragic death was followed by years of feuding over board seats before a settlement was reached last year.

These examples and many others indicate that enterprises with multiple promoters may have structural dissonance built into their framework. In fact, time-bound partnerships of convenience may well be the way to go for aspiring entrepreneurs. Take the case of another IT services company, HCL Ltd, where most of the co-promoters including the influential Arjun Malhotra (the barsati of his grandmother’s house in New Delhi’s Golf Links area served as the company’s first office in 1976) sold off along the way, leaving Shiv Nadar with a 60% controlling stake in the company and crucially the power to run it his way.


Nor is there any evidence to suggest that companies started by single entrepreneurs suffer in consequence. From Henry Ford to Jeff Bezos in the US and Dhirubhai Ambani to Sunil Mittal in India, business history is littered with examples of solo founders who built hugely successful businesses.

Indeed, recent research suggests the opposite may actually be true. In a paper titled Sole Survivors: Solo Ventures Versus Founding Teams Jason Greenberg of the Leonard N. Stern School of Business at New York University and Ethan R. Mollick of University of Pennsylvania’s Wharton School posit that companies started by solo founders survive longer than those started by teams. Further, organizations started by solo founders generate higher revenues than organizations started by founder pairs, and do not perform significantly different than larger teams. Speculating on the reasons for this, the authors say: “…solo founders are also not subject to the same frictions and drags that occur when one (inevitably) disagrees with a co-founder".


That does not imply all entrepreneurs should go solo or that all founding teams end up in court. Like any other relationship, co-founding and running a business needs constant working upon and the dynamic between the co-founders rests upon trust and constant communication. The roles of each of the co-promoters need to be very well defined with decision-making for that role resting finally with the one who’s been given that responsibility. The problems arise when founders initially try and create consensus over each decision and in their eagerness to leave the early bonhomie intact, shy away from confronting each other over issues that need attention. Later, as these issues snowball, the business itself comes under threat.

Which is why a co-founders’ agreement laying down the ground rules that will govern the responsibilities and liabilities of individual partners, along with a mechanism for dispute resolution, needs to be drawn up upfront. Else, entrepreneurs should start companies alone and offer equity stakes to executives who bring in the skills needed.

Sundeep Khanna is executive editor at Mint.