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Live by the sword, die by the sword. We’re seeing a manifestation of this old proverb in the new world of ecommerce.

K Vaitheeswaran founded one of India’s first broad-based ecommerce sites way back in 1999. It was called Fabmart, and later rebranded to Indiaplaza. He also founded Fabmall a couple of years later for online-to-offline grocery delivery.

Fabmall was acquired by the Aditya Birla Group and rebranded into the More chain of supermarkets we now see all over India. Indiaplaza fought on, educating buyers and sellers in ecommerce, working out logistics, experimenting with cash-on-delivery and other payments. It won backing from the Reliance Group of Mukesh Ambani, India’s richest man.

As thousands of young Indians plunge into entrepreneurship, it is essential that the startup ecosystem throws up role models who create sustainable businesses without sacrificing personal integrity.

And yet, its early mover advantage counted for little in the end. In 2013, Indiaplaza downed its shutters, 14 years after it had initiated ecommerce in India.

In a memoir released this month, titled Failing to Succeed, Vaitheeswaran covers his journey: that of a marketing manager who quit IT giant Wipro to start an ecommerce company at the turn of the millennium and face all the challenges of being a pioneer. The book has lessons in starting up for all, and not just in ecommerce. But its most compelling chapter is the last: “End Game.”

There, he confronts his demons, and the question that haunts him. Why did Indiaplaza fail just when ecommerce started to take off in India with a smartphone boom? The answer is a mix of black swan events, the murky side of venture capital, and his own naivete.

The first black swan event was the financial crisis of 2008 which spooked Indiaplaza’s backers. Funds dried up just when Flipkart, “flush with early funding, paid vendors in advance… [and] started shipping large volumes by selling below cost and with free shipping,” writes Vaitheeswaran.

It left him with a Hobson’s choice: accept venture capital with terms that effectively gave investors control over the company, or shut it down. He chose the former, despite his misgivings.

One of his misgivings was that Indo-US Venture Partners (which later became Kalaari Capital), one of the few VCs active in this space back then, had already invested in Snapdeal before backing Indiaplaza. “This was a potential case of conflict but since it was a fait accompli, I accepted the uncomfortable situation… An investor with stakes in several ecommerce startups has the option of deciding to back one instead of the others and in a sense decide the winner before the race is run.”

Vaitheeswaran goes on to detail his struggles with a dysfunctional board, inexplicable hurdles in raising a follow-up round, and finally calling it quits in December, 2013.

Snapdeal took off in subsequent years, with funding rounds of hundreds of millions of dollars. Its founders sold some of their shares when it was at peak valuation of over US$6 billion. They became angel investors in other startups out of their personal wealth, and were hailed as poster boys of India’s fledgling startup ecosystem.

But the deep discounts that had taken Snapdeal to the pinnacle also proved its undoing. It found the rug pulled from under its feet when Amazon committed US$5 billion to the Indian market last year. The US giant could not only match India’s ecommerce companies on pricing and products, but outdo them in customer experience and logistics, with a string of warehouses around the country.

See: Thriller to tragedy: what ails Snapdeal

Snapdeal’s market share dwindled in a flash last year and forced it into negotiations for a bargain basement sale, while Flipkart managed to hold its own and raised a life-saving US$1.4 billion funding round earlier this year.

Last week, Snapdeal sold off its payments subsidiary FreeCharge for US$60 million – an 85 percent discount on the US$400 million it had paid to acquire it two years earlier. Snapdeal itself, once valued at over US$6 billion, is in the final phase of being sold to its arch rival Flipkart for less than US$1 billion.

The negotiations have dragged on, with the biggest investor, SoftBank, keen on closing it, while the founders and early investors hold out for a better payout. The sale of FreeCharge could either clear the way or give more bargaining time to the founders.

For Vaitheeswaran, who had constantly questioned a business model predicated more on discounts than customer loyalty or localized innovation, it’s a time to say: “I told you so.” And also to bring out in the open the seamy side of the startup ecosystem as a caution for new entrepreneurs. Here’s an excerpt from his book, about a bid to sell his company after failing to raise a series B round:

Talking to the CEOs of other ecommerce companies

I contacted the founders/CEOs of several Indian ecommerce companies to explore if they would like to acquire our assets. A CEO of a leading ecommerce company sounded interested and we had a shocking conversation.

‘Hi Vaithee, we heard about your troubles and we would like to help you.’

‘Thanks, that would be nice,’ I said.

‘How much money do you need?’

‘The total liabilities are around INR 100 million (US$1.5 million). That’s what I need
totally.’

‘What are you offering for this amount?’ the CEO asked.

‘The tech platform, the brand, the customer database, and the
employees,’ I offered.

‘Do we need to pay you or the company?’

I was silent for a long moment. I had a bad feeling about
this conversation.

‘The company. Obviously.’

‘It is not obvious, Vaithee. Do not be naive. We know your investors are not helping you, so why should you care about the company? We can pay you INR 3 million in cash for the customer database.’

I was silent for a long moment. I had a bad feeling about
this conversation.

‘I cannot do this. The customer database is a company asset and you have to pay the company only.’

‘How much are the statutory liabilities? I hope you know these are criminal offences.’

‘Around INR 2.5 million. Yeah, I know.’

‘Okay, here is the final offer. We will give you demand drafts worth INR 2.5 million in favour of the regulatory authorities to settle statutory liabilities plus INR 10 million in cash for you. Just give us a DVD with customer details.’

‘Sorry, I cannot do this unless you pay the company.’

‘Well, think about it. If you change your mind, call me. We can do the deal in three days.’

‘Okay, but I am not going to call you. If you want to deal with the company, call me.’

Both of us have never spoken again on this matter although we occasionally bump into each other at some events. Sometimes I read his interviews and profound thoughts on entrepreneurship and starting up.

If I have to choose between finishing first by cutting corners or ending up last by being straight, I’d prefer the latter any day.

Integrity, above all else

At a startup event, when asked what would be the one thing I would look for in any entrepreneur, I said ‘integrity’.

As thousands of young Indians throw away the security of a job and plunge into entrepreneurship, it is essential that the Indian startup ecosystem throws up inspirational and humble role models who create sustainable businesses with the highest standards of personal integrity.

I have read media reports about founders and entrepreneurs in India cheating co-founders to grab more shares in their startup. There are stories about founders getting convicted for financial crimes and then raising funds for a startup after coming out of jail. Clearly, for some investors, return on investments will trump honesty every single time.

Clearly, for some investors, return on investments will trump honesty every single time.

There are media reports about entrepreneurs selling a part of the business to friends at low valuations without informing the investors.

I have heard about founders blatantly faking financials and doing business with newly formed entities owned by friends and relatives.

Investors must share a big part of the blame for this. As long as the founder matches their pedigree profile, their due diligence process is cursory and the focus is primarily in appointing a reputed audit firm who only verify legal and financial documentation and compliance.

How about trying to find out if the entrepreneur who is being funded is an honest fellow?

Excerpted with permission from Rupa Publications India.

Indian terms ‘lakh’ and ‘crore’ converted to millions for international readers.

Converted from Indian Rupees. Rate: US$1 = 64 Indian Rupees.

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