Impact of scandals on the real and notional value of brands

Controversies surrounding fintech startup BharatPe and its handling of the crisis is one for the books. Perhaps filed under the chapter 'What not to do'.

By Tasmayee Laha Roy

Published: Apr 18, 2022 04:38:11 PM IST

For companies young and old, scandals can impact the brand in many ways, chipping away at both notional and real value in the short and long run. Image: Madhu Kapparath

There’s no such thing as bad publicity, they say. But is that always true? Not at least in the case of Indian fintech company BharatPe. A little over a week ago, a LinkedIn post by a person named Karan Sarki, who claims to be an employee of the company, created quite a buzz. In his post, Sarki alleged that he was not paid his March salary and his reimbursements were due since December 2021.

What followed was an avalanche of screenshots, tweets, Facebook posts, likes, comments and all that social media has to offer to viral content. Among the thousands of reactions and memes that came in for his post, there were also comments by not just Ashneer Grover himself but also the senior management of the company. Even with apologies issued later, Sarki’s post did what it did—create more negativity around the company.

Even after exiting the organisation, Grover continues to 'haunt' BharatPe, said experts. They are also citing this to be a perfect example of poor crisis management.

Crisis mode on

“Startups have a notional value and a real value. Scandals and scams often impact the notional value of startups which may later lead to a drop in real value,” says Pankaj Raina, Managing Director, Zephyr Peacock India.

According to him, the moment a scandal is unearthed, the company should initiate actions to stabilise the business to preserve value. The second most important action for a company in a situation like that of BharatPe is to put forward a face that will be responsible for running the show thereafter.

“Understanding the dynamics of other employees to the one in question is as important to measure impact. If these are not done in time, not just investors but lenders also become angsty. Everybody involved directly or otherwise needs assurances about how the company will preserve what is built till date and the future course of action, following any negative incident,” he says.

Unfortunately for BharatPe, Grover’s popularity over time, especially after his appearance on the television reality show Shark Tank India put the company in a position where the smallest negative also didn’t go unnoticed. This, backed by all the loose comments made by senior management executives on social media, seemed to have ushered in strong negativity for the brand.

Sources close to the development say the company is now getting a crisis management executive on board to handle the situation. But is it too late already? Only the next fundraising round can answer the question.

Impact and measures

“Startups are driven by valuation. For them, valuation comes first and then comes value creation. Investors enter a business at different times at different valuations and an incident like this can impact the future valuation of a brand because investors will very carefully scrutinise the incident, and it may very well impact their decision making,” says another expert on conditions of anonymity.

As per reports, BharatPe raised $370 million in its Series E round led by Tiger Global in August 2021. The round valued the fintech startup at $2.85 billion.

Sources in the company say BharatPe has $400 million in the bank, with their monthly burn being $4 million. And they have no immediate plans of raising capital. The company’s plan for an IPO in the next 18-24 months is also on track.

In their defence, their last quarter business shows no dip in numbers. A statement issued by the company last week said BharatPe registered the strongest quarter in its history.

“We have registered 4x growth in our overall revenue over the same period last year. On a sequential-quarter basis, the growth has been 30 percent, despite the third wave of Covid-19. Comparing month-on-month, all our metrics have grown at the fastest pace, i.e., merchant total payments value, i.e., TPV (17 percent), consumer TPV (39 percent), loans facilitated (31 percent), and revenue (21 percent) in March 2022 over Feb 2022,” read an excerpt of the statement.

There was also an interesting part of the statement that said, “Going forward, we are tracking well to break even on our merchant business and further strengthen our consumer business. We request the media to take official comments from the company and not from former employees who no longer have business information.”

Cascading effect on hiring

Whether the former employees have business information or not, their exit may have caused roadblocks in senior management hirings. Jyoti Bowen Nath, Managing Partner of leadership advisory firm Claricent Partners says no matter how large an organisation is, scams and scandals also make senior executive candidates bail out on offers made to them by the company.

“Poor profit and loss statements are lesser problems for C-suite candidates compared to scandals. Once the brand value gets eroded, it is very difficult to reinforce it, and it often has a long term and cascading impact on hiring,” says Nath. “At junior level, these incidents do not matter at all because people always need jobs, but for management-level employees, past scandals are a huge deterrent.”

For companies young and old, scandals can impact the brand in many ways, chipping away at both notional and real value in the short and long run.