Empty Nest: Why the funding birds abandoned NestAway

With absence of backers, and a diminishing runway, NestAway just had one option: to look for buyers. 

March 2018, Bengaluru. Four young birds of the same feather were busy building their dream nest. Started in 2015 by Amarendra Sahu, Deepak Dhar, Jitendra Jagadev and Smruti Parida, NestAway had a flying start. From an operating revenue of Rs5.76 crore in fiscal year 2016, the home rental startup leapfrogged to Rs36.51 crore in FY17. Observers and industry analysts called it beginner’s luck. And they were not too off the mark. The next year, Tiger Global-backed startup had a sedate growth, with a top line of Rs46.98 crore in FY18.
 

With a sizeable presence across Bengaluru, Delhi NCR, Hyderabad, Mumbai and Pune—it catered to over 35,000 tenants and 16,000 owners—NestAway’s math was making sense.
 
No wonder, marquee investors flocked in droves. In March 2018, NestAway raised $51 million from Goldman Sachs and UC-RNT Fund, a joint venture between Ratan Tata’s RNT Associates and the University of California. The series D round of funding also saw participation from existing backers such as IDG India and Tiger Global. The shared rental platform now planned to spread its wings and enter new categories such as community and student housing. The nest was getting crowded, and the founders were fast mastering the bricks and mortar of the business, which had a massive upside.  


 
Though NestAway’s growth was brisk, the writing was on the wall. Ballooning losses were hard to be missed: from Rs37.2 crore in FY16, they more than doubled to Rs97.73 crore the next fiscal, and then jumped to Rs156.81 crore in FY18. A year later, the bottom line was deep in red, to the tune of Rs219.68 crore. 

 “All of us were busy chasing growth,” reckons a former senior NestAway executive on the condition of anonymity, who has been with the company since 2015 and exited last year. The piling up losses should have made the cofounders and stakeholders press the panic button. “It didn’t happen. We wanted to grow, and cutting expenses was not the right strategy,” he says, adding that the startup hit a valuation of $220 million in 2019. “Everybody had losses. We were not exceptional,” he adds.

Also read: 2022 was the year of the funding winter for startups. What will 2023 bring?
 
But there was something not quite right about NestAway. One of the backers, on the condition of anonymity, points out that 2019 was the year when the fault lines in NestAway got exposed. In July, Deepak Dhar--one of the four cofounders who had a 10% stake--quit. Three months later, Smruti Parida, another cofounder with a similar stake, exited. If investors sell their stake in secondary transactions, points out the VC, then there is something to think about. “But when cofounders exit in such a short span of time, it’s a sign of something terrible,” he adds. Early in 2019, another cofounder--Jitendra Jagadev—stepped out of NestAway and started taking care of its subsidiary HelloWorld.
 
While the official reasons for cofounder exits are always sugar-coated, the unofficial reasons are the familiar ones. In NestAway’s case, while there was no cofounders’ conflict and the exits were amicable, the trigger was absence of consensus regarding the role and way senior management was hired and allowed to function. An obsession to get ‘experienced’ hands from ‘big’ names led to a bloated employee benefit cost sheet, which turned out to be the biggest item on the expense book for years.

 In FY18, the employee cost stood at Rs93.49 crore, a 2.1X leap from the previous fiscal. “Many of the senior management were drawing salaries of over a crore,” says another former executive at NestAway. “Even during the pandemic, most of them didn’t have a salary cut,” he contends. While the employee cost dipped in FY19, the numbers again increased in FY21 and FY22. (see box) “Don’t you find this weird,” he asks. In fact in FY22, the revenue from operations (Rs 57.87 crore) was lower than employee cost of Rs69.46 crore!
 
There was another problem for NestAway, and this had nothing to do with the way company was run. The pandemic dealt a cruel blow, and it aggravated the woes. Revenue dipped, operations were shrunk to tame the losses, and it was hard to find new backers. The existing backers declined to pump in more money. A VC with a home-grown fund explains why having big, marquee foreign names on the board means nothing during a crisis. “They never invest a substantial amount,” says the VC requesting not to be named. “If the bet pays off, they are happy, but if the tide turns, they prefer to write-off,” he says.
 

With absence of backers, and a diminishing runway, NestAway just had one option: to look for buyers. The process started last August. And there were three in the fray. “Gruhas and Anarock were the first two to come up with offers,” says one of the VCs of NestAway. “Aurum Proptech was the third suitor,” he adds. While the VCs were keen to strike a deal with Aurum given its track record--it had bought HelloWorld from NestAway for Rs 42 crore in 2022--the management was inclined to go with the other suitors. “The deadlock remained for over nine months,” says the VC. Finally early June, Aurum bought NestAway for Rs 90 crore. A startup which raised around $110 million and was valued at $220 million finally gets sold at a 95 percent haircut.

Also watch: From the sunshine of early-stage funding to damp unicorn runs, numbers unfurl the story of funding winter

 Industry analysts and observers are not surprised. “They had a brilliant start but somewhere down the line they lost their focus,” reckons Anil Joshi, founder of Unicorn India Ventures. Much like any other real estate segment, home rental and co-living are an operationally heavy, extensive and draining businesses. While being too slow can take you out of equation, being too fast can kill you. A startup which was present in just a handful of cities till February 2019 spreads itself hyper thin over the next twelve months. In one of the media interviews, cofounder Sahu reportedly said that NestAway nursed an ambition to be “India’s answer to Airbnb." “One has to be realistically ambitious,” says Joshi, adding that the team at NestAway slipped on execution. “It’s a cruel business where you have to keep optimising cost,” he reckons. The business model, he underlines, made sense. “The segment had massive headroom for growth."


 
Ashish Deora, founder of Aurum Proptech, too reckons that NestAway was well placed in a booming segment, which just had to survive the pandemic. “The startup and the business both are promising,” says Deora, the new owner of NestAway. Shared rental and co-living, he reckons, are the future. “All one needs is to run the business in a sustainable manner,” he says. “We will turnaround NestAway,” he claims. Well, the task won’t be easy, and till that happen, the empty nest of NestAway will keep haunting all founders who aspire to fly high without getting the basics right.

(Forbes India will update the story once it gets replies from the cofounders)