#59- Lido shuts down

A personal take

Until a few days ago, Lido Learning was a company I used to research and benchmark for our diligence of other startups in this space. Lido was on a fantastic growth trajectory. It had a $20mn run rate, on its way to $100mn. It raised $10mn to expand globally, and also added 1000 members to its team. And two days ago, we found that it is shutting down.

Investors in high risk, growth chasing startups understand that most businesses fail before the end of the first year. More than 9 out of 10 startups fail. 3 out of 4 venture backed companies never return cash back to investors. And 3 out of 10 investments go down to zero.

This is true for companies that try to sell a product nobody wants, can not validate their ideas quickly, run out of cash before monetization, or try to grow too quickly.

But Lido was not really anyone of them. Lido was in a space where parents want quality education for their kids. It was at a $20 mn run rate. It was finding customers internationally. More than a thousand people wanted to work for the company. A bunch of investors wanted to invest in the company. If I were a founder, this was the place I’d want to run.

Suddenly, it was not anyone’s darling? We’ve read on social media that the company had not paid salaries for some time. Operations were not scaled up appropriately. Some have even questioned how was it possible to spend $10mn within a span of 5 months.

Chasing growth

Like any other company (startup or established) competing to land grab, Lido expanded quickly. It grew quickly, raised quickly, and expanded quickly. There is nothing wrong in doing this - markets chase momentum. If you wait a long time to establish yourself, there may be someone else who will crown themselves the King or Queen.

The issue here may be expanding internationally too quickly. Indian and foreign markets are different - social construct, purchasing habits, ticket sizes, sales cycles, costs of setting up. The main difference being the cost of acquiring one international customer which is higher than Indian customers. You could run of out of cash before you reaped the benefits of repeat purchases, and word of mouth. This could have been one of the key issues hurting Lido.

I believe that India is a huge market, and understanding this region is something every Indian has done since the day they were born. This is our advantage, and we need to solidify our value proposition in this region before we set foot into another territory. However, founders being ambitious is not something I can and should hold against them.

Founder integrity

Some have even questioned the integrity and intent of founders. “Where did the $10 mn go?” is one of the most asked questions. From what I understand, many early stage funding rounds are in traches where part of the funds (usually more than half the amount committed) are wired to the company on hitting predetermined milestones. If the milestones are not met, then you might as well forget the balance amount.

While I don’t know whether the previous funding round was in tranches, I definitely would not venture to the path of accusing the founding team of misappropriation of the said funds. It will behoove readers to understand that for an early stage founder, almost all of their wealth is tied up in the equity of their company. It seems unlikely that founders will make rash decisions and eventually starve their company out of cash. Doing so will not only affect the value of their equity, but also their credibility. No founder wants that.

Rapid hiring

In its quest to grow rapidly, the company also hired rapidly. It is reported that the company added more than 1000 people to its team in the last year. Chasing growth on account of early (& handsome) validation, and adequate capitalization is again not a wrong thing. It is natural to increasing hiring once your sights are set on a goal.

I also read reports of the company not having adequate funds to meet the payroll. Most people who are a part of the ecosystem know that almost every startup struggles. No less than 3 of our own portfolio companies struggled to meet payroll for months during Covid, and had to delay, or reduce salaries. It is not a pretty sight, but not unheard of.

However, one area where we believe the founders dropped the ball is abruptly firing the entire team. Not being able to keep a company going and letting go of your team because of financial constraints is okay. But not communicating the same in advance, lack notice period, lack of empathy is absolutely unforgiveable.

I keep telling founders that we can not hire in anticipation of growth without testing our hypothesis, and then drop the ball at a later date. We live in a country where one salaried person usually supports a family of 4. Letting go of 1000+ team members without sufficient notice or salary in lieu of, meant harming the lives of over 4000 people. That too in the middle of a pandemic. I do not support founders who are comfortable doing this, because this is not something I will like done to myself.

While I am sure many tutors, and support executives will find employment (Read: Startups open arms to hire Lido employees out seeking work) with other platforms, such large scale layoffs may result in over supply leading to lower pay.

But what about stranded students?

We don’t know what will happen to the 60,000+ students that used to learn on Lido. As things stand, they may not have the guidance and support that the platform and its tutors provided them - that too while we are in the middle of exam season.

I feel that this is a short sighted behavior of Lido to play with the lives and education of the very students it wanted to serve. Kids develop an affinity to certain platforms, and people and associate learnings with the environment. There can be alternatives, but trust building takes time and effort of both parties. Saving grace would have meant a public statement to stakeholders and remedies to alleviate some of the pain. I’m sure the founders are also in pain, but as the leaders of an organization, it was and remains their duty to look after their stakeholders.

Memories of those unaffected will be fickle - we will ho and hum and forget about it in a few days when there is another hot controversy to discuss. But when the dust settles, those affected will remember this. I am sure Sahil or others in the founding team did not want their legacy to be such, but voluntarily or involuntarily they have failed to gracefully wind down.

The bigger question remains, should education startups be allowed to play with the lives of the people they intend to educate, and the people whose services they avail to educate their users? Business is people + purpose + profits. We are yet to see profits, and we do not seem to care about people anymore, I am very sure that this is not the purpose of a business.