What's the point of getting big?
Appster grew. Fast. Very fast. Then it failed.
In this interview with Appster CFO Mahesh Gupta you will learn:-
- Why it’s important that your CFO has influence in your decision making - Appster didn't. Their CFO was in India and whilst technically competent and could see the writing on the wall, failed to mentor the business through the troubled waters ahead.
- What reports founders Mark McDonald and Josiah Humphrey received to make sure their company was growing and performing properly
- Why the decrease in Australian Property prices reduced Appster's potential client pool
- The differences between the cash flow you can expect from startup and enterprise clients
- Why you should price in how long it takes for your customers to make decisions whilst being serviced
- Why bloody hard work, 18 hour days and genius marketing lead to Appsters growth.
Announcer: [Music 00:04:05] Welcome to the Financial Mentor with David Boyar.
David Boyar: Joining us today is Mahesh Gupta, who was the CFO and finance director at Appster. Appster, if you haven't heard of it, was a darling of the Aussie, but also the global, startup landscape. In just seven years, the company grew to 400 staff, and the founders told press that even in 2018, they wanted to get to 100 million dollars in revenue.
David Boyar: This seems like a company that was hell bent on going well beyond what normal people, and certainly Mahesh, people like you and I, expect to be a reasonable level of growth. Accounts lodged with the Australian regulators showed the company was doing eight million bucks in revenue in 2016, made a loss of 2.2 million dollars back then. But, being true entrepreneurs, the founders saw past that. Mahesh, thank you very much for taking the time to join us today.
Mahesh Gupta: Thank you.
David Boyar: You're a very experienced CFO. You're actually a big, really experienced CFO in offshoring companies. The Appster model was really designed around having developers in India, if I'm not mistaken.
Mahesh Gupta: Yeah. We are a global company, and strategically we decided to do all the development out of India. And apart from the development, we also done entire support services built out of India. One of the reasons why we wanted to build out in India, a lot of skills, economical skills are available in India.
Mahesh Gupta: And these people can speak English as other countries, like developing countries, US, and Australia, and Europe [inaudible 00:01:53]. And look at that technology growth in India. We are growing almost 10 to 20 percent year on year basis. And India is one of the largest technology support country in the world.
Mahesh Gupta: Anybody can think about the technology, they have to come to India. I don't see any other country is growing in technology domain, especially in supporting technology, developing technology. Especially when it comes to finance, we have set up an entire ability function for Appster from scratch, and we are just not managing day to day accounting, we also managing out of India, whether it is payroll, taxes, and legal negotiation with the customer everything we scale it from India centers. And that's our strategy how to support a growth business because in hiring accountant in Australia and plus hiring accountant in India, it's two different ball game in terms of the costing.
David Boyar: I'm definitely a fan of offshoring at the moment. We use the the Phillipines. You and I were chatting before, I've used India in the past. Your personal story's pretty amazing actually. You used to work for a company, Vertex. You managed over 14,000 staff in your capacity as a CFO. How did you end up at a little Aussie start-up because when you came to Appster, they only had about 80 staff, didn't they?
Mahesh Gupta: Yeah. So when I joined Appster, they are just set up their center in India. And the fragmented staff here and there. And then when we came on the board, we change entire basically corporate structure of Appster, how the company, how the holdings, subsidiary and entire corporate structure set up for Appster, and make sure when the growth happen, we can easily exit each of the business.
Mahesh Gupta: It's not just the accounting we managed, right? So we were having a holding companies in Ireland, we were having a parent company in the US. We did a large [inaudible 00:04:07] of the company in supporting the co-founder how to scale their business, and without any hassle.
Mahesh Gupta: Basically a lot of compliances come into the picture when you grow the business. It's just not a business. Where the contracts happen, how does the pricing work, how lot of other things which connect with the dev centers, whether recently most of the governments start tracking the global companies basically, know how generated ...
Mahesh Gupta: You know, recently you see that case of like a tech [inaudible 00:04:41]. We fairly deal with the ATO and get rid of that mess, effectively.
David Boyar: Of course, and I've seen it done many times when large companies put some pretty important parts of their finance team off shore, and into India. Sounds like these guys had a pretty complex structure, with a head company in the UK?
Mahesh Gupta: Yeah. So I did very innovative things in after to make sure the corporate structure is designed essentially that there is no hassle, any point of time, if the founder wanted to sell or exit, any independent entity. They can do it very easily, without disturbing any other part of the business.
Mahesh Gupta: Like, even if you today, when they after declare bankruptcy in the Australia, US, they can very easily get rid of Australia entity and US entity separately. It doesn't require to have a look at a holding company and then do it. That's the reason, easy for Mark [inaudible 00:05:47] got exit from the Australian business.
Mahesh Gupta: And when we design the corporate structure, the growth and failure both happen successfully.
David Boyar: Right. That's actually very smart of you, because it protects the performing parts of the business. So I actually didn't realize this, is Appster still operating in other countries?
Mahesh Gupta: No. Appster is not operating any of the countries this point of time. They're basically, we've actually set down [inaudible 00:06:14] operation globally.
Mahesh Gupta: And India, Australia, US, and basically physically represented in these three countries, though we were managing our business in the Europe and Singapore and some other part of the world. But primarily, our presence are in these countries.
David Boyar: We'll get to the end of Appster in a moment, everybody likes hearing the big darling that collapsed and crashed. And I'm keen for your thoughts on that. But you joined with 80 staff. How did you build your finance team? What were the key roles that you have? Because it's a lot more than just bookkeepers, when you grow your company like this.
Mahesh Gupta: Yeah. So when I joined Appster, and I was based out of India. And there are a lot of activity going on in Australia. So I transitioned towards activity from Australia to India. I understand [inaudible 00:07:10].
Mahesh Gupta: And one of the, just not a bookkeeping, any growth with this, you have to put a lot of control and reporting in place. Make sure the information through to the business holder such a way that they can take a quick and right decision in the business.
Mahesh Gupta: So when I set up a finance function, I look at how charted by phone with design, what should be the right cost center to implement in the accounting system, where the information to be capture, when the accounting entry talk into accounting system. So when the reporting team generate a report, they can get an accurate and optimum reports and inform to the stakeholder to take the right decision.
Mahesh Gupta: And sorry, go ahead?
David Boyar: No, keep going.
Mahesh Gupta: So and not on just accounting and make sure the tax compliance and other compliance also managed out of India. So I have been working with a lot of international companies which works in Australia and US and Europe, and understand importance of compliances. Because it's growing business, you have to support lot of thing to grow the business, and finance work very closely the business to help them to grow.
Mahesh Gupta: We keep doing lots of analyticals, what kind of customer you need to tap to grow, right? We have to make sure the database of the customer is designed such a way that when anybody in a sales team just pick up and call them, it's a [inaudible 00:08:58] lead.
Mahesh Gupta: So we design a lot of reporting system from the sales and back end side to make sure the sales get the right information to generate the leads.
David Boyar: [Music 00:09:11] One of the criticisms of Appster that I've read about, is that they had the wrong type of customer. Too many start-ups. Start-ups are unreliable, many of them do end up failing. Do you think that the company chased the right customer? I'm so excited to hear that you think the role of finance is to help a business attract customers.
Mahesh Gupta: It's a depend on what segment you are doing a business. I understand when you work with a lot of start-ups, your duration of contract is not a years, years. Right? They generally came for three to six month, and then you have to start a new customer, yeah?
Mahesh Gupta: But however, if I look at that number of entrepreneurs in the world, there are millions and billions of people who want to get into the technology, right? Yeah, it's ... right, right. And I understand when you go to the enterprise customer, you sign the contract, you have done it for a couple of years. And the next time you don't need to generate a sales slip.
Mahesh Gupta: But our fundamental is that, you are focusing only for high tech entrepreneurs, and trying to commoditize this business over a period of time. But we failed to commoditize this business, because we were so specific in terms of quality, design and delivery. And these start-ups does not understand lot of ...
Mahesh Gupta: And we failed to convince the mark- the start-up, that hey, unless you quickly take a decision, it will not be able to survive. So what happened in a business, when I go to any entrepreneurs, they're not responding as quickly they were supposed to be. So taking that time for a delivery is increasing. Which lead to a more cost in our business.
Mahesh Gupta: And we do not say no to the customer, because when I send a design to the customer, and they were supposed to be come back in two days, they take a week. Right? Because software ... so whatever the scope you decide initially when you start developing this software, a lot of change happening. Very frequently.
Mahesh Gupta: And which leads to increase delivery time, increase cost of delivery, and then there is an argument or understanding with the customer whether we going to do free of cost, or we will charge them. If we charge them, these entrepreneurs have a small budget, right? And ultimately, half of time we compromise 50-50, and which lead to increase our cost as well.
Mahesh Gupta: So that's the problem when you deal with the start-ups.
David Boyar: Is it fair to say then that in part one of the main reasons Appster failed is the pricing model, being a fixed fee, wasn't the right fit for the level of service it was offering?
Mahesh Gupta: [crosstalk 00:12:03]
David Boyar: Because if you've got a fixed fee, and you've got all these labor costs growing and growing and growing, whilst you're doing out of scope work, changes, the entrepreneur wants to change this, they want to change that, you end up copping the cost.
Mahesh Gupta: Yeah. So one of the reason of failure is not fixed cost, it's the reason of failure, we did not build up sufficient quote libraries, which automate [inaudible 00:12:27] customers, and can be reutilised effectively, because we have double up hundreds of app, we would have been basically made a standard quote library that repeated to the customer. If you really look at 30 per cent have been able to develop, is almost the same. Everybody needs a google sign up, everybody needs a Facebook sign up, everybody needs an admin panel. A lot of common thing.
Mahesh Gupta: And we failed to implement lot of things, not quote, I just talked about three things, there were a lot of other things, which can be replicated the app. If we would have been done successfully, we would have a number of standard code and deliver quickly and cost effective. And it's not just a fixed price model.
Mahesh Gupta: Because I personally feel, a fixed price model is good, because when are you dealing with the entrepreneurs, they have a limited budget. If you seel them as a T and M, then they're not necessarily come to you, because any start-up, cost is a matter for them. Right?
Mahesh Gupta: So one of the failure is that we did not bring that much efficiency in building our software and development cycle, which supposed to be [inaudible 00:13:52].
David Boyar: Okay. One thing I just want to circle back, when you were talking about building reports, what were the most common reports that decision makers used, that you prepared for them? And what were the most common reports that the co-founders relied on?
Mahesh Gupta: Okay. For the co-founder report in terms of the finance side, they look at which project are making a profit. Which project are not making a profit, at a gross margin level. Or contribution margin level.
Mahesh Gupta: Another report they required, what are the customer generating the repeat business, because for a co-founder, if we get more business from our existing customer, then our sales and marketing cost is reduced, right? So they wanted to see how much of customers giving us a repeat business, which basically are measure in quality and our effectiveness, otherwise we are not getting the repeat business?
David Boyar: It makes a lot of sense, a repeat customer is the cheapest form of customer acquisition, isn't it?
Mahesh Gupta: Yeah. So we make these report bi-weekly, and monthly and show them in the dashboard which are the repeat customer, what is the profit margin going in each of the project, and everything.
David Boyar: One of the ... I was blown away with the growth of Appster, I never really got a real feel for just how fast it was growing. Because so many different things were in the media, and everyone sort of seems to escalate things.
David Boyar: But the growth was just a remarkable success story. Obviously hasn't ended well. How did it grow?
Mahesh Gupta: I think one of the ... I think I give this credit to Mark and Josiah. They're a marketing genius, and these guys work at least 18 hours a day, and they spend last six seven year, whatever, in the business, every moment of their live, these seven years into the business.
Mahesh Gupta: And they bring the same kind of team, including like me, so we be ... any time, any customer, any geography, we are available to talk. It is not that we available to talk 10 to seven. So it's a commitment to the business, hundred per cent, there's nothing beyond that.
David Boyar: I love it. You know, just bloody hard work, hey?
Mahesh Gupta: It's bloody hard work, and put everything to make successful a business. And convince to the people, hey, yes, this is what we are doing nobody doing in the world.
David Boyar: The ... in part of your answer there, you said, that if the customer had a question, we were available. There's a commitment to the customer. How important is customer service in what Appster achieved?
Mahesh Gupta: If you really look at the customer, one of our important DNA is ... that's the reason we reach this stage, right? And if you really look at out of the ten, seven customer give us a eight plus when we ask their feedback in terms of quality, in terms of the delivery, in terms of the commitment.
Mahesh Gupta: and we also help, we are not just a developing a platform for a customer, we are helping to grow their business as well. And we are telling everything how Appster grow, we will help customer to how you can also grow.
David Boyar: I love it, because just everything is getting digitized at the moment, it just seems to make so much sense, to hear it from you, who was there in the trenches with them.
David Boyar: One question about cash. The 2016 accounts, which is really the only real financial information someone like me would rely on to show they made a small loss, 2.2 million bucks. Well depends on who you are, whether 2.2. million dollars is small, off eight mil in revenue. Usually I find when I work with entrepreneurial clients, one thing is always running out, cash.
David Boyar: What tools as the CFO did you use to help manage cash flow?
Mahesh Gupta: So in terms of the saving of cash, when we even exit from the business, which went down in March 2018, we were profitable. Though we did not submit our end of year ... return till now, with your ATO. But we were profitable, and the loss is one of the reason, with initial part of the business, because whatever we earn money in the business we keep investing back to the business. Into sales and marketing, and acquiring of new customer.
Mahesh Gupta: Loss primarily came with a lot of heavy investment being made into the business, right? If we did not make those investment in the business, we would not have been grown, right? But we have reach a certain stage in about six month before, where there was no more investment required, that kind of growth. And we were start earning money.
Mahesh Gupta: But suddenly, our sales went down, which kills us and basically tied down enough business. And when you see a [inaudible 00:19:15] as a loss, right? We took upfront fee from a customer, is about 40 to 60 per cent. Which bring cash into the cycle, and we keep running our business, right?
Mahesh Gupta: So one is the P and L loss, and when you look at the net profit, but if you look at our operating cash cycle, it's a positive, right? Because ...
David Boyar: Yeah. So- no, keep going. What I ... I was so surprised when it went into liquidation, because it is a model that gets a huge amount of cash up front, when the customer signs on. So for it to go into liquidation, the only thing that [inaudible 00:19:51] me, and here's the question for you, I guess- [Music 00:19:53].
David Boyar: Was it growing too fast? Was it reinvesting too fast?
Mahesh Gupta: No, suddenly what happen, our sales lead is dropping. And one of the reason is just sale leads are dropping are cost is higher than in market, right? And what happening nowadays, there are hundreds of app developer in the market. They wanted ... they need a business and wanted to do business quite economical, but they may not have that kind of quality or quality in delivery side.
Mahesh Gupta: So most of the customer is currently, may get their app but I'm not sure how in terms of quality, effectiveness user experience in their apps. So and we would not able to compromise in terms of quality, right? So we start losing customers. And one of the reason, if you look at a lot of entrepreneurs in Australia, when they put the money into the business, they took the loan against their housing.
Mahesh Gupta: And if you really look at the last one or two years, the housing price went down in Melbourne and Australia, which reduce ... which basically, the customer we were targeting, their capability to take out of funds has reduced. When they don't have money, they can't put more money to us. So one of the reasons is as the market in Australia is down because of the financing situation, which directly impact us. Because our customer is not ... they don't have running a business where they can spare cash and give it to us, they have to arrange finance.
Mahesh Gupta: And one of the common thing to arranging your finance, people take out the loan against their properties, which is economical invest, right? And if you look at their price went down by 20 per cent, it means their capabilities to put money into a business is also erased.
David Boyar: Right. Makes a lot of sense, I'd actually never viewed that angle. I'm gonna take that to some people I know in the start-up community and ask them if they're seeing a similar trend.
David Boyar: Mate, if it's okay with you, I want to talk about something that most people think is phenomenally boring. Financial controls. Right? Now, please keep listening, people who are listening to this, our ear listeners, please keep listening, I promise we're gonna try to make this exciting.
David Boyar: I read a story from one of the co-founders, who said that a few years ago, how they took on a very senior person to run the operations in India, and this woman amongst other things was responsible for making payments. Story goes that the woman's driver was seen throwing a suspicious box of receipts into a river. That caused the company to lose three hundred thousand dollars.
David Boyar: Now I read this, and I thought no way. How did this escape financial controls, how is this done out of the system? So my question, is this true, and how did she bypass really good controls to do this?
Mahesh Gupta: Yeah, you know in a world, a lot of kind of people, right? The ethical people, unethical people, right? And maybe when Mark Josiah initially started or wanted to set up a dev center in India, he ... did not get a right resource that time.
Mahesh Gupta: I think ... when Mark hire that lady, it maybe they were 21 or something at that time. And maybe they in a just growing story, they hired somebody just like that without checking a reference, right? And very important in the finance zone, you have to check a reference of the people from various angle, because finance is a very difficult role, require a lot of honesty, integrity, dignity. And finance is your custodian for a business. And I think it was a wrong hire, right? It was a totally wrong hire.
Mahesh Gupta: And I'm happy Mark and Josiah figure out very initial stage otherwise there would have been a big mess in the business. We would have failed that point in time. Because cash is so important at that point in time, start up the business. Yeah.
David Boyar: Thank you for sort of explaining that. I read that, I thought this is just impossible to believe, like how on earth did this happen? But I'm glad that it didn't happen on your watch, because as you say, a good financing person with the integrity that we operate with, it shouldn't happen.
David Boyar: I've got one final question for you, and it's about yourself and what you're doing now, being the CFO of a company gone into liquidation is always an interesting time. I've done turnaround work myself. I was really interested that the company went into liquidation straight away, which is we're shutting down operations, that's it, done and dusted, rather than explored other options or potentially trading out in a different option, maybe even through voluntary administration.
David Boyar: How come the company just came to a sudden end, do you think it could have gone on?
Mahesh Gupta: Actually ... very tricky question. We were trying to basically explore lot of alternate before we took this decision. It is just not an overnight decision, me, Mark and Josiah was in discussion for last at least one and half month, how to grow business with the reduced cost.
Mahesh Gupta: And we were thinking based upon the sales team and lot of marketing lead what we generate, we will able to sustain it. But the point came, because there is a minimum cost in the business, right? So basically it is not just a overnight decision, we were think through very in detail. But if we got to the market and look at a buyer, somebody, it took at least six months to year. Nobody decided to buy a business overnight, right?
Mahesh Gupta: Somebody come and do due diligence, and we were not having that much of cash. And we never wanted to delay salary for employees. And it's a crime in Australia if I delay salary for our people. And that's the reason we decided to file bankruptcy, otherwise if we delayed the salary of employee for one or two month, for a couple of days, then we can circle back the business and we could done much better.
Mahesh Gupta: And that's the reason I'm missing, if we would have some commitment from some of the investor, then for these situation, I can draw the money and run business. But and Mark and Josiah decided not to take funding in the business from day one.
David Boyar: Okay. Wow. So the guys are really true to their own business values, and would rather see it ... they'd rather see it end than take an investment and give up a share of the company?
Mahesh Gupta: Yep. That's right.
David Boyar: Wow. Not so sure I would have done that, I must be honest (laughs).
Mahesh Gupta: (Laughs) and currently, I think US and Australia bankruptcy liquidation is going very well. And India liquidation takes years, because India is not in terms of liquidation, it's not an easy process. It take at least two year for me to do the complete liquidation. Because in Australia, if you say moment you declare liquidation, a liquidator come to your office and take over the charge. Which is not the case of India.
Mahesh Gupta: In India when you do a voluntary liquidation, you have to discharge your liabilities and pay all the severance and everything to the employees, which is not ... and we don't have cash available to make the payment.
David Boyar: Yeah, wow. Wow, that's interesting.
Mahesh Gupta: So yeah, in India, liquidation was totally different, so I am dealing with a lot of regulator bodies to convince them, hey, we are not run out of the business, there is a situation and it takes at least two year, me to get down the pays and get a final paper done.
Mahesh Gupta: And that ... and personally, I think I started my own ventures, and trying to see if I can help them to go further.
David Boyar: Mahesh, I want to end by applauding you in a way, if I can. You've mentioned during our brief interview about how important integrity is for people in finance and people in accounting. On your LinkedIn, you take credit for part of Appster's growth. You say, I was part of Appster's growth story, I supported the business growth, and then you own what happened. Unfortunately, I was part of the Appster bankruptcy as well. That's what a great finance person does.
Mahesh Gupta: Yes (laughs).
David Boyar: We tell the whole story, we own up to what we do. You are an exemplary CFO for doing that, in my opinion.
Mahesh Gupta: I own the responsibility, because if I'm not able to convince something, my failure, not somebody else failure.
David Boyar: That is a great way to end, Mahesh. Do you have anything else that you'd like to mention to our listeners?
Mahesh Gupta: No, thank you. Thanks David for your time.
David Boyar: Not a problem, thank you very much.
Mahesh Gupta: Thank you, bye bye. Talk to you later [Music 00:29:51].
Announcer: The Financial Mentor with David Boyar.