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A would-be Uber rival's US$250m taxi ride to nowhere
[LONDON] When bills for a corporate credit card used by Karhoo Inc chief executive officer Daniel Ishag arrived, employees in the London office of the car-hailing startup often spotted unusual purchases.
There were designer shoes and clothing, along with veterinarian's bills for a pet dog. The employees flagged the costs as potentially non-business related, but signs of lavishness continued - first-class flights, a blowout in Las Vegas, Cuban cigars.
Mr Ishag's spending, described by several employees and those familiar with Karhoo's finances, came to an abrupt end this week when the company shut down after running out of money. As the extent of the startup's financial problems became known in recent weeks, Mr Ishag stopped coming to the office and two other executives embarked on a futile attempt to keep the firm afloat, said the people, who asked not to be identified for fear of damaging career prospects. About 200 people lost their jobs.
Mr Ishag did not respond to phone calls, e-mail or LinkedIn messages seeking comment. Some of the money was reimbursed, according to a person familiar with the costs. Employees said they didn't know where Mr Ishag was currently. In an e-mail to employees this week, he apologised for the company's collapse.
"I deeply regret the impact and inconvenience recent events have caused you all," Mr Ishag said in the e-mail. "I feel responsible, not only to you but also to your dependents as well, and wanted to extend my apologies to you all. I truly wish things had turned out very differently." Even by the standards of tech startups that fail more often than not, Karhoo's demise is extraordinary. Before the company's price-comparison app for hailing a taxi was released, Karhoo grabbed headlines last year when it reportedly raised US$250 million and said it had plans to bring in more than US$1 billion. In fact, it never raised that much. According to internal financial documents, it had raised US$39 million as of September and was bleeding money as it attempted to take on Uber Technologies Inc. In its two-year life, Karhoo generated about US$1 million in net revenue, according to the records shared with Bloomberg.
Karhoo employees said they were largely unaware of its dire position until a recent Friday, when managers told them the company didn't have enough funds to make payroll. There were no severance packages and people weren't paid for the previous month's work. People were furious. As the announcement was made, Mr Ishag had been in Singapore in a last-ditch effort to raise more money, two former employees said.
Many employees were left wondering how the company could have blown through what they thought was US$250 million in the bank. Some of them joined Karhoo because they were told in interviews that the company had raised that much money, making it more stable than a typical startup. After the figure appeared in UK news reports, company executives also cited it in meetings with potential business partners, according to people who attended.
Some workers had been confident in the company's trajectory, after its app was downloaded nearly 300,000 times since it was introduced in May.
The company spent heavily to expand globally, several employees said. Long before the app was launched, Mr Ishag opened offices in London, Singapore and Tel Aviv and built a marketing staff of more than two dozen. The company rented apartments in New York, including one at a cost of US$12,000 per month, said a person with direct knowledge of the cost. The company also had a 10-year lease on an office in New York.
Mr Ishag touted Karhoo as an upstart competitor to Uber. Its app aggregated cars available from non-Uber taxi and car services, allowing customers to pick from them. But the launch, originally scheduled for January 2016, was pushed back to May.
As Karhoo introduced its service in London and several other UK cities, Mr Ishag was attempting to raise more money. One person involved in the process said Mr Ishag was at one point seeking a US$400 million valuation. To entice investors, he had to show that customers were using the service in droves to hire taxis, several former employees said.
The company began an aggressive promotional campaign in which it gave away codes for free rides, according to former employees. But the service had a bug that didn't properly process the codes, meaning customers could use them over and over again. Some people on social media said they had taken more than 100 free rides.
The company had to pay drivers or taxi companies even though Karhoo didn't receive any money from customers. In October, about 70 per cent of its bookings were with promo codes, according to sales documents seen by Bloomberg.
The app's payment processing system also didn't have many fraud protections, such as verifying a user's address or requiring an e-mail address to set up an account, several people said. At one point, more than 90 per cent of passengers' credit-card payments were being rejected as a result of the problems, three people said.
Customer service was such an issue that Karhoo hired an outside contractor to handle it. The company, ModSquad Inc, is owed nearly US$500,000, according to a breach-of-contract suit filed against Karhoo in New York. One employee said Karhoo cancelled the contract after it realised the cost of ModSquad's service equated to about US$3 per ride each customer was taking - more than it was taking in total after paying drivers. Several taxi companies that are owed money have been calling former Karhoo employees seeking payment, one person said.
Karhoo and ModSquad are scheduled to appear on Dec 8 in the US District Court in New York. When contacted, Erik Anderson, the lawyer representing ModSquad, said he couldn't comment about ongoing litigation.
Employees described Mr Ishag as persuasive and said he often talked about "creating a reality" for the company. He also gave himself perks like smoking in the office, flying first class and staying in top hotels, while staff members flew in economy and slept at budget inns.
When his dog, a pug, required a medical procedure, about US$6,000 was charged for a veterinarian, two people familiar with his expenses said. In Las Vegas for a technology conference, he threw a party with drinks, exotic dancers and party favours that included Cuban cigars with Karhoo's logo, two people said.
The company approached one of the Las Vegas party attendees later to see if he wanted to invest. Having seen what was spent at the party, the person demurred, according to a person involved in the fundraising attempt.
Mr Ishag's career started at age 17 when he left his London school and went to India to start his first business. In 2000, he was one of three founders of an online advertising group called Espotting, which used a network of search engines to deliver targeted traffic to advertisers. Mr Ishag's next move was to become CEO of waste-management company Bluewater Bio Ltd, which went public in 2007 and then got taken private again. He spent eight years there before departing.
Mr Ishag said in a July interview with the online publication Startup that he got the idea for a comparison app for ground transport while in California and then decided to develop a prototype in India before raising money for Karhoo from investors. A cousin, David Ishag, joined the company's board as chairman. David Ishag didn't respond to a LinkedIn message seeking comment.
The company has dozens of backers, including Eric Daniels, the former CEO of Lloyds Banking Group Plc, who said his investment was "modest." Other reported backers include Nick Gatfield, former chairman and CEO of Sony Music Entertainment; Jonathan Feuer of the private equity firm CVC Capital Partners; and David Kowitz, co-founder of Indus Capital Partners. Mr Feuer declined to comment. Mr Gatfield and Mr Kowitz couldn't be reached.
The company closed down owing US$30 million to creditors, employees, property managers, advertising agencies and other contractors, according to one person who has seen the figures.
Mr Ishag wasn't seen around the company's offices as employees boxed up their belongings and left. In the e-mail, he thanked them for working without pay.
In the interview with Startup, Mr Ishag discussed the challenges of building a tech venture.
"If someone wants to do something special or difficult, that person has really got to focus all their efforts," he said. "It takes a toll; it takes a toll on the people around you. It takes a toll on your partner if you've got one, or on your wife. That's why I'm saying, as an entrepreneur, it is a way of life because it does affect everything you do."