This has been quite possibly the most hyped event (or fiasco?) in Bangladesh’s Startup landscape. People are so conflicted and emotional when it comes to this, that I am almost a bit hesitant to term it ‘the Evaly scandal’. Still Like we do with any other topic here, let’s talk about it from a disenchanted yet technical perspective.

Was I diplomatic enough? Phew! Let’s start!

What does a startup do? It tries to build a business; not only that, it tries to grow the said business at a rapid pace. As a matter of fact, a startup targets building business hundreds or thousands of times faster than a regular business. When it is big enough, and it has the majority market share, it is supposed to earn supernormal profits. Think Uber, Amazon, or Netflix. Never before in the history of mankind has a business grown from nothing to hundreds of billion-dollar businesses within a decade. But when you are trying to grow that fast, you cannot really make profits, in fact, you incur losses trying to attract customers and spending on technology, operations streamlining new product designing, and research. Then how can you do it? The answer is venture capitalists or VCs. What they do is that they give you enough cash in return for shares of your company. They believe in the same business philosophy of incurring losses now to make massive profits later. They know the risk they are taking, and they know if it clicks, they will have an outsized return on their investments. So they write big cheques so you can keep making losses while growing fast.

Now let’s discuss a story. Story of Charles Ponzi. He was an Italian-American man known in the early 1920s in North America for his money-making scheme. He promised clients a 50% profit within 45 days or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the U.S. as a form of arbitrage (the how is not necessary for the sake of the story). Now imagine if a bank promises you this kind of return. It will be around a 350% interest rate a year! Who in their right mind would keep money in such a bank right, obviously it’s a scam. But people can be gullible sometimes and Ponzi was convincing. So people believed in him and gave him money. What he would do was pay the first round investors the money from the second round investors. And this went on and on. Until there were no more investors and the last round of people lost everything. Since then this kind of scheme is known as the ‘Ponzi scheme’. In these schemes, a fraudulent person/company offers something too good to be true. But actually, they just rob Peter to pay Paul here. And they keep skimming money in the meantime. Ultimately everything falls apart when no more people fall for the scheme.

Bernie Madoff was famous for running a $64B Ponzi scheme. What he did was similar. He promised investors a high return. This return was supposed to be generated from stock investments. But his promise was higher than what could be generated from the stock markets. So what he did was pay investors dividends from other investors’ money. Eventually, it all came crumbling down and he went to jail.

So why are we bringing these to talk about Evaly? Let’s see how Evaly operated. They would offer steep discounts on products. Even they offered a 50% discount on high-value items like motorcycles! But the sellers of those obviously were not selling to the Evaly customers for such a steep discount. Basically, Evaly was supposed to pay for the difference between the seller’s sell price and the buyer’s buy price. And this difference would often cross 100,000 Tk. Evaly started with a capital of only 100,000 Tk. How do they manage to give hundreds of crore taka in discounts?

They just took it from other customers. Basically, when you would order something and pay them, they would use some of that money to pay for the discount for a previous customer’s purchase. And then the rest run their operations, pay rent, salaries, buy cars, etc. So it worked fine when they had orders coming. But it also meant, that once the orders stopped coming, they won’t be able to pay for hundreds of thousands of orders and will have to go bankrupt.

This is how Evaly differed from Bkash, Pathao, or Daraz. Hypothetically if these companies stop getting any orders from today, they can still fulfill all the current orders and pay their vendors in full. Because their discounts are paid for by investors. But in the case of Evaly, one customer’s discount was paid for by other customers.

So this is why eventually Evaly had to stop. Will they be able to honor the promises they made? Unlikely. Is what they did a Ponzi scheme? There is strong evidence in favor.

We are yet to find out how the govt solve this issue.

Till then…