How health-tech startup PhableCare scammed everyone

In April, after months of exasperation, around 20 former employees of health-tech startup PhableCare filed a plea before the deputy labour commissioner, Bengaluru, about unpaid salaries, other dues and exit documents.

In response, the company wrote a letter saying it had decided to suspend its business with effect from 31 December 2022, citing “unforeseen situations, pandemic, depletion in the revenue and cash flow in the company and coupled with recession in fundraise for startups since March 2022 in India”. The Morning Context has seen copies of both the petition and PhableCare’s letter.

The company’s response came as a shock to the petitioners. According to two of them, several employees were on the payroll, going to the office and carrying on with their duties in the months following December, when the company claims it suspended operations.

PhableCare was also hiring during that period, say the two former employees, on condition of anonymity.

Curiously enough, in January, the company’s LinkedIn page even featured a post about a new office in Bengaluru. The same month, it also sent out a tweet looking for interns.

Things have unravelled fast for the Bengaluru-based startup since, bringing the curtain down on its fate. Its app is no longer functional, the founders’ email addresses are inactive and many former employees have been complaining about unpaid salaries. Going by an Inc42 report, it began laying off employees last year itself. From over 800 in August last year, the size of its workforce fell to 200 in February, says the report.

A little about the company. Incorporated in 2017, PhableCare offered to track the health of patients suffering from chronic diseases through apps like Fitbit and Google Fit. It also arranged online consultations with doctors, facilitated lab tests and delivered medicines as well as medical devices. In the 2021-22 fiscal, it clocked Rs 21 crore in revenue, as against Rs 2 crore the previous year. Its losses, however, rose from Rs 30 crore to Rs 154 crore.

In April last year, the company raised nearly $25 million (about Rs 187 crore at the time) in a Series B funding round, which was led by Kalaari Capital and included Aflac Ventures, Digital Horizon and Stride Ventures. “Our focus over the next two years would be to take the technology to over 30 million Indian households and over 1 lakh super specialist doctors in India and capture 25% of the market,” co-founder Sumit Sinha had said at the time.

Fast-forward to today. In the letter to the deputy labour commissioner, PhableCare said it was looking for third-party investors to buy its business so that the company could clear the outstanding dues of its employees.

So, how did a six-year-old company that raised about $25 million just last year come apart in a matter of months?

The Inc42 report mentioned sources who put the company’s troubles (delayed salaries and layoffs) down to a high cash burn and its inability to raise funds amid a funding crunch. But there is more to this than meets the eye.

Part of the problem seems to lie in the way the company was being run. Our conversations with seven former employees (including the two cited above) paint a grim picture, one where the day-to-day operations seemed to be riddled with cracks. All the seven former employees requested anonymity. Six of them tell of fraudulent practices, such as inflating sales figures and fudging user numbers. Five of them say they witnessed some of these goings-on first- hand but cannot access evidence since they are no longer in the system.

“It was very clear that they were running the organization to show that they have grown so much and they are going to do the next big thing,” says the first of the two former employees cited in the beginning.

Questions sent to both the founders on Saturday didn’t elicit a response.

By all accounts, at the heart of the PhableCare crisis lies an ambition to grow too fast and at all costs. A theme that has now become all too prevalent, with startups like GoMechanic,
BharatPe and Byju’s, to name a few. Let’s dive in.

A numbers game
PhableCare started out mainly as a platform connecting patients with doctors and helping the former manage chronic diseases. “This process is hard to monetize, so it got into e- commerce,” says a second former employee cited at the top. Which basically means that the company also delivered medicines and some medical devices.

There was obvious pressure from investors to grow revenue, says the second former employee. “In the process to increase the top line, a lot of shoddy practices happened,” says this person.

A third and a fourth former employee give an account of one such practice. To meet sales targets, they say, the company had an arrangement where some of the drug retailers would transfer money to its account and it would record sales transactions only on paper, with no actual goods changing hands. The numbers would then be shown as revenue, and the company would later send the money back to the retailers.

“They used to do these transactions with four-five vendors where they would get Rs 1-2 crore from them and they would transfer the money back,” says the fourth former employee.

There was another grey area. Although PhableCare was primarily a B2C business, selling medicines and medical devices to users on its platform, most of its revenue was coming from B2B customers (retailers), says the second former employee. “On the one side, you are buying from a chemist and, on the other, you are selling to customers. If you are buying it at a 13% commission and you are selling it at a 40% discount, the merchant is smart enough to come and buy from the platform,” says this person.

“The company would manipulate the books to show [B2B] bulk orders as [B2C] individual orders. This was common knowledge,” says the third former employee.

Apart from that, this person says the company would misreport numbers by engaging in “shady” deals. “For instance, a third-party company would bring the leads for people who wanted lab tests done and would fulfill the service, but the numbers would be shown on PhableCare’s books,” says this person.

The startup also appeared keen to gloss over facts in order to give the impression that it was growing organically. “We used to acquire users through performance marketing [digital ads]. The founder would come and ask if there was a way to show that the users who came from paid channels were actually acquired through doctors,” says the third former employee.

The first former employee also insists that the company was indeed misreporting user numbers. “They were running a few bots that were creating fake users in their database,” says this person. “During some of the marketing activities, they used to say they have 10 million-plus users. At the back end, there are entries of 10 million users, but a lot of these users don’t exist.”

The management, however, kept “saying this could be because of users entering wrong data. There was a software bot running that was not developed by an internal team member. Which meant that they used some external service provider to do this,” says the person quoted right above.

Besides, the numbers being presented to investors were not the same as what the employees were seeing, according to the second and a fifth former employee. “At investor meetings, there were multiple times when we were told not to discuss a few numbers,” says the fifth former employee. “If there were follow-up questions on this, we were told not to get into the details.”The number of active doctors on the platform, for instance, was 150, while the figure being projected was 10,000, according to the second former employee.

Misleading numbers apart, did the company have a concrete plan?

The business itself was not designed to perform well, says the first former employee. “The company was giving 40% discounts on medicines and offering cashbacks for every activity on the app. For example, every month, we were adding Rs 20 crore to people’s wallets just for referring the app to their friends,” says this person.

Even as all of this was playing out, the funding was getting harder to come by. At the receiving end of the uncertainty were the company’s employees.

Left in the lurch
Things were looking bleak on the investor front. According to the first former employee, Manipal Hospitals, a key investor, had backed out. We could not independently verify this information.

The chaos started in July last year when the company laid off around 150 people, says a sixth former employee. In August, pay cuts were also enforced for a sizeable part of the leadership team, notes the fifth former employee.

Also, salaries were delayed from August onwards,says the first former employee. The reason given for the delay was that the company’s accounts were frozen because of an audit being carried out by potential investors, according to the second and the fifth former employees. We could not verify if this was the case.

“PhableCare kept saying that funding was coming in, but that never happened,” says the first former employee. However, according to the second and the fifth former employees, the company raised a bridge round last year involving angel investors.

The layoffs, pay cuts and delayed salaries were not the only problems.

In some cases, ostensible deductions from salaries towards employees’ provident funds and tax deducted at source did not reflect in the employees’ accounts. The Morning Context has perused the third former employee’s EPF passbook and tax statements, neither of which showed the said deductions.

With nowhere to go, some employees are now seeking legal recourse, like the petitioners mentioned in the beginning. But the fight hasn’t been an easy one. “Some of us started getting anonymous calls. Some were requested not to take the legal route and were told that [the founders] are trying hard to sell the company. Others were threatened that they would be blacklisted,” says the first former employee.

A seventh former employee filed a police complaint. The complainant says that after the complaint was filed, the founders made allegations that this person had taken bribes. “[The founders] said they are doing an internal investigation and will send proof in 15 days, but they never got back,” says this person.

With the company ceasing operations without so much as a convincing explanation, it seems the former employees have an uphill battle ahead. PhableCare’s story then is yet another cautionary tale of startups that prioritize growth above all else. Even if it means brazenly manipulating numbers and neglecting employees. The Morning Context