The news of Indonesian firm Sorabel’s (erstwhile Sale Stock) plans to shut down by the end of this month sent shockwaves across Southeast Asia’s startup ecosystem — more so because the VCs-backed fashion e-commerce startup was believed to be going strong after its rebranding sometime last year.
Sorabel, which has so far secured about US$27 million in four rounds from the likes of Gobi Partners, Golden Equator, Open Space Ventures, and InnoVen Capital, was on the verge of raising a new massive funding round when it decided to pull the curtain down.
COVID-19 hit the business but it was not the only reason behind the decision.
e27 talked to Jeffrey Yuwono, Co-founder of the 6-year-old company, to know what made them to take the extreme step.
Excerpts from the interview:
Q: Sorabel was being led by an experienced team, was going strong until the end of 2019, had a good amount of venture capital, and was close to raising a new round of funding. What went wrong all of a sudden?
Indeed, Sorabel was going strong, and the strategy was to make sure our Series C raise is followed and leveraged strong, post-rebranding growth.
From the rebrand in February 2019, our revenue grew 2.5x by December but it took until the end of Q3 2019 to build that momentum.
In Q4, the revenue was growing between 10 per cent and 20 per cent monthly, and the company was generating positive margins after marketing costs, clearly demonstrating the brand’s strength.
However, this also meant that the window for closing the next round of financing would be March/April 2020 — the period, it turned out, when COVID-19 would hit the hardest.
From a capital perspective, despite the uncertainty, the company did procure several offers, including a term-sheet pulled at the last minute as uncertainty reached new levels in late March.
It is important to keep in mind that these are investors from outside of Indonesia, who were unable to travel to the country to simply verify that the physical operations existed — that is a lot of risk to ask any investor to accept in any circumstances, let alone the economic uncertainty of March and April of 2020 (or even now).
This meant that as COVID-19 hit, the company’s cash reserves were already depleted.
Then from a sales perspective, Sorabel’s positioning could only have been worse if it were an offline retailer.
We sell fashion, a luxury item all about representing oneself to the outer world when people weren’t even allowed to go outside.
We target the mass middle and middle-low income market, and these were the people losing their jobs and worrying if their next pay-check would be their last.
In other words, the last thing the company’s core market wanted to do was buy fashion.
Thus, COVID-19 struck during the most vulnerable point in our funding strategy and devastated our core customer base.
Q: Do you think the management failed to anticipate the impact of the pandemic? Shouldn’t you have taken steps such as pivoting and cost cutting to salvage the business?
The facts say quite the opposite, as the company was already implementing cost reduction measures even before the onset of COVID-19. By March, we had already cut core opex by 20 per cent and marketing costs by 80 per cent, in part as a pre-arranged strategy to reach profitability by Q1 of 2021, and in-part as a defensive move in anticipation of worsening economic conditions related to the pandemic.
Once COVID-19 hit, in addition to further cuts that slashed opex in half, the company moved aggressively to find new sources of revenues:
- We began selling masks (so popular that our first batch sold out in seven hours), but unfortunately margins on masks were simply too small and the supply of materials too limited;
- We tried to sell medical PPE kits and even had a buyer overseas ready to purchase. However, it was prevented by law from exporting and could not find ready buyers domestically.
Q: But as per some news reports, Sorabel became breakeven in 2018 and was on its way to become profitable?
Sorabel Co-founders Lingga Madu and Jeffrey Yuwono (R)
Sorabel was never break-even, nor was it even on its way to break-even before the brand change.
In fact, the unit economics were the core rationale for the brand change: only by improving the brand and its image could the company command enough margin on its goods to be profitable (indeed, the achievement of positive margins in Q4 2019 is proof that the brand change strategy was working, albeit too late).
Simply put, COVID-19 crashed squarely through the company’s fundraising window, choking off the flow of funds when it was most vulnerable.
Arguably, Sorabel could have pursued a more defensive strategy (lower operating leverage in the form of trading fixed for variable costs) but it was too late to do that in 2020, and frankly the evidence shows that demand from April-June 2020 wouldn’t sustain such a strategy anyway.
Q: Despite being an e-commerce firm, why did Sorabel fail to take advantage of the pandemic (like most of its peers)? Many fashion e-commerce firms are still going strong in the region…
Frankly, I strongly disagree with the premise of this question: fashion e-commerce firms and most other “non-essential” e-commerce firms have found it tough going during COVID-19.
COVID-19 was a boon to innovative startups focused on bringing essentials to e-commerce such as Sayurbox and Tanihub with groceries or Halodoc with healthcare, or even Carsome with financing through second-hand vehicle sales.
Unfortunately, fashion is not an essential, particularly when everybody is in lockdown. In fashion, the impact ranged generally between a 50 per cent and 70 per cent drop in revenue (particularly devastating as it occurred during the Ramadan sales season), with only those companies more focused on the upper end of the market spared.
Also at issue was the ability pivot. As discussed earlier, the company tried to pivot to masks and PPE, but it takes cash pivot. Some fashion e-commerce companies had strong cash reserves heading into COVID-19, but Sorabel did not.
Q: What do you think a typical fashion e-commerce startup should do at the time of an unprecedented crisis like this to salvage the business and save jobs?
COVID-19 is a global pandemic and a force majeure: by definition it is difficult to predict, and its effects difficult too. Even larger companies with deep cash reserves had to lay off 40-60 per cent of their headcount, but in this is probably the real commercial lesson.
Also Read: Does profit matter more than impact?
Companies, especially startups, need to blend their fundraising/cash reserve strategy with both market risks and business model risks. The greater a company’s burn from fixed cash expenses, the more cash the company needs to have in reserve to survive a severe economic downturn, and thus the longer cash runway the company needs to build and protect.
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Image Credit: 123rf.com
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