Last week, Sorabel joined the list of the startups that have had to shut down as the new coronavirus disease ravaged hundreds of thousands of human lives and businesses around the globe.
The sudden demise of Sorabel, a popular fashion e-commerce platform in Indonesia backed by prominent names in the venture capital industry, shook the tech startup industry in Southeast Asia, with many wondering whether the management failed to see the obvious as COVID-19 spread rapidly.
In an interview with us, Sorabel’s Co-founder and CEO Jeffrey Yuwono said that as the pandemic hit, the company’s cash reserves were already depleted although it had procured several investment offers. But these potential foreign investors were unable to travel to Indonesia to verify the e-commerce startup’s physical operations.
“Thus, COVID-19 struck during the most vulnerable point in our funding strategy and devastated our core customer base,” Yuwono told us.
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Shannon Kalayanamitr, Partner (Investor Relations) at Gobi Partners, one of Sorabel’s key investors, also validated this. “The team (Sorabel) planned to fundraise, and as investors we had assisted with the gearing-up, recommending them a financial advisor and then was struck by COVID19 right after term-sheets were issued, thus leading to a revoking of the term sheets.”
Market data, however, paints a different picture that there had been some miscalculations on the part of Sorabel, which might have led to the current situation.
“Customer acquisition cost (CAC) is a vital metric for every e-commerce business. Unsustainable CAC will ruin the business since e-commerce companies have to constantly spend huge amounts of cash to acquire both new and returning customers,” according to Sergei Filippov.
“We’ve seen a dramatic rise of CAC for e-commerce in Indonesia during the past three years, which forced projects to fine-tune their online advertising strategy,” added Filippov, Managing Partner at Morphosis Capital Partners, an early-stage investor with operations in the US, the EU and Southeast Asia.
Citing a November 2019 interview of Sorabel CEO Yuwono, Filippov said that the fashion e-commerce firm’s business strategy heavily relied on offline presence as a source of traffic for online. In that interview to Asian Nikkei Review, Yuwono had said that the company looked at offline as a relatively cheaper way of acquiring customers and that it was planning to open 15 physical shops by the end of 2020, mostly in small provincial cities in Indonesia.
“We have reasons to believe that there have been significant expenses planned for even bigger offline expansion than was stated,” Filippov reasoned.
As a matter of fact, the strategy and operating cashflows control weren’t strong enough for Sorabel to convince investors. Thus, when the startup ran out of cash, there was simply not enough time for it to pivot the strategy towards a better profit margin.
As per some reports, Sorabel achieved break-even in 2018 and was on its way to be profitable. While Yuwono dismissed the break-even reports, he told us that the business was, in fact, going strong until the onset of COVID-19.
“From the rebrand in February 2019 (Sorabel was earlier known as Sale Stock), 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,” he shared.
Then what caught it unawares?
“A combination of factors,” explained Filippov. “One, an offline-based customer acquisition business strategy that led to expense bloat and high cash burn rate. This strategy was simply impossible to execute during COVID-19. As of July 27, the situation in Indonesia continued to worsen with a constant rise of daily infections every week. Thus, every offline based CAC strategy will remain extremely risky and impossible to fully execute.”
This coupled with a weak online advertising presence also contributed to this situation. As per a Similarweb data, Sorabel had 5x less social presence than Pomelo Fashion and had a non-existent (0.7%) paid search traffic compared to Pomelo’s 41.4 per cent.
“During COVID-19, many VCs opted for putting more cash into their best-performing startups and cut off those who didn’t have a strong business model and enough cash flow for the next six months,” Filipov shared.
For instance, Openspace Ventures, one of Sorabel key backers, injected more cash into gojek and its video streaming venture. This required a significant amount of money since gojek already was in its F investment round and claimed to receive US$3 billion investments up to date in total.
Similarly, Sorabel — which had raised debt financing from InnoVen Capital in August 2019 — saw its debt ratio situation worsen later in the times of crisis.
All this lead to a precarious position, resulting in Sorabel’s ceasing of operations, said Filippov.
Fashion industry v/s COVID-19
As expected, the fashion industry took a severe beating during the pandemic. As per a SimilarWeb data, Pomelo’s (another leading fashion e-commerce firm in Indonesia), there was a 40 per cent dip in monthly visits during the February-April period from January numbers and a further 32 per cent dip in the May-June period (580,000 monthly visits) from April’s (850,000 monthly visits).
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Indeed, Sorabel managed to grow 22 per cent in February-March as opposed to January 2020 numbers, but then it suffered a severe 65 per cent drop in visits in the April-June period, down to 410,000 from 1150,000 visits per month.
According to Kalayanamitr, there are industrial winners and losers in times of a crisis but unfortunately, the fashion industry, similar to travel, is not a beneficiary of the pandemic.
With the global economy suffering, people prioritise spending on necessities and consumer demand falls for everything else. In Yuwono’s view, fashion is not an essential item, 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.
“In my personal view, there was a much lower incentive for consumers to buy fashion goods if they can’t go out to see and be seen, either due to the government directives or fear of infection. Amazon and Shopify have succeeded (immensely) as their core business model isn’t just built on fashion,” according to Saif Farooqui, Mentor at Facebook Accelerator.
How fashion e-commerce can survive
“E-commerce startup should keep a close eye on its operating and growth strategy: monthly cash burn rate and ways to improve the operating cash flow, CAC, inventory turnover rates v/s its most successful competitors and profit margins,” advises Filippov.
Unfortunately, more often than not e-commerce startups rely on the unrealistically bloated lifetime value of the customer (LTV) or diminished CAC to impress investors and sacrifice profit margin to a point of no return.
“My advice will be a reminder of the classic 1985 Home Depot case when the company had US$12 million in monthly cash burn rate with only three weeks of operating cash left. By focusing on improving their operating cash flows (careful inventory management, focus on profit margin increase, etc), Home Depot switched to US$ 4 million per month cash generation rate just a year after. The company is still doing strong and ranked #28 in Fortune’s 500 list,” he concluded.
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