The 15 things we did to avoid closing down our startup because of COVID19!
Coronavirus, Winston Churchill, and Storat. How did our startup survive while being a services focused startup, so far!
Note: I wrote this article on July 5th ,2020 on a 15 hours empty flight from Abu Dhabi to Chicago as I was relocating to open Storat in United States, which is one of the steps we took so our startup could survive COVID19.
In February 2020, our company started feeling the impact of COVID19 and by March 31st, our daily revenue reached ~ $0 per day. Our startup is an online marketplace in the UAE focused on services with a commission-based business model. The country came under a complete shutdown for services. We stopped receiving bookings for swimming lessons, sports classes, salons, laser hair removal sessions, and home services like cleaning or moving. (figure 1).
In late March 2020, the logical course of action was to shutdown the company and let everybody go. However, we had one advantage, we were nimble and got used to pivots as we were still perfecting the business model.
What happened in the next three months is a story to tell and I am happy to share with other business owners and startup founders as they can benefit from some of the tactics we applied. Not only we survived, but we doubled the company revenue and profit by June 2020 and increased the daily booking from 0 to ~AED 90,000 ($ 25k) per day by early July 2020 (figure 2).
1. We tripled our marketing spend!
Yes, that is correct; while other companies started reducing marketing spend, we did the exact opposite, we tripled our marketing spend! The rationale was simple:
- Few categories saw increased demand because of the coronavirus. Categories such as shipping and moving (people were being let go and were, therefore, on the move), deep cleaning, and disinfection services. As a result, it made sense to increase marketing spend on those categories to gain market share.
- With many competitors, specially VC backed, stopping or reducing spending dramatically, the Customer Acquisition Cost (CAC) for each new customer dropped. That became an opportunity to gain new customers at a lower CAC.
- We negotiated with our marketing suppliers a 90 days payment term, that gave us breathing room to control our cash flow and keep it positive; and because we have already been using a prepayment model, we could collect the cash today from the service providers, but pay related marketing expenditure 90 days later!
2. Launched new categories that we anticipated will grow because of COVID19
Coronavirus hit the two main categories that drove the majority of our revenue: cosmetic medical and sports. We switched our focus to home and office services (cleaning, moving, overseas shipping etc.). We also considered launching three new categories: grocery delivery, laundry delivery, and disinfection services. We scrapped grocery delivery because of the logistics complexity. We launched laundry delivery and disinfection services in 48 hours around mid-March 2020. We had relationships with many relevant suppliers. We built the relevant forms on the web and mobile platforms, launched a marketing campaign, and we were in business.
3. We pushed into B2B
Actually, we were pushed into Business to Business (B2B). Storat was focused on Business to Consumer (B2C) services and it represented 98% of our revenue. Before the coronavirus, we were puzzled on how we would enter B2B while staying nimble and lean. In the middle east, B2B requires a field sales force and more traditional tools to gain market share. The coronavirus changed all of that. We started receiving more and more calls from businesses requesting various services. What happened in the first sixty days was:
- Many of our competitors where either not reachable as they are still busy rewiring their business for remote work, or they reduced their marketing spend to see what will happen. For us, we were 100% remote since October, 2019 and we tripled our marketing spend to gain more share.
- Many businesses, that previously demanded face-to-face interaction to transact business, became remote. Therefore, they were fine with awarding large contracts to our company without meeting face to face.
4. We switched our accounting from an Accrual basis to a Cash basis accounting system.
we stopped recognizing revenue if it is not yet collected
The difference between accrual and cash basis accounting is the timing of when revenue and expenses are recognized. The cash method is a more immediate recognition of revenue and expenses, while the accrual method focuses on the anticipated revenue and expenses. Why was this important to do under the coronavirus pandemic?
- Many of our service providers started facing financial difficulties, so we decided that invoiced revenue will have a much higher risk of collection under force majeure circumstances. As a result, we stopped recognizing revenue if it is not yet collected.
- While cash basis accounting is inherently not scalable, we were small enough to make the switch. This gave us a much tighter control over our cash flow as both Profit and Loss (P&L) and Cashflow statements morphed together.
5. We applied tighter control over credit rating for both buyers and suppliers
With Coronavirus hitting small and big businesses hard, as predicted, those businesses started facing cash shortages with no quick access to liquidity. The force majeure clause in many contracts meant that collection will be a serious problem very soon. Rightly so, within a few days, some of the service providers started sending us notices asking to delay payments or cancel contracts. So we became more rigid on payment terms even with enterprise businesses.
6. We switched completely to a prepaid subscription model
The prepaid subscription model is one of the reasons we are still in business today
In September 2019, we implemented a prepaid subscription model for home service providers. This may be one of the reasons we are still in business today. What is prepaid model? Before September 2019, our model was postpaid. Meaning, we give orders to service providers through Storat.com. If they deliver the service, we issue a monthly invoice that they have to pay within 15 days of invoicing. It was clear within 6 months that this is not a scalable model as a lot of service providers elected not to pay their invoices! Switching to prepaid model in September gave us a level of control over the marketplace transactions. Hence, we were receiving our commission from service providers before they can accept orders through our platform. It took us six months to perfect the business model, implement the related technology (order distribution systems, billing system for prepaid, etc.), and convince enough merchants with it to create liquidity.
With the coronavirus, we decided to expand the model across all categories. As medical cosmetic centers, sports centers, salons and spas started coming back slowly in early June, we switched all subscriptions to a prepaid model. Our decision was that we either control the transaction in the category or we exit that business! The pandemic made it much easier to make hard decisions.
7. We reduced the marketplace “leakage”!
If you are familiar with marketplaces, the two core metrics for success are Customer Acquisition Cost (CAC) and Long Term Value (LTV). For a marketplace to survive and scale, buyers must keep coming back, ordering through the marketplace so it can cover the CAC through higher LTV for each buyer. The problem with service marketplaces is that buyers and sellers must connect directly for service delivery. Hence, they can exchange contact information and do future transactions directly, cutting out the marketplace. This is a major problem for many service marketplaces, they fail to scale, or switch to lead-based model which can’t exceed 5% to 6% of the Gross Merchandise Volume (GMV) that is going through the marketplace.
In the beginning, we tolerated leakage, as we were more focused on developing the core marketplace technology, onboarding more merchants, and building the required processes (call center, customer service, etc.). With COVID19, we accelerated building the technology and processes to reduce leakage. We developed a new agreement with explicit clauses about future transactions and related penalties. We asked all our merchants to sign them (200 of them!) or they would stop receiving orders through Storat.
As a result, the CAC for home services dropped from AED 102 ($28) per new customer to around AED 50 ($15). The number of repeat orders increased by more than 500% in the same period.
8. Accelerated our development sprints from weekly to daily.
With COVID19, a week became an eternity. We applied two new principles to our development strategy:
- For each feature, it shouldn’t take more than 24 hours to build.
- The new feature must have a direct and clear impact on our short term revenue or cost.
Between March 15th and June 15th 2020, we deployed almost every day. Sometimes 2 to 3 per day. Faster deployments meant less testing and more bugs, which made some of our customers unhappy. Also, the pace of changes was too fast for a lot of service providers to learn quickly and cope with. Merchants came back complaining “why are you changing something that is working?” From our end, it was working, but it didn’t scale!
Also, our deployment process was cumbersome, we ran deployments manually using Ansible scripts and it took each deployment between 1-3 hours to complete. COVID19 pushed us to remove all the none essential components from the deployment process. We migrated from Ansible to Laravel envoyer.io. It was also an opportunity to upgrade our back-end systems to the latest versions of Laravel, Php, Nova, Mysql, Linux, etc. and we optimized our infrastructure to run on fewer servers, which gave us extra computing power that we can use for expanding to a new country without incurring additional cost.
9. We applied a Work From Home Policy as early as November 2019
In early November 2019, we implemented a full work from home policy. This gave us a competitive advantage as we didn’t have any operational downtime. While competitors were busy trying to figure out the logistics and operations to run a business remotely, we were set and ready for business. In October 2019, we upgraded the company internal VOIP telephony system from Grandstream to 3CX and we deployed it across the three locations. In the same period, we deployed GSM VOIP technology which gave us a better connectivity with customers while reducing operational cost.
10. We evacuated all our offices and terminated all the rental agreements
Well this may not be possible for all businesses. But for us, we were 100% cloud-based Internet business. Although we went remote as early as November 2019, we kept our offices in Bangalore, Cairo, and Abu Dhabi as a status of power, to interview new employees, and for internal meetings, if needed. As the coronavirus started spreading in the middle east, we switched to a survivability mode. Those offices became a none-essential liability. We managed to maneuver our company out of three lease agreements in three countries in less than 30 days. That alone saved our company more than $25,000 per month in office rent and other related expenses. It may not be a lot for a big company, but for us, and under coronavirus, this was a large expense.
11. We stopped all long-term investments
As a startup with the intent to scale, a large amount of our investment in resources was focused on the long-term objective to scale. For example, we had a subcontracting team working on SEO, merchant onboarding for future categories, etc. We stopped all of that to preserve cash and focus on today’s problem.
12. We moved all employees to Sales and Marketing
Number of positions in our company became redundant or not essential because of the changes we made above. However, it was hard to let good people go, especially if they have developed the expertise in what we are doing and have the motivation to make the company navigate through the pandemic. So instead of terminating people, we moved everybody to sales operations, and I mean everybody! Even HR started taking calls and chats and converting those to orders. We split the sales organization to cover the basic internet web funnel.
We also reduced our marketing channels to two, one for new customers acquisitions and the second for repeat orders. Hence, we needed only one person to cover marketing to generate leads for the marketplace. The rest of the sales team covered bookings, redemption, collection, and after sales customer service.
By mid-May, sales were going well again, we started hiring again in our call center to address the increased demand.
13. We reduced the metrices we were tracking to two
Before coronavirus, We developed extensive business intelligence dashboards to monitor the various aspects of our business. We monitored as many as 100 data points to have a better understanding of key performance indicators and monitor the conversion funnel (figure 5: one of Storat internal BI dashboard).
While it was important, a lot of our employees found it confusing or they couldn’t focus with too many metrics to track. So, we reduced the essential metrics to two and we held everybody accountable for them:
- Redeemed orders Total Commission per Month (CPM).
- New Customer Acquisition Cost (CAC).
CPM told us how much gross profit we are making after deducting service providers commission. and CAC showed us how much it is costing to acquire new customers. By subtracting CPM from total CAC, we could tell quickly what our gross margin is. As all other cost elements were fixed and all subscriptions were moved to prepaid, the entire company focused in increasing that delta.
14. We accelerated opening in a new market
Let’s face it, while the UAE is an impressive market, it is a small market. Especially for B2C. The microeconomics for UAE B2C is that there are only 3-4 million people with enough purchasing power to target. With Covid19, that was reduced by at least half. Initially we didn’t plan on expanding to new markets before 2021. If your platform is an eCommerce marketplace, there is much more operational requirements to expand to new markets. eCommerce marketplaces have a skin in the game, we process payments at both ends of the markets, we must meet the regularity requirement of any new country we expand to, and we need direct relationship with banks and local payment gateways.
Our expansion strategy was simple. The next target market was Saudi Arabia and the plan was to open there in early 2021. We would expand there if and only if, we achieved the following three objectives:
- Improve the technology and user experience so 50% of the orders are direct.
- Mature the business model with clear sign of scalability in the UAE like recurring business, lower CAC, organic growth, etc.
- Generate positive cashflow or raise additional funding.
Under coronavirus, we have achieved those objectives by end of May 2020. Well, two months of meeting those metrics was not enough time to prove sustainability, but what was happening gave us the urge to take risk and ACT now. All businesses were scrambling to web enable under COVID-19. It was a fulfillment of our vision "Go online or get out of business". So, we made the following changes to our plan.
- We changed the target country from Saudi Arabia to United States which is a much larger market. While far in distance from our original base, The US has a much lower initiation cost with higher potential for growth.
- We brought forward the expansion plan from Jan 2021 to July 2020.
- We decided to lead with our original Software as a Service (SAAS) business model to become cashflow positive faster in the new market.
By mid June 2020, we freezed development in the UAE platform, I handed over the operations in the Middle East. Our small R&D team started working on the US version of the platform. In July 5th, I relocated to Houston and I started setting up the US operations.
15. We kept everybody super motivated
The most important aspect of survivability is to keep your team super motivated. In our All Hands monthly company meeting in April 1st ,2020, my team didn’t know what to expect because of the grim results in the previous two weeks and the bad news that was flying all around us. Some people were whispering about their fear of being let go today as this is what happened with their peers in other companies. I started the meeting quoting Winston Churchill 1940 famous quote about the UK policy fighting until the end and never to give up.
I made sure to read every sentence to them loudly, so it is clear to all that we are not giving up and we are in this fight until the end. Regardless of any strategy, there is nothing in the world like a motivated and determined team. What my team did in the following three months was extraordinary. Ironically, the best three performing months in more than four years in business!
Like many, I am not sure what will happen next, and what is the future impact of this virus on businesses. But even in the grimmest moment, opportunities will always exist;
It is about being nimble, lean, and adaptable to change!