Termsheet pulled amid pandemic, Sorabel says timing proved to be its undoing

Photo by Masaaki Komori on Unsplash

Days away from officially shutting down its operations, Indonesian fashion e-commerce firm Sorabel (formerly Sales Stock) is in active discussions with “multiple parties” to sell parts of the business, including its brand, confirmed Jeffrey Yuwono, and Kevin Widlansky, the startup’s former CEO and CFO, respectively.

COVID-19 took a toll on Sorabel’s business, causing a 50 per cent drop in sales in the first two quarters of the year. The firm also saw potential investors pull a Series C term sheet at the last minute, slashing its operational runway, they said in an interview.

Sorabel last raised an undisclosed pre-Series C round from South Korean venture capital firms Ncore Ventures and Shift in August 2019. Its other existing investors include Gobi Partners, Openspace Ventures, Golden Equator Capital, SMDV, Alpha JWC, Convergence Ventures, Korea Investment Partners and MNC Media.

Yuwono, who took on the reins as CEO in mid-2016 told DealStreetAsia that the fundraising failure turned out to be a knockout punch. “When fundraising disappeared in March due to COVID-19, I felt defeated and wondered whether I still had the energy required to be CEO for this company. So I had a frank conversation with shareholders and agreed that I would be able to resign upon achieving certain operating goals. Once we achieved those goals, I tendered [resignation] in June,” he said.

The following interview has been edited for brevity and clarity:

We have learnt that there are offers to acquire the Sorabel brand while the other parts of the business would be liquidated. How far along is the process at the moment? 

I can confirm that there are multiple parties interested in an acquisition. However, given the liquidation process, the decision will ultimately be out of our hands and in the administrator’s after their appointment by creditors and shareholders. I can add that the interested parties are strategic players, with the biggest draw being the evident strength of the brand.

What value do these potential acquirers see in the Sorabel brand? 

The acquirers see value from various angles, but in general, they see the improvement in brand awareness and customer stickiness after the 2019 brand change, particularly within the coveted emerging Indonesian middle-class market segment located in tier 2 and 3 cities.

The results from this newfound brand strength finally began to show in Q4 of 2019, when double-digit topline growth from October to December brought revenues to new heights – around $3.5 million per month – while generating positive margins after marketing costs.

What went wrong with Sorabel? 

More than anything, timing went wrong. The fundraising strategy was to raise the company’s Series C round from a position of strength, leveraging strong growth after the rebranding. Indeed, after the rebrand in February 2019, revenue grew 2.5x by December, but it took until the end of Q3 2019 to build that momentum. In Q4, revenue was growing 10-20 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 would hit the hardest. Simply put, COVID-19 crashed squarely through the company’s fundraising window, choking off the flow of funds when it was most vulnerable.

Kevin, was it a case of financial mismanagement at Sorabel? 

I joined the company as the CFO at the tail-end of 2019. In as much as the company’s cash runway was chronically short and was not necessarily suited to its operating leverage – for instance, higher fixed costs from things like multiple locations and many in-house solutions – particularly as it was operating at a loss, the financial management could have been better (as it could be for just about any startup). Other than that, as somebody who was schooled in world-class, SarBox financial control environments, I can confidently say that though there was definitely room for improvement, financial mismanagement was not “what went wrong” with Sorabel.

Jeffrey, why did you choose to step down as CEO in June? That must have been a difficult decision to make. 

I  joined Sale Stock in January 2016 as the head of business operations. Six months later, the founders asked me to become a co-founder and gave me the President title. I became CEO in 2018. I have been on an amazing journey with the company, and we have grown tremendously together. I am so proud of all that we achieved.

When fundraising disappeared in March due to COVID-19, I felt defeated and wondered whether I still had the energy required to be CEO for this company. And so I had a frank conversation with shareholders and agreed that I would be able to resign upon achieving certain operating goals. Once we achieved those goals, I tendered [resignation] in June.

Even though I have not been involved with Sale Stock on a daily basis since then, I am still here to help on discussions with potential acquirers, assist employees to find new roles, and do whatever the company needs. I still care very much about Sale Stock even though I am no longer its CEO.

We learnt that some investors pulled term sheets. Is this true? How much was Sorabel meant to receive and when? What was their explanation for doing so?

Yes, this is true. Despite the economic uncertainty from February through April, the company did procure several offers – of course, the amounts must remain confidential – 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 Indonesia 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). Thus, their reason was straightforward: Far too much uncertainty, particularly in a “non-essential goods” market like fashion.

What about your existing investors? Did you approach them for funding? What did they say in response?

We, of course, approached our existing investors, who have always been helpful in bridging us and were again from December 2019 through March of 2020. However, COVID-19 not only hit the capital market hard but hit our target customer market hard too, thereby depleting cash much faster than we would have otherwise projected.

In Q1 2020, the company in alignment with its existing investors 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 partly due to a defensive move in anticipation of worsening economic conditions related to COVID.

Once COVID hit, in addition to further cuts that slashed OPEX in half, the company moved aggressively to find new sources of revenues:

  • The company began selling masks that were so popular that our first batch sold out in 7 hours but unfortunately, margins on masks were simply too small and the supply of materials too limited;
  • The company tried to sell medical PPE and even had a buyer overseas ready to purchase; however, it was prevented by law from exporting and could not find ready buyers domestically.

The investors helped as much as they could on the capital and customer fronts; unfortunately, COVID hit us all too hard at the worst possible time.

How badly did COVID-19 hurt Sorabel’s sales in Q1 and Q2? 

From a sales perspective, the company’s positioning could only have been worse for COVID if it were an offline retailer:

  • Sales Stock sells fashion, a luxury item all about representing oneself to the outer world,
    when people weren’t even allowed to go outside;
  • Sales Stock targets the mass middle and middle-low income market, and these were the people losing their jobs and worrying if their next paycheck would be their last.

In other words, the last thing the company’s core market wanted to do was buy fashion. This resulted in a 50 per cent drop in sales revenue during the period. Thus, COVID not only struck during the most vulnerable point in our funding strategy but also simultaneously devastated Sale Stock’s core customer base.

How are you managing morale in the company and among soon-to-be-former employees? What’s next for Sorabel? 

As we are confident that our administrator will ensure a fair process for managing the sale of assets and settlement of debts to all creditors, our main focus is on the employees.

One thing that has always defined Sorabel people is the care with which they look after each other. Currently, we are as much as possible endeavouring to find our people employment in support of the brand. Beyond that, we are leveraging our networks among our investors and their portfolio companies, within the startup ecosystem in Indonesia, and within the Sale Stock leadership cohort to quickly find new employment for members of this very special group, who fought together to
write the name Sale Stock permanently in the annals of Indonesian e-commerce pioneers.

If you could have another chance to do things differently with Sorabel, what would you do and why? 

  • Focus more aggressively and earlier on profitability

Sale Stock, like many startups, was not initially designed to ‘play defence’ – it was designed to grow fast in an era of capital aplenty. Companies, especially startups, need to blend their fundraising/cash reserve strategy with both market risks and business model risks in mind. The greater a company’s burn from fixed cash expenses, the more cash the company needs to have in reserve to survive a sharp economic downturn, and thus the longer cash runway the company needs to build and protect. When I [Jeff] joined the company in 2016, we cut costs and reduced burn rate; we cut costs and burn rate again by 60 per cent in the run-up to COVID. Looking back, we should have been more aggressive earlier on both fronts.

  • Executed the brand change earlier

The facts are undeniable – the brand change worked, generating double-digit growth while creating positive margins after marketing costs in Q4 through vastly improved brand perception and our private label product fit. If we had executed this change a year or two earlier and combined with a greater focus on profitability, we would be having a much different conversation today.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.