(Addition: dbs just announced it is trying to help F&B and bring down commissions to 10%. If they can do it, great for everyone! Competition is the answer not regulation. Btw.. dbs is doing it to attack grab who is trying to enter banking space. Best way to fight is to hit your competition on their home ground! )
Let’s do the math for delivery providers before just slamming them.
1. For consumers, food delivery is not meant to be a eating out replacement. It’s meant to be a way to eat restaurant food at home which is occasional. Meaning maybe 3-4 times a month max on average per household. Not daily which is how restaurants seem to hope it is used.
2. For restaurant, it’s meant to supplement their outlets income by using kitchen extra capacity. Normal times, it’s like 5% to 30% of total revenue.
3. Now let’s see it from delivery platform pov.
$50 per average order
30% fee is $15
Add $3 fee to consumer
Total is $18 to platform
-Cost per delivery is $8-10. Let’s say $9.
-epayment cost of 2% or $1
Gross profit per delivery is $8 or 45%. Bigger restaurants even a smaller gross profit as they negotiate 15-25% cut.
This 45% need to pay for overhead and marketing cost to acquire driver and restaurants. Don’t forget incentives for good drivers. And of course general admin and mgmt overhead.
4. Now, this does not mean commissions can’t come down. It can but it has to be by competitive behavior by restaurants, other platforms trying get market share, maybe even taxi player muscling in? Saas player like Oddle is trying.
5. It also does not mean restaurant has to lose. They should charge 30% more to compensate. Or even 40% more to fully compensate. Btw big restaurants don’t pay 30%, they pay 15-25%.
6. The clear loser is the consumer as we have to pay more. But the fact is the service is expensive. Imagine what you are getting. Human drive to outlet, wait, get your food all packaged, deliver it right to your doorstep! Consumers who don’t want to pay will have to go hawker and take out. To me that is the best solution and not to subsidize delivery in a big way. Small way to help people who can’t leave their homes should do.
7. Another way to see this issue is to benchmark and check against grubhub numbers which is listed. They have a blended 23% commission charge. 5.9b gmv with 1.3b revenue in 2019. Also if we check deliveroo and grabfood numbers I am sure they are all loss making still.
8. So for a much smaller scale Sg, 30% commission can cut down more but not much more. And don’t forget average basket size at grub hub is high at $80+usd.
The basic problem is this is an expensive service. It’s not reasonable to say everyone should be able to pay for it. And restaurants should not look to platforms to save them. Platforms are also a business and 30% does not look too high for our market size.
Btw I don’t think this crisis is restaurant and cafe owner fault at all. They deserve to be helped and govt is doing more for them. But making platforms the fall guy is barking up wrong tree.
In fact on a side note, the real monopoly making very fat profits is visa, MasterCard and Amex. But somehow everyone thinks it’s ok to pay them their cut of 1.5-3% fee on all transaction value!!!!
Thoughts on startup scene in South East Asia. While effort is made to be accurate in terms of numbers, i may sometimes get the data wrong. My purpose is to share what i know and what i have learned over the past 23 years. Feel free to leave comments or to email me. And if you are keen to learn more about Angel Investing pls visit https://www.angelcentral.co/investors/membership
Wednesday, April 15, 2020
Tuesday, April 7, 2020
How COVID recession is affecting our startups.
I just wrote an article on what steps founders can take now to prepare for the downturn. As investors, it will be great if we can remind them on the various topics they need to think about. Beyond that, we can also give morale support by recognizing the stress they are under and also being patient as they come to terms with the new situation.
One interesting thing is that as Ning & I start surveying our startups to get a sense of the impact of the recession and their plans, we realize that our strategy of not having a fixed area or industry and our strategy to go for more conservative founders seems to be working well even with the COVID stresses. Of course, there is also an element of luck at play. Here's an interesting summary. Most of the VCs we know have also done this with their portfolio.
Out of 23 startups who replied.
New Revised Revenue for this year compared to original projection
same and up - 5
0% to -25% - 8
-25 to - 50% - 6
>-50% - 4
Cashflow runway with new scenario projections
> 20 mths - 14
12-20 mths - 4
<12 mths - 5
So while we can see that definitely the bulk of startups are affected by downturn in a big way on revenues, we are happy to note that most of them just raised their latest round last 6 months and so still have a lot of runway to tide through this tough period. We are focusing on the 9 which only have less than 20 mths to see if we can help extend their run way via loans if it makes sense. Unfortunately, we do anticipate 1-2 failures next 6 months.
Hope this sharing is useful!
One interesting thing is that as Ning & I start surveying our startups to get a sense of the impact of the recession and their plans, we realize that our strategy of not having a fixed area or industry and our strategy to go for more conservative founders seems to be working well even with the COVID stresses. Of course, there is also an element of luck at play. Here's an interesting summary. Most of the VCs we know have also done this with their portfolio.
Out of 23 startups who replied.
New Revised Revenue for this year compared to original projection
same and up - 5
0% to -25% - 8
-25 to - 50% - 6
>-50% - 4
Cashflow runway with new scenario projections
> 20 mths - 14
12-20 mths - 4
<12 mths - 5
So while we can see that definitely the bulk of startups are affected by downturn in a big way on revenues, we are happy to note that most of them just raised their latest round last 6 months and so still have a lot of runway to tide through this tough period. We are focusing on the 9 which only have less than 20 mths to see if we can help extend their run way via loans if it makes sense. Unfortunately, we do anticipate 1-2 failures next 6 months.
Hope this sharing is useful!
Steps to take now to prepare for the Covid Recession
Its happening as we speak. Last 1-2 months, many startup management teams and boards have been in emergency strategy planning sessions to figure out how best to navigate this deep downturn. And because data is coming in fast and furious in this new connected world, it can sometimes be tempting to wait for more data before doing up a revised plan for this year and next. Don't be tempted. Do it now!
Ning & I have been on many video calls with our portfolio founders last 3 weeks helping them figure out what is the best path. I want to share our thought process and some steps today to help fellow founders.
Step 1 : Assess your situation.
Use latest sales numbers last few weeks to figure out the level of slowdown you are facing. So far it looks like travel is almost 90-100%, Events / F&B is 40-70%, B2B saas software around 30-50%, media up on traffic but down on spend=net down 10-30% expected and ecommerce/delivery/healthcare/edutech all doing better than expected. The list goes on and it will be interesting to see the follow on demand shock and wealth reduction effects on p2p lending and other fintech businesses.
Get a clear handle of your costs and start to think which can be cut. Get a calculation of the time frame and amount of wage and rent subsidy.
Step 2: Make a reasonable projection on forward revenues and collections for various scenarios.
Assume the recession will result in depressed sales for 6 mths (base case), 9 mths (bad case), 12 mths (very bad case). You should make cashflow projections for all 3 cases. What this means is for eg if 1Q2020 sales was $300K. But its falling off a cliff for March say to just 50k entire March . Then for the 6 mths scenario, extrapolate April-Sep will be just $50K mthly. Then project some growth and recovery from Oct - Mar 2021. Apr 2021 onwards back to $120K a month. Thats for base 6mth case.
Step 3: Project out a 24mth scenario and reduce costs
With 1,2, you can project out 24 months and see how much cash you will spend each month factoring in grants, reduced sales and collections. Next step is to reduce costs until you meet your desired goal. We are asking our startups to execute a plan for 24 month runway now. You figure out your own.
Step 4 : Get credit line. Then SELL AND INNOVATE OUT OF THIS CRISIS
Start applying for credit lines if needed to shore up finances. At same time, see if there are opportunities to grow other types of sales. During the GFC, recruitment advertising plunged. But employer branding budgets were still present in select FMCG, Govt, Tech sectors. So we created brand new packages that gave them branding. Interestingly branding packages were worth a lot more than recruitment ads and they helped us a lot. Go full steam to acquire clients.
Step 5 : Track cash and new metrics in mths ahead and tweak plan as things change.
Self-explanatory.
======================================================================
Additional Point 1 - Get a handle on collections and clients.
AR is not cash. AR is you behaving like a bank when you are not. You need to do 2 things.
a) Chase down all the old AR and stop selling new contracts to clients who are not paying. This is particularly critical now esp for fellow startups who may not have runway left. But they will continue to consume your services if you let them.
b) Shift sales to sell to clients who can pay upfront or good credit. Divide your clients into 3 segments. First segment is the bluechip profitable MNC and govt clients. You can continue as per normal getting their sales and even extending usual AR timing. Second segment is normal customers who have always paid up on time and who deserve some trust.Third segment is unknown or risky credit clients. For group 2,3, you can still do their business but ask for cash upfront. You can even give a discount for it. It will work out better that way.
Additional Point 2 - Deliver all the bad news transparently in 1 go and lead by example
It may feel correct to cut down costs and manpower as the revenue falls but that is not good for morale. Do it all in 1 go at the front and make sure management takes the biggest cut. At the same time be very transparent and overcommunicate everything. From the economy, how it is hitting company to your thought processes.
From there on, its off a low base and things hopefully keep improving. If it turns out the 6 mth scenario is wrong and its a 9mth, then do another cut 6 months later. But not small cuts month by month.
Additional Point 3 - If you are removing headcount, make sure it is done legally and humanely. Explain to remaining staff why. And yes, of course take the opportunity to remove poor perfomrers.
Good luck to all fellow founders and see hope to see a wave of cost efficient and super battle hardened startups when we emerge from this downturn!
NB: we also did a survey of our 31 startups to gauge impact on their business and runway. Situation better than we expected thanks to recent fund raising and emphasis on costs.
Ning & I have been on many video calls with our portfolio founders last 3 weeks helping them figure out what is the best path. I want to share our thought process and some steps today to help fellow founders.
Step 1 : Assess your situation.
Use latest sales numbers last few weeks to figure out the level of slowdown you are facing. So far it looks like travel is almost 90-100%, Events / F&B is 40-70%, B2B saas software around 30-50%, media up on traffic but down on spend=net down 10-30% expected and ecommerce/delivery/healthcare/edutech all doing better than expected. The list goes on and it will be interesting to see the follow on demand shock and wealth reduction effects on p2p lending and other fintech businesses.
Get a clear handle of your costs and start to think which can be cut. Get a calculation of the time frame and amount of wage and rent subsidy.
Step 2: Make a reasonable projection on forward revenues and collections for various scenarios.
Assume the recession will result in depressed sales for 6 mths (base case), 9 mths (bad case), 12 mths (very bad case). You should make cashflow projections for all 3 cases. What this means is for eg if 1Q2020 sales was $300K. But its falling off a cliff for March say to just 50k entire March . Then for the 6 mths scenario, extrapolate April-Sep will be just $50K mthly. Then project some growth and recovery from Oct - Mar 2021. Apr 2021 onwards back to $120K a month. Thats for base 6mth case.
Step 3: Project out a 24mth scenario and reduce costs
With 1,2, you can project out 24 months and see how much cash you will spend each month factoring in grants, reduced sales and collections. Next step is to reduce costs until you meet your desired goal. We are asking our startups to execute a plan for 24 month runway now. You figure out your own.
Step 4 : Get credit line. Then SELL AND INNOVATE OUT OF THIS CRISIS
Start applying for credit lines if needed to shore up finances. At same time, see if there are opportunities to grow other types of sales. During the GFC, recruitment advertising plunged. But employer branding budgets were still present in select FMCG, Govt, Tech sectors. So we created brand new packages that gave them branding. Interestingly branding packages were worth a lot more than recruitment ads and they helped us a lot. Go full steam to acquire clients.
Step 5 : Track cash and new metrics in mths ahead and tweak plan as things change.
Self-explanatory.
======================================================================
Additional Point 1 - Get a handle on collections and clients.
AR is not cash. AR is you behaving like a bank when you are not. You need to do 2 things.
a) Chase down all the old AR and stop selling new contracts to clients who are not paying. This is particularly critical now esp for fellow startups who may not have runway left. But they will continue to consume your services if you let them.
b) Shift sales to sell to clients who can pay upfront or good credit. Divide your clients into 3 segments. First segment is the bluechip profitable MNC and govt clients. You can continue as per normal getting their sales and even extending usual AR timing. Second segment is normal customers who have always paid up on time and who deserve some trust.Third segment is unknown or risky credit clients. For group 2,3, you can still do their business but ask for cash upfront. You can even give a discount for it. It will work out better that way.
Additional Point 2 - Deliver all the bad news transparently in 1 go and lead by example
It may feel correct to cut down costs and manpower as the revenue falls but that is not good for morale. Do it all in 1 go at the front and make sure management takes the biggest cut. At the same time be very transparent and overcommunicate everything. From the economy, how it is hitting company to your thought processes.
From there on, its off a low base and things hopefully keep improving. If it turns out the 6 mth scenario is wrong and its a 9mth, then do another cut 6 months later. But not small cuts month by month.
Additional Point 3 - If you are removing headcount, make sure it is done legally and humanely. Explain to remaining staff why. And yes, of course take the opportunity to remove poor perfomrers.
Good luck to all fellow founders and see hope to see a wave of cost efficient and super battle hardened startups when we emerge from this downturn!
NB: we also did a survey of our 31 startups to gauge impact on their business and runway. Situation better than we expected thanks to recent fund raising and emphasis on costs.