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QZ&A

How an Indian fashion startup went from burning cash to turning a profit within a year

By Sushma U N

What does it take to turn profitable in India’s online fashion retail business? For five-year-old Voonik, it was all about tamping down on shipping and marketing costs.

The Bengaluru-based company made a gross profit in the month of December 2017. On Jan. 02, its founder and CEO, Sujayath Ali (37), took to Twitter to declare that the firm would no longer “burn” (spending cash to sustain a business) any more dollars.

In financial year 2017, the Sequoia Capital-backed company earned a revenue of Rs117 crore ($17.5 million), up from Rs16 crore the previous financial year, according to Ali. Quartz could not independently verify the figures as Voonik has not yet filed its documents with the registrar of companies.

This 4.5 times jump in revenue, along with the demonetisation “wake-up call,” prompted the team to focus on profitability.

Ali spoke to Quartz about how Voonik managed to make profit at the EBIDTA (earnings before interest, taxes, depreciation, and amortisation) level and the company’s plans for 2018.

Edited excerpts:

Most Indian startups are more focused on growth than profits. Why did you choose the latter?

In 2016, when demonetisation hit the country, we saw a drop in orders. Even the orders we got added to our burn because shipments failed as customers didn’t have the cash to pay. That was a wake-up call for us as we realised that we needed to reduce our expenses. We needed to build a sustainable business that did not depend on ”bought growth”—growth which involved heavy spending on marketing.

So from January 2017, we began working towards a profitable growth.

What exactly did you do make profits?

Our biggest cost was shipping. We were losing money on every shipment. So, throughout 2017, we worked on projects where we observed shipping across each category and came up with the right algorithms to make shipments more cost-efficient. And by December, we had 20% gross margin on shipping.

Our second-biggest cost driver was marketing. To cut costs there, we stopped focusing on traditional channels that others were using, such as Facebook and Google. Instead, we started putting our efforts on innovative channels that would allow us to make money immediately. For example, we started referral programmes that allowed us to make money from the very first transaction.

How significant is monthly profitability?

To become profitable at the annual level, we have to first become profitable at a monthly level and then at the quarterly level. So, this is the first milestone. If you take our December profit and loss account, we have made a profit, and now our next goal is to make a profit in the first quarter of calendar year 2018.

Your tweet mentioned that there’s going to be no more burn. What was your burn rate earlier?

At the peak, we went to almost Rs10 crore burn, which was in August-September 2016. This financial year we operated for a few months at Rs5 crore and then gradually brought it down to zero.

Voonik
Sujayath Ali, Founder & Ceo, Voonik

Someone asked if the company had “started paying” salaries to its employees. What was that about?

We have paid all salaries, including to people who have resigned. There’s nothing pending. I didn’t respond on Twitter because I don’t know what that was about. Only if we don’t pay can I make a statement about this.

Someone also said on Twitter that Voonik is in talks with Myntra for an acquisition. Is that true?

There’s no acquisition and we haven’t even spoken to Myntra. These are just baseless rumours.

What are the challenges ahead for Voonik?

We have a good brand recognition in the affordable fashion segment and we feel there is an opportunity for us to build private labels. There’s no brand focused on the mid-tier and value segments, so we almost have a free-run in the market. But we haven’t done private labels before so it is going to be a huge challenge for us.

At this point, we aren’t actively looking to raise funds. But we might do so in three-four months to give any of our investors an exit, if they want. Though we are turning profitable, we may need some buffer funds, in case we have a bad quarter with an unforeseen event like demonetisation.

How do you plan to end fiscal 2018 in terms of profits?

Unfortunately, I won’t be able to give a full-year guidance. But overall, the idea is to start focusing on growth.

2017 was all about cost-reduction and leveraging technology to get to profits. In 2018, we want to apply our engineering talent towards growth, too.

In terms of hiring, currently, we are around 160 people, and I don’t think this company will exceed 200. This year we’re targeting a total headcount of 175 and by the middle of next year, we’ll get to 200 employees.