That’s all folks. After three years of operating in Pakistan, Airlift Technologies has announced a complete shutdown of its operations from tomorrow (July 13). The company announced the decision of the shutdown in a meeting today with employees.
Earlier, multiple Airlift employees told Profit that there was ravaging anxiety at the startup because of the reports that Airlift had decided on a complete shutdown and an all-staff meeting has been called tonight for some important announcement.
A high-ranking source at Airlift, on the condition of anonymity, told Profit with authority that the startup was wrapping up operations completely and an announcement in this regard will be made soon. “They have decided to give a two-month severance package to employees and shut it down completely,” the source at Airlift said.
Launched in 2019, over the course of its brief presence in Pakistan Airlift fought tooth and nail to first make their mass-transit model fail and later jumped onto the quick commerce bandwagon spending tens of millions of dollars along the way.
So what happened? Briefly, a lot. A global funding crunch, rising inflation, soaring petrol prices, all mean that people are now less willing to pay money for luxuries like immediate grocery delivery. On top of that, because of the global economic downturn, companies like Airlift have had to make these services more expensive. For a very long time, startups have been using VC money to subsidise these luxuries, and as investors pull their purse strings tight during the recession there is a bit of a modern meltdown in progress.
Airlift, like other quick commerce companies, had been working on the belief that if they acquired enough customers they would eventually reach scale and become profitable. The problem was that particularly in a country like Pakistan, where cheap house labour and a culture of extracting favours from places like local kiryana stores exists, people were never going to be happy paying for these services.
That still, however, does not entirely explain why Airlift might be shutting down completely. Startups are built on the concept of solving an existing problem. Perhaps Airlift’s biggest blunder was trying to solve a problem that never really existed.
Where is the shutdown talk coming from?
Airlift employees have been in a veritable state of anxiety for a few weeks now. Over the course of Eid, Airlift’s services were unavailable and warehouses were reportedly being packed up. Already recently stung with 31% of their colleagues having been given the boot, employees began hearing rumours that the startup was making the moves to exit Pakistan entirely.
Another employee told Profit that the startup was going for a complete shutdown because of fundraising difficulties that saw investors, without specifying who, backing out from investing from the $20 million round. “The company is wrapping up stock at its warehouses and there is considerable uncertainty around the future of the employees,” said a source at the startup.
The source also affirmed that no official announcement regarding the closure of the company has yet been made internally, but anticipate clarity in the coming few days.
Profit reached out to Airlift CEO Usman Gul and multiple other high-ranking executives for an official response to reports regarding the company shutdown. Not a single response has been received till the filing of this report.
On its Twitter handle, Airlift has said that their services were temporarily suspended, without positively denying rumors of a total shutdown. In response to a Twitter post which asserted that Airlift will be shutting down completely, Airlift said that it was currently undergoing restructuring in response to the global downturn. “We are adapting to the changing economic conditions but we are still committed to providing hassle-free services to all our customers. Our services are temporarily unavailable,” Airlift wrote further in response.
But multiple high-ranking sources at Airlift have confirmed that the startup is in-fact opting for a complete shutdown because of funding woes that have been compounded in the presence of the downturn in investments. In a recent update, Airlift employees have been called for a session tonight. The material of the discussion in the meeting was not disclosed to us.
What went wrong?
Quick commerce is on the ropes everywhere. The delivery in 30-minutes model gained great fame and investor confidence during the early pandemic but has since been faced with harsh criticism over its feasibility. Airlift not only put all its chips on the quick-commerce bandwagon, but had done so after already failing to make an earlier mass-transit business model work.
Despite an $85 million investment in Series-B round last year co-led by Harry Stebbings of the 20VC fame, and Buckley Ventures, the cash-burning models have led Airlift here. The startup’s existence has been a series of fake hype and has focused more on inflating investor confidence than focusing on good business fundamentals.
The company had earlier pumped up the rumour mill with claims that Airlift had raised $200 million. Prior to a meeting with former prime minister Imran Khan and in the office of former commerce minister Razzaq Dawood in January this year, Airlift co-founder Ahmed Ayub told a group of startup founders and commerce ministry officials that the company had completed a $200 million raise.
While no official announcement of the $200 million round was made, the startup’s funding woes had begun with increased investor scrutiny of numbers. In the follow-on act, Airlift has been in the process of completing a $20 million bridge round raise, amid news on May 25 that Airlift was cutting down operations, shutting down completely in South Africa and retaining operations in Karachi, Lahore and Islamabad only in Pakistan. Airlift further announced laying off 31% of its workforce, citing concerns around fundraising in a bear market, as investors shun the ‘growth at all costs’ model.
The startup has been in the process of raising a $20 million bridge round from existing investors, of which $10 million was reportedly being provided by Ali Mukhtar of Fatima Gobi Ventures. Ali Mukhtar has not confirmed his participation in Airlift’s recent round, in a question asked by Profit.
Sources say that another prominent investor in Airlift, Aatif Awan of Indus Valley Capital, has also backed out from investing in Airlift anymore, which hints at the dire straits Airlift is in. Awan neither confirmed nor denied these claims when approached by Profit.
Reportedly Ali Mukhtar backed out only after Aatif Awan backed out. When investors back out, it is not an assumption that the business they supported all along, does not hold promise anymore. The down round, which saw Airlift’s valuation slashed substantially, was earlier reported to have been completed, which would have provided Airlift the much-needed lifeline to get through the downturn peacefully.
Airlift’s restructuring, which included shutting down South Africa and smaller cities in Pakistan, was part of the company’s strategy to be self-sustainable, to be self-reliant when funding was running dry. To be self-reliant, Airlift had to generate cash from its own operations, which in the retail quick commerce business, does not look doable.
What is the quick commerce model?
In the world of quick commerce, very high growth comes from serving a large number of customers and very very quickly. So if a 15-minute or even a 30-minute delivery promise, which serves the purpose of the existence of quick commerce business, is to be met, a startup like Airlift needs to make its logistics operations super fast to enable such deliveries. Under the quick commerce model, that is done through setting up a network of warehouses or dark stores which are only used for holding inventory and fulfillment of orders.
If such operations are to be scaled to serve a big number of customers or the masses, these warehouses need to be opened up at a large number of locations to ensure that the startup is able to serve customers from any neighborhood it serves. Setting up this network of warehouses and the fulfillment costs associated with such deliveries makes quick commerce a very costly affair, according to an expert on quick commerce, who chose to comment anonymously.
Quick commerce startups further entice customers through heavy discounts on products and deliveries. The startup has to forego its own margins to be able to attract as many orders as possible to increase GMV numbers and raise subsequent funding rounds at higher valuations. That had been the game during the great Pakistani startup funding pump of 2021 which saw $381 million invested into Pakistan (tiny by global standards). It had been about pumping money and getting to those explosive growth numbers, without testing the sustainability in absence of VC funding.
Airlift had been able to do that really well. According to the numbers available to us, Airlift’s revenue growth had been impressive. From $1.4 million in Q1 2021, Airlift reached $16.9 million in gross revenue in the last quarter of the year, clocking in at $33 million in gross revenue for the entire year.
But it’s a retail play, ladies and gentlemen! You can only earn as much as the manufacturers you sell products of allow you margins. These margins are very tiny at the beginning and swell as the company grows bigger, and sells good volumes to convince manufacturers to give them better margins.
The problem with Airlift’s numbers
Airlift had been recently making some tall claims to its investors. From the numbers available to us, Airlift was trying to give this confidence to investors that it would be able to turn those profits that investors were looking for. For starters, these numbers do not inspire confidence because of the way retail works and the macroeconomic doom in Pakistan.
Gross revenue looks impressive at Airlift, net revenue does not. For the first quarter of 2021, Airlift’s net revenue was only $100,000. It grew to $300,000 in the next quarter, was zero in the third quarter, and was only $400,000 in the last quarter of 2021. As a percentage of gross revenue, it’s a very low margin which is the nature of retail businesses such as FMCG retail. For instance, Airlift’s gross margin for Q4 2021 was only 2.36%. After further subtracting costs, Airlift reported a negative $5.8 million adjusted EBITDA during the last quarter alone of 2021.
That’s $5.8 million burnt in cash before even adding marketing and central services and general administration cost in the case of Airlift.
In retail, however, if you have substantial volumes, manufacturers might allow you higher margins. Airlift has thereafter reported higher revenue numbers and better margins. For the first quarter of 2022, Airlift reported gross revenue of $21.9 million with net revenue of $900,000, translating into a 4% margin, and a $5.3 million cash burn at the adjusted EBITDA level. For the next quarter (Q2 ’22), however, Airlift forecasted its revenue at $23.8 million, with a gross margin of 13% and adjusted EBITDA falling a big number to negative $3.1 million for the quarter. At the EBITDA level, Airlift is tracking positive numbers and in the third quarter of the ongoing year, Airlift claimed to investors that it will be earning a 20% margin which will turn its EBITDA to a positive $400,000, proving the company’s financial stability.
This is all based on an assumption, however, that Airlift would be able to secure 20% gross margins in the retail industry. First of all, its growth is questionable to negotiate those margins.
Airlift has already shut down its operations in smaller cities in Pakistan where it was not able to grow in the first place because of low purchasing power in these cities. Secondly, it would not be able to grow as significantly if it has already scaled down operations and would not be thinking of expanding in the absence of funding.
More importantly, however, rising food, fuel, and electricity costs in Pakistan because of the consistent surge in inflation have waned purchasing powers in the top-tier cities like Karachi, Lahore, and Islamabad, which, Airlift claimed in a recent announcement, formed 90% of the company’s operations. To add to the confusion, Airlift claimed to investors that all of Pakistan, which included smaller cities like Sialkot, Faisalabad, Gujranwala, Peshawar, and Hyderabad, besides Karachi, Lahore, and Islamabad, constituted 90% of its total operations.
Airlift has not responded to Profit’s query as to which of the above statements is true. The lack of transparency casts a shadow on actual Airlift growth numbers in Pakistan, as well as prospects of growth in Karachi, Lahore, and Islamabad where it operates now. So if Airlift is not able to grow because purchasing power has waned and because it does not operate in other cities anymore, it would not be able to negotiate a 20% margin with manufacturers, which is already high to claim. The retail industry, especially FMCG retail, operates on thin margins. A source in the FMCG retail industry told Profit that big retailers like Metro operate at margins of around 15% and Airlift claiming margins of 20% is unrealistic.
Gross margins of 20% are possible on certain categories of products but are unrealistic to be margins overall for a business. Airlift further claimed to its investors that it had negotiated product margins with Unilever from 10% to 34.5%, which is again an unrealistic claim unless Airlift negotiated this margin on one or two products and not the overall basket of goods from Unilever. According to a source in the FMCG industry, the margins from Unilever for retail stores can go as high as 15-18% but 34.5% overall was not possible. Another source said that even for products on which 34.5% margins are available, they can only be achieved if a certain sales volume is achieved on those products. Most of the time, those targets are not achieved because they are very high, the source said.
On the other hand, FMCG companies are also under pressure, having increased prices because of the recent surge in inflation which would decrease their own sales but the margins are likely to have shrunk because of the increase in costs. Fewer sales mean pressure on margins for everyone including manufacturers, distributors, retailers, and digital retailers like Airlift.
This casts doubt on the future prospects of profitability of Airlift’s quick commerce business. Its claims of revenue are unrealistic because the margins are unrealistic and not available to anyone in the industry. While these are margins of the FMCG industry we are talking about, Airlift has been selling electronic products such as phones as well, which are again a low margin product, nowhere near to the 20% margin as claimed.
In questions posted by Profit, Airlift has not disclosed how much of its business comes from FMCG products.
The delivery fee equation is equally messed up
The overwhelming majority of Airlift’s revenue comes from product margins that they have estimated at 20%, for the third quarter of 2022, which will drive them a positive adjusted EBITDA value. The next source of revenue is the delivery fee, which Airlift plans to raise to 2% of the revenue. This metric would again be under pressure because of the rising fuel costs.
Delivering orders to customers has become more expensive, and on the other hand, consumers would be unwilling to pay delivery fees because of the fall in their own disposable income. In fact, Airlift would have to increase delivery fees by more than 2% of revenues to keep up with the rising fuel costs but would be in a situation where it would lose orders if it did.
So the situation for Airlift looks something like this: it needs to generate its own money to be sustainable but would not be able to do so because of the industry it operates in; the great margins they are seeking are not possible while its own costs of delivering quick commerce orders have increased. In short, it does not look like a business that would be able to generate its own money and become sustainable. And in times during which VC money is chasing sustainable businesses, it doesn’t sound unbelievable that investors backed out from investing further.
It could be possible that Airlift would have tried to seek buyers and sell it to them, even if it’s for peanuts. Over $100 million have been pumped into Airlift since 2019 so completely shutting it down means that nobody gets anything against the investment they made, except for some proceeds from selling inventory and office equipment. But could Airlift have gotten acquired by other players in the industry to consolidate their position in the market? Airlift’s $20 million round was being raised at a $50-100 million valuation, while its earlier Series-C round (rumored to have been completed at $200 million) was being raised at a $275 million valuation.
Airlift has already seen its valuation slashed quite substantially because of the downturn in investments, and as we have argued, quick commerce is not an attractive business that can be made sustainable anytime soon. “The valuations are random numbers. They are not actual valuations so for any potential buyer, extensive due diligence would be required to ascertain the actual worth of the company and it might actually be very less,” said a source in the industry.
Then Airlift has credibility problems, with questions raised over the authenticity of its numbers. Going to a potential buyer would require thorough audits which might reveal that the company was never as strong as it purported itself to be.
By far the biggest company that could have acquired Airlift is foodpanda. The problem, however, is foodpanda’s parent company is also suffering from the effects of the investment downturn and has seen its valuation slashed on the public market.
“It is not ideally a market these days where you would find buyers. Companies don’t have money for acquisitions right now and the financial heft for acquisitions is particularly missing in Pakistan,” the source said.