Made To Fail
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January 3, 2023
At the IPO, it was ‘Sofa' so good… but today, MADE.com is bust.
Fingers have been pointed at supply chain issues and the 6 long weeks it took to ship MADE's furniture. (This as 4 hour deliveries are becoming standard).
However, like most corporate failures, it seems that the company’s whole business model was just ‘Insufficiently Profitable’.
According to data from their 2021 Report and Accounts, an average MADE order looked like this:
Sale Value £246
Gross Profit £97
Fulfilment £45
Contribution £52
Marketing £38
Meanwhile overheads were running at something like £40m.
MADE isn’t alone in being a heavily funded, unprofitable business. For the last two decades of cheap money, unprofitable growth has been considered fine. In many sectors, it’s been the norm. Raising money every 9 months doesn’t build a business.
But many startup founders have only seen that movie. Cheap growth capital and masses of optimism drove investment in unproven business models with the expectation that they would become profitable in the future. Institutional Investors had so much money to deploy, they neglected risks and rolled the dice. WeWork, Uber, Peloton - were precarious models from the get go but they kinda worked and they’re still here.
The UK has millions of not-quite-profitable startups and SMEs, that are struggling to grow and are often precariously undercapitalised. Battered by Brexit, Covid and government policy flip-flopping, they are now facing unprecedented wage demands, energy and operating cost inflation, markets shrinking, labour shortages and export challenges.
These pressures mean that the dawn of profitability has been pushed over the horizon and many business models are so wonky that profits look unlikely at any point.
Ask yourself, does the company have a clear, unifying vision? Do prospects get excited by it or do they say ‘So what’ and glaze over?
Executional efficiency can only improve profitability when the business model is solid. Take a forensic look at what you are doing and ask yourself, ‘Are our customers happy?’ then ’Are we charging enough?’
Is the business able to scale - with or without further investment? That means sell more stuff to more customers and retain them for longer? If yes, you should be able to raise but be careful of the cost.
Can the business simply survive on its own cash? Explore launching some pragmatic survival initiatives as though you were at war. (Spoiler alert - you are). Guidance follows below:
Damp down every penny of cash burn to extend the financial runway in ways previously unthinkable. Analyse every expense to assess return on capital. Unless you can find tangible proof. Cut now. Don’t dawdle.
Look dispassionately at your team. Calculate the revenue contribution of every single staffer. Letting go of great people can be a killer but if you don’t balance the budget, you might kill the whole company.
Finally, remember life is finite. If you are totally stressed out and the business isn’t working, perhaps it’s time to try something better? You can always shut up shop or maybe perform a massive pivot. Be brave.
Institutional investors are dismissive about ‘lifestyle businesses’. These, often sub-£10m revenue businesses, account for a large chunk of the UK’s 5 million companies. The founders might be making a comfortable living and the staff might be happy, well paid and well treated, Investors see them as flat-lined Zombies showing no growth with no global ambition. Should that matter?
With the rise of the ‘B’ corps, we are starting to question the accepted wisdom of shareholder primacy. It’s really hard to build a socially responsible business if its prime objective is to create returns for external investors. Yet if ownership is confined to the founders, executive, workers and stakeholders, this is much easier.
Stretch your mind back to the beginning of the industrial revolution and you would see ethical businesses like Cadbury, Wedgwood, Quaker all offering their employees housing, sustenance, education and recreation facilities. Not zero-hours contracts.
Regardless of who is in office, the British Government needs to improve its game and create an environment that incentivises entrepreneurs to build sustainable, decent companies and ensure that they thrive.
Britain has been falling behind America and Germany since the mid-2000s. In 2022, measured at purchasing-power parity, British GDP per head will be 25% lower than America’s. Average wages in Britain now lag behind America’s as far as Poland’s do Britain’s.
Without government ingenuity and a change of tack from institutional investors, Britain’s current recession may see a ‘Great Unravelling’ of the small businesses and startups that the country has been counting on to power the next generation.
We must all do our best to stop that from happening.
