$200m start-up lays off 40 people despite doubling its valuation

It has developed a digital debt recovery system, which communicates with a company’s debtors electronically and gives users a one-click, self-service portal where they can resolve their outstanding payments without speaking to anyone.

Despite the somewhat gloomy nature of the industry, the company was named as the 2022 AFR BOSS Best Place to Workafter it sought to tackle an ongoing shortage for tech skills by introducing measures such as a four-day week for all employees, unlimited leave, the ability to work from anywhere in the world and a $US1000 quarterly payment for home-office related costs .

The good times came to an end for 40 employees about three weeks ago, just before the end of the financial year, with most of the people made redundant being in sales and marketing related roles, rather than tech and product development.

Sacking staff

“It is the hardest thing I’ve ever done in the company, without question,” Mr Foreman said.

“It’s 40 real people, with real lives and real consequences, so priority one was how to do that with as smooth of a process for them as possible.

“We ran an internal survey afterwards and about 90 per cent of the company completely understood why we had to do that, and some were even relieved that we were making the difficult call.”

Like solar financing start-up Brighte, which also recently laid off staff in anticipation of tougher markets aheadMr Foreman said Indebted was performing well financially, and had hit its straps in the last year or so.

It acquired a US-based rival called Delta Outsource last February as part of its bid to crack the American market and, despite strong growth at home, US revenue now accounts for 80 per cent of Indebted’s total revenue.

Mr Foreman said the company was not yet profitable, but its revenue grew by over 100 per cent year-on-year, and it had a clear line of sight to cashflow breakeven over the next 18 to 24 months.

“For the last couple of years, the focus for almost all start-ups and investors has been growth, with people raising a lot of money and going as hard as possible,” he said. “I almost feel that we are now in a more healthy part of the cycle, where we can go back to first principles and show line of sight to profitability.

“The worst thing is to see a business hit a brick wall and run out of money, with everyone losing their jobs because the leaders are asleep at the wheel.

“You should be able to see that brick wall coming and apply the brakes and avoid it. For us, because we’ve raised the capital, have a good strategy and are growing really well, it is just a case of pulling the foot up off the accelerator a little and letting it cruise a little bit, while we take a look around and sort of refine things.”

Falling values

In a letter to investors last week, first reported by street talkone of Australia’s largest tech start-up investors Square Peg Capital said it had marked down the valuations of its Funds 1, 2 and 3 by a combined $175 million, or about 15 per cent, in recognition of likely drops across its portfolio of companies .

Though it stood by all of the companies it had invested in, it conceded that it had invested too quickly last year, and valued some of its start-ups too generously.

“We are now entering a tougher phase for early-stage technology
markets, as well as the potential for a major economic slowdown. We don’t know its duration or severity,” Square Peg wrote.

“There is a lag in private markets, and it will take some time for valuations to fully adjust, and the likelihood is they will ultimately overshoot on the downside. We have already seen valuations move fairly substantially but there is further to go in this process.”

Doubling the valuation at Indebted would suggest it has dodged current sentiment for re-rating private start-ups. Last week investors told Chanticleer that they were being Canva shares at a $US20 billion ($29 billion) valuation, in comparison to a $US40 billion valuation at its most recent capital raising in September 2021.

Mr Foreman said Indebted had always taken its valuations at a relatively sober multiple (in local start-up terms) of between 11 and 15 times revenue, which he said would lead to less likelihood of future down rounds – where the value of staff and investors ‘shares goes down.

“Our business will probably have its best years ever in the next three or four years if things materialize the way everyone expects them to, but of course we are not immune from the valuation crunches that all high-growth technology companies are,” he said .

“I think we have always been very rational with our valuations, and while we have always fought for fair valuations, we’ve never done anything like the 100 times revenue multiples, or some of the crazy things that you saw at the peak of last year.”

Carthona Capital partner Dean Dorrell said he had high hopes for Indebted, given its growing global footprint, and was fully behind Mr Foreman’s decision to slow things down and cut staff in the current climate.

“Josh has been super practical by recognising even when he has raised a significant new round that he needs to be conscious of the general fundraising environment and has trimmed his costs,” Mr Dorrell said.

“It’s an exercise we have been through with all our portfolio founders, and it’s a sensible approach to assume that raising will be difficult for the next few quarters and to adjust the growth trajectory accordingly.

“In the end, for the good companies, it will be for the best – a renewed focus on sustainable growth and unit economics will make them stronger.”

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