Seven-Year-Old Unicorn Open Faces Challenges Aligning Deeds with Reputation

As a seven-year-old unicorn, Open faces challenges aligning its deeds with its reputation. Despite its success, the company encounters hurdles in maintaining consistency between actions and perception. This highlights the complexities of reputation management and the importance of integrity in sustaining long-term success in the business world.

In May 2023, the neo-banking platform Open achieved unicorn status following a $50 million funding round led by IIFL, with participation from Tiger Global. However, despite this milestone and significant funding, questions persisted regarding the scale and profitability of the seven-year-old firm. Until March 2023, Open's enterprise value to revenue multiple remained high at 260X.

According to the consolidated financial statements filed with the Registrar of Companies (RoC), Open's revenue from operations experienced a modest 25% growth to Rs 30 crore in FY23 from Rs 24 crore in FY22. It's worth noting that in FY22, Open reported revenue of Rs 40 crore. This variance in revenue figures for FY22 may be attributed to changes in accounting standards and revenue recognition methods.

Established in 2017, Open specializes in providing banking, payments, and accounting solutions tailored to small and medium businesses. The company primarily generates revenue through two main streams: subscription sales via its software and commissions earned from customer transactions.

In addition to its core operations, Open accrued Rs 23 crore from interest on deposits and current investments, categorizing this income as non-operating revenue. This brought the company's total revenue for FY23 to Rs 53 crore.

Employee benefits constituted a significant portion of Open's expenditure, accounting for 50% of the overall expenses. This cost increased by 33% to Rs 149 crore in FY23 from Rs 112 crore in FY22, with Rs 40 crore attributed to ESOP expenses, which are non-cash expenditures.

Various overhead costs, including those related to information technology, advertising, legal services, payment gateway, and card issuing, contributed to Open's overall expenditure, which rose to Rs 296 crore in FY23 from Rs 217 crore in FY22.

Caveat: In our analysis, we have excluded the cost associated with the change in fair value of compulsorily convertible cumulative participating preference shares for FY22, as it pertains to a non-cash item.

Despite its modest scale, Open witnessed a surge in expenditure, resulting in a 37.5% increase in losses, reaching Rs 242 crore in FY23 compared to Rs 176 crore in FY22. Notably, the Return on Capital Employed (ROCE) and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin for Open stood at -50% and -394% respectively. These figures underscore the financial challenges faced by the company amidst its expansion efforts.

As of March 2023, Open's total current assets amounted to Rs 332 crore, with a substantial portion represented by a cash and bank balance of Rs 311 crore. On a unit level, the company spent Rs 9.87 to earn a rupee in FY23.

Having raised over $180 million to date, Open boasts a diverse investor base. According to data from TheKredible, Beenext holds the largest external stake in the company at 11.72%, followed by Tiger Global and Unicorn India Ventures.

Despite the influx of funds and its ascent to unicorn status, questions linger regarding what compelled investors to back the firm so fervently. The commercial viability of targeting India's MSME sector has been a subject of scrutiny, given the failures of numerous startups that were initially highly valued but ultimately faltered. With Open's last funding round occurring as recently as 2023, amidst acknowledgment of the challenges within the MSME sector, the rationale behind investor confidence in the company's prospects remains unclear. It remains to be seen what unique value proposition Open offers, particularly in light of the struggles faced by similar ventures. As time progresses, the efficacy of Open's approach will undoubtedly be revealed.

Source: entrackr