Why Airlift couldn't make it

The story behind the demise of Pakistan's most well-funded tech startup

This is a break from the series of posts on personal finance and demystifying financial assets to share a story that is more personal to me and many others close to me. After all, you did subscribe to a publication named Ali’s Random Walks. We will come back to discussing financial topics and demystifying more financial assets in the weeks to come — Subscribe and stay-tuned.

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“Founders need to seek the truth instead of merely validating their own assumptions.” Qasar Younis, the founder of Applied Intuition, told attendees at a recent conference for Pakistan-based entrepreneurs and investors. This, coupled with some other conversations I had when I came across this quote, reminded me that the truth about why Airlift couldn’t make it still hasn’t come out.

As of writing this post in November 2024, 28 months after shutting down operations, Airlift still holds the title of Pakistan’s most-funded VC-backed company, raising a total of $110 million in capital, shattering records for the largest series A and B rounds Pakistan had ever seen. Airlift’s shutdown was a defining moment for Pakistan’s nascent startup ecosystem with far-reaching repercussions for many people and the ecosystem. A lot of critics, self-titled journalists, so-called “startup experts” jumped at the news to get more clicks and subscribers, selling their own uninformed assumptions, opinions and guesses as the truth for why Pakistan’s largest startup failed. The founders, board members and leading investors were put in a defensive position and chose not to publicly respond to the raging accusations and not add fuel to what had become a shouting match. The actual truth for why the company failed never got the chance to come out.

It was no mean feat for a Pakistani startup to raise nine-figure dollars in funding. It involved total commitment, excellence and dedication from an immensely talented group of people to build in many, not all, ways a world-class business not once but twice over during Airlift’s three and a half years span. First for the on-demand bus-hailing business and then, after Covid struck, from scratch again for the quick commerce business. Airlift was the first startup from Pakistan to be able to successfully launch asset-heavy operations outside of the MENA region in South Africa. 

Unfortunately, a lot of great work done by an exceptional group of people came to naught when the company failed to secure further funding. The first question asked to many ex-Airlift people when they sought their next roles was not about their accomplishments that enabled a company to scale operations across two continents, but on why the company failed. Almost every individual was made to carry the burden of explaining Airlift’s failure in some shape or form. 

I believe it’s important for the truth to be made public. At least it contains many important lessons for other founders and operators in Pakistan’s startup space on not making the same mistakes that Airlift did. This post is my attempt to share the truth about why the company didn’t make it through. 

I believe I am qualified to share an opinion on this because I did have a seat on the bridge of this ill-fated rocketship. I was at Airlift from the seed stage when it was still running buses till the end, 3-years later, when it closed the quick-commerce shop. During this time I led the Product and BizOps orgs whilst also looking after Growth, Marketing and Pricing for interim periods. Along the way solving a lot of the glue stuff (which were problems that needed to to be solved before one could decide where on the org chart they fit in) and having significant influence over company strategy. 

The truth about why the company failed is complex, messy and not clear-cut. The company didn’t fail because the CEO/Co-founder joined the team for a PlayStation game once after-hours, nor entirely because of losses due to inventory pilferage from warehouses nor procurement in-efficiencies nor fraudsters abusing the marketing promotions. There is no truth to the vile lies spread about the founders allegedly buying luxury cars or real estate from company funds. You’ll probably not find any attention grabbing headlines or soundbites from this post. Much of what comes next may seem boring business concepts to the layperson. 

This is going to be my aspiration to get as close as possible to the capital-T Truth. There’s a fair chance that I may miss certain details which I wasn’t privy to or omit by error. Much of what comes next will likely be my subjective opinion and assessment. This post does not represent the views of the company or the founders, directors,  board-members or investors of the company. They would not have seen the draft of this post prior to publication. They’ll recognize which one of Airlift’s values I am living up to here.

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One of the most profound insights I came across recently is: “You can’t judge the quality of a decision from the outcome.” Many may correlate that just because the company shut down within two years of launching quick commerce operations, then it must be a series of bad decisions by the leadership team that led to this outcome. We can, and will later in the post, critique many of the strategy decisions as sub-optimal, but we’ll be doing that with full 20/20 hindsight. 

At the time when those decisions were being made, I was onboard with most of them, agreed to many and committed to almost all of them. Many of the strategic decisions were made with the right due process, utilizing qualitative and quantitative data to the extent it was possible and giving everyone the right to debate and voice their positions especially when they dissented with the majority. There was no dictatorial CEO or board-member imposing their wishes as the company strategy. Not that this is the best of defenses, yet most of those decisions were also in line with the prevailing Covid-era, zero-Interest-rate-period wisdom in the quick-commerce industry and the VC/tech global space. 

Let’s proceed towards examining the perceived and actual factors that led to Airlift’s downfall. We’ll start by talking about hypotheses that are hyperbolic yet still believed by many people as the main causes contributing to Airlift’s downfall, possibly because of a lack of better alternatives. Then we’ll talk about areas where the company did make the right decisions but was caught wrong-footed in 2022 when the markets turned and the tide of venture capital went away. Lastly we’ll come towards some “rookie mistakes’ that may be relevant for all early-stage companies. This section can hopefully serve as lessons from Airlift’s failure for other founders and startup teams on how they can avoid some of the errors that we made.

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What is not true

“The company failed because of inventory wastages and fraud.”      

At its peak, Airlift was doing $90 million in annualized revenue or about Rs.1.27 billion in monthly sales. Average shrinkage rate, which is an umbrella term of inventory damages, expiry or pilferage, in the retail industry is at about 2% on the lower end. Airlift’s shrinkage rate as per our internal assessment was around 1.5%. While I admit that we should have done a lot better at this and kept it sub-0.5%, yet 1.5% is not criminally high and still better than the average for the retail industry. 

At Rs.1.27 billion of monthly sales and 1.5% shrinkage rates, that’s Rs.12.7 million of monthly inventory losses. Any cherry-picking reporter could easily get the saucy headline that Airlift failed because it was losing tens of millions worth of inventory each month. True or not, this only tells a small part of the full story. Put another way, would Airlift have been successful if this number was an order of magnitude less at Rs.1.27 million a month? Probably not.

There were other operational inefficiencies in procurement of fixed assets needed for Airlift’s dark stores and centralized warehouses. There was a big problem with arbitrageurs buying and reselling our most competitively priced products, known in retail as loss-leaders. Yet this number as a % of total sales, was still less than 1%. 

“The company failed because the founders siphoned off company funds to enrich themselves.”      

This is another popular lie spread by vile rumor-mongers and cynics including a known person in Pakistan’s small tech space whose career highlight is being quoted as a digital expert by NYT, WSJ and CNN.  

I am fortunate enough to know the founders personally and consider them as friends outside of work. The founders had the same cars and lived in the same houses when Airlift shut-down as prior to the company starting. All of them are still living in Pakistan and there's no visible sign of wealth or flashy objects which Pakistan’s newly rich love to exhibit. There is no proof of the plots of land or V8 luxury cars or embezzled funds that were rumored to have been acquired by them.

“The company failed because it paid exorbitantly high salaries to young employees a few years out of university.”      

This is schadenfreude from other employers who were either losing talent to Airlift or failing to poach from Airlift. At Airlift, we prided on building a highly talent-dense company, sought exceptionally rare talent and did pay above-market salaries to keep and retain the top-percentile talent. We valued people more along the characteristics of raw intelligence, EQ, relentless, resourcefulness, boldness, intellectual humility and the ability to operate under uncertainty. Traits which are uncorrelated at best or otherwise negatively correlated with years of experience. So it is true that we had many people a few years out of college out-earning people with decades of experience in non-tech companies. 

Even the above-market salaries weren’t that steep, maybe 1-2 standard deviations above the market average. Corporate payroll was a relatively small percentage of Airlift’s overall cost base, and it’s not true that the company failed because it was paying exorbitantly high salaries to people.

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Reasonable decisions that turned out badly

To better understand why these decisions were made, let’s first explore the industry dynamics of the quick-commerce space and the context of the 2020-22 period.

The 2020-21 venture-backed, quick-commerce space was a manic one, with companies like Gorillas, Getir, Flink in Europe; JOKR, Rappi, GoPuff, Fridge No More in the Americas; Zepto, Blinkit in India; Breadfast in Egypt raising billions of dollars with multiple investments rounds a year. All these companies were engaged in a global land-grab to dominate as many national markets as deeply as possible. Airlift was also a participant in this global mania vying to dominate the Pakistani market quickly and expand into the Middle East and Africa. The operating mantra for all these companies at that time was blitzscaling and hyper-growth. 

Airlift raised the $85 million record Series-B round in August 2021, at a valuation around $275 million, by demonstrating leadership in the Pakistani quick-commerce market and planning for expansion beyond Pakistan. Venture investments are made with the expected return of investments expressed as multiples of the initial investment and not in mere percentages. The investors who contributed to the $85 millions Series B at a $275 million-ish valuation, did roughly expect the company to grow this valuation by 5-20x in the $1-5 billion range over the next 2-3 years. This is the standard game in the venture capital space. It was highly improbable for a startup to have earnings needed to justify a multi-billion dollar valuation by solely operating in the Pakistan market. Airlift had to expand beyond Pakistan. It was understood by all investors that Airlift would use these funds to gain a larger share of the Pakistani grocery and retail market AND expand outside of Pakistan. 

Given these circumstances and blessed with the Series-B capital, expanding internationally was the straight-forward choice at that time. After conducting a thorough analysis of many countries across factors ranging from size of the population, purchasing power, cultural dynamics, current competition state, legal barriers etc, we zeroed in on South Africa as the first country to expand to after Pakistan. Was South Africa really the right country to expand to amongst alternatives? The counterfactual is hard to argue.

Setting up quick-commerce operations requires massive, upfront capital investments. To launch a new metropolitan area, we’d first establish a massive 70,000-100,000 square-foot warehouse, known as the Mothership in Airlift, to store all the dry-goods inventory. Simultaneously, we’d build a network of dark stores in all major neighborhoods ensuring that any address in the city could be reached within 15 mins from a darkstore. Next we’d procure substantial inventory to stock both the Mothership and dark stores, hire staff for picking/packing operations, contract with a logistics company for mid-mile logistics between the Mothership and dark stores and build a last-mile delivery fleet for customer orders. All this had to be done before opening up the city for orders. 

Compare this to launching a food delivery company like foodpanda, UberEats or Deliveroo, where you also have to acquire customers to order via your app and sign up delivery riders. For a food-delivery business you only have to sign-up restaurants but here in quick-commerce you have to build and run your own restaurants and the wholesale stores that supply ingredients to said restaurants. 

Once we had set up all the infrastructure and announced the launch of our operations in a market, customers would gradually sign-up on the platform and start placing orders. In the first few months when order volumes hadn’t ramped up, a market would be losing money until the infrastructure reaches a certain level of utilization. In this interim period, the operations and delivery staff are underutilized and being paid to be on standby to guarantee quick delivery times to customers. The gross-margins from delivering a smaller volume of orders would not be enough to cover the rent, utility and security costs of the warehouses. To reach adequate utilization levels, we would need to acquire the maximum number of customers as early as possible. 

E-commerce customers care about 3 main things: Price, Convenience and Availability. Traditional e-commerce players like Amazon, Walmart offer competitive pricing and a huge range of available products, but take anywhere between 4 hours to 4 days to deliver. Quick-commerce promises to deliver within 20-30 minutes. The conservative thing to do in q-commerce is to restrict availability to only the small-range of the most popular products like CostCo does and charge a premium for the rapid service. 

Since we wanted to grab a large share of the market as quick as possible, we went gung-ho on all three factors: Convenience (being in the q-commerce space), Price (by pricing close to the large discount retailers like Walmart, Carrefour, Metro) and, availability (offering not only dry-goods grocery but also adding fresh produce, fresh meats, frozen food, pharmacy and electronics). This further increased costs in several ways: Gross margins decreased, more cash became tied up in maintaining a wider inventory range, capital and operational expenditures went up due to specialized storage requirements – particularly for fresh produce, meat, and medicines – as well as security needs for high-value electronics.

Once we've built the underlying infrastructure and the exciting value proposition for customers at great cost, we then have to spend further to tell people about this. This meant spending heavily on brand and digital marketing to acquire customers.

People asked us how we managed to spend all the Series B $85 million plus some leftovers within one year. Well, a lot of it went towards setting up this infrastructure comprising 5 Motherships and about 120 dark stores across 9 cities in Pakistan and 3 in South Africa. More millions got tied up in working capital to build the inventory. Further millions went to Facebook and Google for digital advertising to acquire the customer base ranging in the millions. All this before we count the expenditure on developing the technology platforms, running the cloud servers, paying for third-party APIs and the corporate payroll and administrative expenses.

Why scale such a business

You may now reasonably think that q-commerce is a terrible business requiring massive capital investment, with razor-thin margins and little hope of becoming profitable. However with higher sales, we were able to get better procurement prices and credit lines from suppliers boosting our gross-margins and reducing working capital requirements. Higher gross-margins and higher utilization of infrastructure then led towards operational profitability. The company-level strategy  thus being that at the Series B stage, we’ll expand all over Pakistan and in South Africa swallowing the operating losses. We’ll blitzscale infrastructure deployments across both countries and offer customers competitive pricing, rapid delivery and wide availability. Then with Series C funding, we’ll increase utilization, drive optimizations and turn the company profitable. 

Given the ready availability of capital and investor interest in this sector in 2021, this did seem like a reasonable plan. With this rapid capital deployment for expansion in Pakistan and South Africa at the Series B stage, the entire house, and the land beneath it, was bet on the outcome of being able to successfully raise a Series C round and then using that capital to turn the company profitable.

Venture capital and technology investments are highly cyclical in nature. VC investments spike sharply when the global economy, particularly the US economy, is doing well and rapidly contracts as soon as outlook starts becoming pessimistic. Within the technology investments category, investors only tread towards the riskier, ops-heavy tech-based business more closer to the top of the cycle once the pure software opportunities get saturated with competition. Independent of industry category, investors first try to find attractive investments in the safer developed markets like North America and Western Europe, then the emerging markets like India, China and South-East Asia and only towards the end, and the top of the cycle, the riskiest frontier markets of Pakistan and Africa. Combining all these factors, you can project that investors will only invest in an ops-heavy, tech-backed business in a frontier market like Pakistan at the peak of the business cycle and would retreat as soon as the cycle starts going south.

2022

2022 started with several negative events in quick succession. Russia’s invasion of Ukraine led to a sharp spike in energy prices across the globe which led to inflation spiking in the US and Europe which led to central banks in advanced economies hiking interest rates and capital rushing back to safety. Airlift’s Series C investment round failed to materialize. In response the company jettisoned the South African business and did a round off layoffs and attempted to put together an internal bridge round from previous investors to put the core Pakistan business on life support. The bridge round failed when one of the lead investors pulled out at the last minute. You can hear more on this story from one of Airlift’s leading investors and board members here on this podcast.

Airlift didn’t become insolvent once these funding rounds failed but it realized it would get there in a few weeks if it continued operating. At that stage it would not have any cash left over to give severance to staff or pay back the trade creditors. The company had reached profitability at the marginal order level but still had a big outlay of fixed infrastructure costs, corporate payroll and technology costs that translated to net losses every week. The company decided to voluntarily shut down operations and began winding down, disposing of inventory and warehouse equipment to pay back suppliers and creditors. 

Market timing played a significant role in Airlift shutting down in 2022. The strategy of blitzscaling - prioritizing massive upfront capital deployment and hyper-growth before optimization - had been deployed successfully by many tech companies in the 2010s enabling them to become global players or have successful exits. Before Airlift, I’d worked at Careem, which, after its $3.1 billion exit to Uber, is considered one of the the crown jewels of the Middle East and North Africa startup ecosystem. I had seen Careem’s P&L during its similar phase of hyper-growth and rapid expansion. Careem’s financials were as much in the red as Airlift’s. If Careem had seen a similar downturn as 2022-23 before its Series C and D rounds, it is possible that Careem might not have survived. Conversely if Airlift had experienced the same tech boom that Careem benefited from in the 2010s, then Airlift might also have reached profitability and the state of being default alive. 

Reflecting on Airlift’s situation with only the market dynamics of 2021 in mind - and without the knowledge of what was to come in 2022 - I believe Airlift did make the reasonable decisions to aggressively expand operations upfront, even though the large fixed cost outlay of that expansion ultimately contributed to Airlift’s downfall.

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The faults in us, and not just our stars

I don’t intend to externalize all the blame on market timing. Looking back there are tons of mistakes that we made. A lot of things I hope we’d do differently if we could turn back time and do it all over again. There’s no guarantee that Airlift would definitely have thrived if we hadn’t made these mistakes and errors. It is possible that, excluding a small number of exceptional markets such as Indian and East Asian cities with high GDP per square foot and low labor costs, globally quick-commerce is a lousy market. As per Andy Rachleff, formerly of Benchmark Capital, “When a great team meets a lousy market, market wins.” Nonetheless, I’ll expand on the valuable lessons to be learnt from Airlift’s failure that may help others in similar phases of their startup journeys not fall in the same pitfalls. 

Airlift was fully committed to be in the top-percentile of companies on the high-growth venture track. Seed and an 8-figure Series A round within the year, closing 9-figure funding in less than 3 years and en-route to subsequent Series C-D-E and startup nirvana of a multi-billion dollar exit within 10 years. The company never paused to consider what if things don’t go as per plan until it was too late. As Mark Twain said “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.“ 

When Airlift fully committed to prioritizing growth over all else in 2021, it was sure that with close to $100 million annualized revenue run-rate, it would be able to raise a large Series C round, as per the precedents set for similar companies around the world at that time. In the Q4 '21 shareholder update to the lead investors, the company did report that after receiving all the wires of the Series B financing round, cash holdings at the end of the quarter were less than half of what had been raised in the Series B round. One could extrapolate that if more than half of the round was burnt within the last 5 months of 2021, the remaining half would likely run out in 2022. Yet no one planned, until it was late, for the contingency that the Series C may not be raised in 2022. As Josh Wolfe would put it, Airlift’s failure did come from the failure to imagine failure.

Airlift prided itself for operating at high speed, for growing revenue not in percentages but in multiples quarter over quarter. For an ops-heavy business masquerading as a tech company, this rapid growth came at steep costs and expanding liabilities. The expansive infrastructure needed to support $100M in revenue added to steep recurring costs on rent, utilities, logistics and salaries. With unreliable supply chains in frontier markets, we had to hold several days worth of inventory in our warehouses to guarantee availability to customers. As the daily sales volume increased, so did in proportion, the working capital stuck in inventory. The necessary optimizations needed to alleviate these constraints such as franchising operations, negotiating down procurement prices and acquiring credit lines with suppliers were postponed further away on the strategic roadmap. I give the analogy that; imagine a vehicle that gets progressively larger as it covers more distance. Starting off as a small car, turning into a SUV, then a bus, a lorry and eventually metamorphosing into a trailer truck. Now imagine driving this vehicle at 100 miles per hour on a mountain round. It was exhilarating, thrilling and generated a lot of awe but when the road suddenly turned in 2022, the vehicle went off the cliff. The company was over-leveraged for short-term success and there was no slack or buffer or a margin-of-safety to be able to survive a market turning.

Inside of a company, there are functions that are inherently risk takers, such as Ops, Product, Expansion, Marketing, Growth etc. These functions consume resources and take risks to propel the company’s growth. To balance the risk takers, there are risk controllers such as in Finance, Audit, Security etc. Airlift was heavily over-indexed towards risk takers and lacked empowered risk controllers. Airlift did not have an empowered finance leader who would have a strong handle on company financials including its burn rates, ROI on spends, working capital constraints, risk etc and used that position be an effective forcing function to the rest of the company leadership. This led to unsuccessful projects and experiments being abandoned, not properly shut down and continuing accrue costs. Lack of enforcement on headcount constraints leading to an inflating employee base. The large spends on digital marketing and customer promotions not being critically analyzed for the return-on-ad-spend. Neither of these leakages and inefficiencies on their own were big enough to become a leading cause of company failure, yet they did exemplify a systematic weakness of bleeding from several areas. If Airlift had someone being obsessively diligent about controlling these spends from early on, there may have been a small chance of a different end to this story since “a stitch in time saves nine.”

To build a gravity-defying business like quick-commerce in 2020, you need visionaries and mavericks who would push the risk-envelope to the red line. At that early stage of the q-commerce industry before any established precedents, it was suboptimal to take a standard, multi-day delivery, e-commerce model and try to iterate that towards 30-min quick commerce. To launch a new industry category like quick commerce, you have to start with the outcome that you’re committing 30-min delivery time to the customer and work backwards using first principles to figure out what’s needed to be able to deliver on that commitment. As the company grows in size and stakes get bigger, it is extremely important to balance the talent profile of the leadership team by having empowered skeptics, especially in a function like Finance. These skeptics, being more conscious of risk, would play an important role in balancing the endless optimism of the mavericks and visionaries. When looking for skeptics to join the leadership team, you have to be careful to not mistakenly end up with cynics and pessimists in an early stage company. At Airlift, we didn’t prioritize balancing the risk appetite within the leadership team.

Another important lesson, mentioned on this podcast also, is that Airlift should have had institutional, multi-stage investors on the post-Series B cap table. That these institutional investors, being more patient and having the ability to write larger cheques for Series C and beyond, may have helped the company raise more cash, survive the downturn and not shut down. These institutional investors on the company’s cap table and board, with their decades of experience through economic booms and recessions, could have shared these same critical lessons with Airlift before its closure. Lessons around being more disciplined with cash and finances, having the right personality balance on the leadership team, not running an ops-heavy business like a pure tech company and, lastly, not over-leveraging in the 2020-21, post-covid, ZIRP mania at the expense of long-term viability. A lesson similar to what David Packard said decades back that “More companies die from indigestion than starvation.”

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Epilogue

Airlift’s shutdown was probably amongst the most graceful shutdowns for a startup in the region. The voluntary shutdown allowed the company to pay off the most vulnerable segments of employees and contractors, the delivery riders and operations staff in full and on-time. Permanent employees got a six-week severance as opposed to months of unpaid salaries which is often the norm for companies shutting down in Pakistan. A small team stayed back to sell off assets and inventory that allowed the company to settle all trade creditors, with the smallest of suppliers getting close to full cents on the dollars they were owed. Two years on from shutting down, there are no open legal cases against the company, the directors or the board; no FTX style drama.

Silicon Valley or the US may celebrate business failure but it’s still stigmatized in most of the developing world. My personal objective for writing this now, 28 months since the company shut down, is to alleviate the burden for explaining Airlift’s failure from everyone who worked at the company. So that these people, who are amongst the most talented in the world, are known not for the failure of the company that was once incorrectly rumored to have become Pakistan’s first unicorn, but for the work they did to build a company that got close to being a unicorn within a record 3 years. These people built technology and systems that allowed for the movement of millions of dollars worth of fast-moving-consumer-goods across 12 cities in 2 countries, carefully curated an organizational culture that convinced exceptionally talented engineers to relocate from Silicon Valley to Pakistan and embarked on a mission that convinced tier-1 strategy consultants to leave their global consulting jobs in South Africa for an unknown Pakistani startup that aspired to make an impact across sub-saharan Africa. Many of these people have had their crucible moments in Airlift’s rapid rise and fall. Once the scars heal and the venture markets will turn back around for the up-cycle, these people will be a force to be reckoned with – watch out for them around you.

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Special thanks to Ashfa Bashir for reviewing the draft of this post.