Exotel was a rare startup success story. Then this happened

Sometime in June 2022, about 800 employees of Exotel from across India and other countries had congregated at Aamby Valley in Lonavala.The stage was all set to celebrate the 10th anniversary of Exotel, which offers products that allow companies to make and receive phone calls over the internet instead of traditional telephone lines. It was also an occasion to celebrate the merger of Ameyo with Exotel, and the acquisition of Cogno AI.In a YouTube video of the event, one could see employees in Exotel’s signature blue tees being welcomed with Bhangra dance and delightful Punjabi music to one of Maharashtra’s poshest resorts, surrounded by picturesque forts like Korigad and Morgiri, dams and scenic waterfalls. There was more fun afterwards. A night full of DJ music and dance, drumming and a bit of roulette in a room flooded with pink lights and shining masquerade masks.Ameyo and Cogno AI, which were offering end-to-end contact centre solutions and conversational AI, respectively, complemented Exotel’s existing cloud telephony business. The two companies were important for Exotel in offering end-to-end customer-engagement services, catering to the growing communications platform-as-a-service (CPaas) market.Armed with the capabilities of Ameyo and Cogno AI, and $97mn from investors, Exotel had an ambitious target of reaching $200mn in annualised revenue rate (ARR) in three years, followed by an IPO. The company was growing at 70% year-on-year, making $50mn in ARR.This was in 2021-22.Here were three profitable companies that had come together to create a single entity that offered anything an enterprise would want in customer engagement, from contact centre solutions, cloud telephony to AI chatbots. The possibilities of Power of One — the theme for the annual event, Ekam 2022, at Aamby Valley — at that point seemed infinite.The exuberance and optimism, however, were short-lived. Between the optimism and realities of the business after the merger a year later, the 70% growth became the first casualty. This is how things stand as of FY23, the last publicly available financials:1. The company’s consolidated revenue from operations stood at ₹420 crore, at 35% growth.2. Its consolidated losses had more than doubled to ₹109 crore, the second year of consecutive losses after the merger.3. There was employee churn, as the company lost 25% of its workforce in two years and at least a dozen leaders.Things were not supposed to turn out the way they did.Founded in 2011, Exotel was one of the rare success stories in the Indian startup ecosystem. The company had weathered a tough funding environment, shifted to larger enterprises from being purely focused on small and midsize businesses. It turned into a profitable venture while largely being bootstrapped. After raising ₹2.5 crore in 2012-13, the company raised ₹700 crore from a clutch of investors such as A91 Partners, Blume Ventures and Steadview Capital in 2021. medium113840037The headwindsExotel is one of the key players in the CPaaS space, which refers to cloud-based communication services like SMS, WhatsApp and calls, both voice and video. Other key players include GupShup, Route Mobile and Tanla Platforms from India.According to a 2023 Gartner report, CPaaS grew 8.8% to $12.2bn in 2023, with the economic headwinds resulting in longer buying cycles. In addition, the competition has been growing with large players like Airtel bulking up their offering. This impacted all businesses, Exotel included.However, in the case of Exotel, there have been additional challenges. Following the merger, the company reported losses for two years in a row. To be sure, the three entities were profitable earlier.In FY21, Exotel reported ₹119 crore of revenue from operations with a profit of ₹10 crore and cash balance of about ₹28 crore. For the same fiscal, Ameyo reported ₹98 crore of revenue from operations and a net profit of ₹14 crore. Cogno AI’s revenue stood at ₹6 crore, with ₹1 crore profit.Exotel had been reporting continuous profits since FY17, and Ameyo since FY19. medium113840056 medium113840064According to Exotel, these “short-term losses” were due to strategic investments in research and development (R&D), geographic expansion (to UAE and Saudi Arabia), and new Gen AI-led technologies to position it for long-term growth. An Exotel spokesperson said in a statement that these investments have potentially paid off with operational profitability in 2024.The statement does address the question of consolidated losses. But do Exotel’s problems go beyond weak macros and rising competition?Well, the company’s expenses have also been rising. According to ministry of corporate affairs filings accessed through business intelligence firm Tofler, expenses grew 62% in FY23, with a 43% increase in employee benefits expenses.Three former employees ET Prime spoke to talked about the rising challenges after the merger. They said this in part was driven by constantly changing goalposts, sales strategy and lack of clarity on what the company wants to achieve.One of the executives, who spoke to ET Prime on the condition of anonymity, said the metric Exotel has been chasing kept changing every few months. “If it is revenue one quarter, it would be gross margins next and something [else] the next quarter,” the executive said.Multiple employees on public forums like Glassdoor shared similar concerns.The company introduced a ‘two-in-a-box’ model to improve sales.In a ‘two-in-a-box’ model, a member each from the sales and customer success team were given the responsibility for a single client account. In a commentary with its investor Blume Ventures, Exotel co-founder Sachin Bhatia said that by giving co-ownership, “they can pair up really well and celebrate each other’s wins instead of fighting over target ownerships”.“It did not work. What it did was pass off the ownership and accountability to the other when things went wrong,” a former employee quoted above said.ET Prime could not independently ascertain the veracity of these views. However, ET Prime sent detailed queries on operational challenges and gave Exotel a week’s time to respond. The company did not respond to specific queries on these challenges. medium113840075Integration pangsSince September 2022, the company’s workforce has witnessed significant decline. According to LinkedIn analytics based on Exotel employee data, the company’s headcount declined by 25% across sales, support and engineering job functions. This also included layoffs in the past two years.The company also saw at least a dozen of its leaders leave in 10 months, which ET Prime has verified using updated LinkedIn information and sources. These likely had an impact on Exotel’s operations.Sources said the integration has not been smooth due to employee churn and as a result, for some clients, their point of contact has been constantly changing. This has impacted client relations, a former executive said. ET Prime couldn’t independently verify this claim.Exotel did not respond to ET Prime’s detailed queries on employee churn, client concerns, “changing goalposts” and questions about the sales strategy. The company also did not respond to queries on whether it was able to get its dues from its clients, Byjus and Dunzo, the two startups that are in deep financial crisis.ET Prime had sent 10 broad questions with 12 sub-sections on September 3, for which the company responded with the below statement on September 9:“Post-merger, Exotel incurred short-term losses due to strategic investments, which have already paid off with operational profitability beginning 2024. These investments in R&D, geographic expansion (to UAE and Saudi Arabia), and new Gen AI-led technologies like CQA, Agenoids and contextual conversations have positioned us for long-term growth. Additionally, the company is now cash-flow positive, demonstrating its ability to generate sufficient cash to fund ongoing operations and growth initiatives.”One last thingThe market conditions have been challenging, with competition intensifying in the CPaaS space. While Exotel said that it was operationally profitable in FY24, a clear picture would emerge only when the company announces its results for the fiscal.