Behind Instamojo’s Bold Pivot From Payments To Shopify Challenger

“September 27, 2023, RBI barred us from operating as a payment aggregator. October, 2023, we faced an existential crisis. Our terminal valuation was zero,” Instamojo cofounder Sampad Swain recalls the disruption that would set off an existential crisis for the payments aggregator.

Until September, the Bengaluru-based startup was said to be making close to INR 1 Cr in monthly profit. “We were on track to register $1.5 Mn in profits for FY24,” he tells us.

But then the RBI returned Instamojo’s PA license in September, 2023 because of the company’s net worth less than INR 15 Cr at the time of application that dates back to 2021. This was a body blow to the company’s ambitions of becoming a payments giant.

Swain explained that even though the shortfall on the company’s side was just INR 60 Lakh, it fell short of the RBI-prescribed minimum amount. In fact, the issue dates back to 2021 when Instamojo had nearly $4 Mn in its US accounts.

However, regulations are regulations.

“They returned our application. Unlike some others who were rejected, ours was returned, meaning we will be eligible to reapply after a year,” the cofounder and CEO says, but now as that deadline approaches, Swain is reconsidering where Instamojo needs to go.

He goes on: “Who doesn’t want full control of the payments value chain end-to-end? However, it involves significant costs and human resources to meet compliance requirements. But then it had to become just a fraction of our business.”

From Payments To Digital Commerce

For Swain and Instamojo, the RBI action came as a moment of introspection. The cofounder says this was the moment the startup decided it wanted to be the Microsoft for small businesses rather than the HDFC bank.

Then came the pivot to Digital Commerce as a Service (DCaaS) with a product that enables small businesses to set up their digital commerce operations, by simplifying the process for creating an online store and setting up a multichannel presence. 

Unlike the likes of Unicommerce, Increff, Browntape, and Easyecom which have been majorly known for their inventory management systems, warehousing solutions along with other ecommerce solutions such as order management, purchase management etc, and are more suitable for large businesses that are in the 10-to-100 journey, whereas Instamojo is looking to be the GTM enabler for 0-to-1 and 1-to-10 businesses, or those that are in the initial stages of their journey. 

It’s a model that’s best exemplified by Shopify globally. 

In India, Instamojo will compete with the likes of Dukaan, Bikayi, Shopify and DotPe among others, but while these companies are targeting the new-to-ecommerce merchants, in the long run, their path will collide with players who are catering to large retail enterprises and brands. 

In comparison to Unicommerce which has been catering to the likes of boAt, Mamaearth and has currently around 3,505 clients including SMBs and enterprises, Instamojo wants to play a volume game.

Even if the margins are lower, the volume could go up to millions, given that India has over 65 Mn MSMEs. This kind of volume would work for us in the long run, believes Swain.

It goes without saying that pivoting wasn’t easy for Instamojo. Payments accounted for almost 80% of the company’s revenue till then. Working with PAs like Cashfree, Razorpay, and PayU meant that Instamojo’s payments division was no longer a revenue stream for the company.

There has been some restructuring in terms of headcounts as well.  The company had to lay off around 20% of the workforce directly associated with its in-house payments aggregator operations. And, this was followed by firming up the strategy to acquire merchants and refining the product-market fit. Here’s a look at Instamojo’s suite of features: 

For Swain, this was not about attracting big brands and large retail giants. The company has taken an MSME-first approach. “For example, some just need a payment link to share with their customers. We have a solution for that. Some SMEs sell through Instagram. They have been advertising and maintaining a presence on Instagram but needed a landing page with payment integration. We now offer this in the form of online pages.” the CEO says. 

Swain also claims that some customers have been with Instamojo for more than three years before the pivot, and the startup has managed to retain almost half of such active customers. But the question is can Instamojo compete against the Shopify juggernaut, or indeed against the likes of Dukaan and DotPe .  

Can Instamojo Crack Profit?

The global market for ecommerce enablers is massive, and the likes of Shopify, Wix, WooCommerce, and US-based BigCommerce have managed to grab a lot of upwardly mobile entrepreneurs in India as well. Among startups, we have the likes of Dukaan, Bikayi, DotPe, and Nammacart actively chasing the MSME segment for digital commerce solutions.

Backed by investors like Lightspeed and Matrix, Dukaan pivoted to the model after failing to establish a product-market fit in kirana tech. The startup has raised more than $20 Mn till date across multiple rounds but has struggled to scale up revenue, which was at INR 10 Cr in FY23, with net loss at INR 35 Cr. 

Similarly DotPe, which had a GTM strategy around restaurants and eateries, expanded to ecommerce SaaS at large, combining payments-related features such as point of sale devices and QR codes. DotPe has so far raised over $90 Mn in funding from the likes of Temasek, InfoEdge, Google and PayU. 

DotPe claims to have over 7.5 Mn merchants so far.  In FY23, it reported a loss of INR 72 Cr on a revenue base of INR 36.9 Cr. These numbers do not paint a healthy picture of unit economics in this space. 

Instamojo will have to grapple with the problems of sustainability and unit economics just like its competition. The startup is eyeing profitability again by Q3 FY25, and has sought 18 months from its investors to achieve profitability and revenue figures of the past. 

What’s Instamojo Banking On?

There’s a lot of customer insight being carried forward from the payments product to the digital commerce solution. For one, the experience of the last 12 years will be a key strength, the cofounder says.

“We know exactly what the consumer problems are, how much they can afford while moving from 0 to 1, and then scaling up there on. Our products have been carefully designed around the same. At the same time, we are well aware of the risk. Seven out of ten businesses go down in this phase of expansion. We have a broader and better understanding of these realities,” he explains.

He also acknowledges that Instamojo’s target audience doesn’t want to invest much on the tech side, and are looking for individual solutions rather than a full suite. This has informed how Instamojo has built its products.

Swain also claims that Instamojo’s payments industry partnerships will be key for MSMEs. “We know how much bargaining power we have to leverage with payments partners. This is something that our competitors don’t know.”

Further, unlike other startups where the annual attrition rate is more than 20%-25%, Instamojo claims to have under 3% attrition over the transition period. “Despite having offered lower salaries than the competition, people have not left us, showing confidence in the products that we build,” Swain claims.

The biggest threat for Instamojo is Shopify, the Canada-based listed ecommerce SaaS giant, which is currently valued at $7.3 Bn. Shopify offers a similar feature set in its platform, including store creator, website builder, analytics, B2B-specific features, advertising and marketing tools and much more.

Most importantly, Shopify stores get access to thousands of plugins that make it easy for brand owners or operators to pick and choose what features they want to add to their stores.

While Shopify is more feature rich, it is costlier. Pricing varies from INR 18,000 to INR 21 Lakh per annum depending on the store size and volume. Some might say that in the Indian context, Spotify is better suited for businesses that have scaled up to a certain size and want to target overseas customers, according to a retail proprietor who has subscribed to Unicommerce’s SaaS solution.

After-sales support is another area where Swain claims to have an edge over others, thanks to the company’s experience of dealing with smaller merchants in the past. But most platforms have moved to automated help and support systems, which may be more cost efficient to scale up.

Among the Indian rivals, Dukaan has moved to AI-powered customer support — to much controversy, one must add. But Instamojo and Swain did not detail how the company is building its competitive edge in this regard.

Can Instamojo Get Its Mojo Back?

Before the RBI’s notification, in FY22,  Instamojo reported INR 7 Cr in revenue from IT services, while INR 38 Cr from payments.The company’s employee benefit expenses, including salaries, recruitment charges, and provident, were down to INR 14 Cr.

Essentially, Instamojo was profitable where most of the competition was struggling. Now, the company aims to be profitable again by the end of 2024 or in early 2025. “This is not a goal, but our survival instinct,” clarifies Swain.

Having regained 60% of its pre-September 2023 revenue, Swain believes that having survived thus far, Instamojo can only go to strength from here on. And he also credited the company’s ‘bootstrapped’ mentality.

Unlike Shopify and others who have spent millions in acquiring users, Instamojo plans to take it easy when it comes to advertising. “Instamojo’s last ad was in September 2021. Yet, we were profitable because of our consumers who have been doing the marketing for us,” Swain says boldly.

The past eight to ten months have been about going back to the drawing board. Having laid off 15-20% of the staff from its payments compliance and related services, a leaner Instamojo is now focussing its energies on hiring for the inside sales and support teams.

Meanwhile, this restructuring has created opportunities for cross-selling, allowing the company to offer ecommerce services to existing and lost customers. The RBI notification surely sent many customers to rival platforms, and many might have already signed up with rivals for ecommerce SaaS.

Despite Instamojo’s enthusiasm, the fact is that many merchants and MSME sellers have been slow on the uptake when it comes to ecommerce SaaS. Several of them have turned to marketplaces such as Amazon, Meesho and Flipkart which also have such products dedicated to enabling ecommerce adoption.

Plus, the bruising experience of kirana tech startups in India has also poked holes in the MSME tech thesis. While Swain and Instamojo are bullish, it’s clear that the pivot from payments to ecommerce SaaS comes with a set of challenges that even existing players have not figured out the answers to.