Header Ads

Startups In Their Profitability Era

December 16, 2023 0
Startups In Their Profitability Era

After the funding peak of 2021, when valuations of dozens of startups skyrocketed far away from their actual revenue, it seemed that a profitable startup was rarer than a unicorn.

But the sobering reality of the past two years has given unicorns and soonicorns of India a lot to think about. And primarily, their thoughts turned to one big question: How do we get to profitability?

Several startups have managed to answer this question in FY23 and even the likes of Zomato have turned the course around. What explains this new phase for Indian startups and tech giants?

We’ll look to get the answer about the profitable startup brigade in India, but after a brief detour into these top stories from this past week:

  • Omidyar Hits The Eject Button: Omidyar Network, one of the oldest active VC firms in India, is exiting the market. Did the firm’s legal problems with regulators force its hand?
  • Groww’s Super App Year: Groww thinks like a D2C company and looks at problems from a consumer-first perspective, says cofounder Harsh Jain as he gives us a peek into how the fintech giant is looking beyond investment tech
  • Decoding CRED’s 2023: This was a big year for CRED — embracing the platform life with multiple new and revamped products, and proving that financially too, it is on the right track with its FY23 numbers

Startups Don The Profitability Hat

When we last looked at the financial state of Indian unicorns in March this year, as many as 55 out of 74 Indian unicorns who had released their FY22 numbers were in losses. Their combined loss of $5.9 Bn in FY22 was almost double their cumulative loss in FY21.

While losses are not new in any way, the fact that investor sentiment was turning sour meant that startups had to focus on generating cash from their business rather than relying on VC funding to expand and grow. In other words, VC money was used to widen the top of the funnel, but when the tap is turned off startups have to find a way to get more revenue from the users they have acquired.

“VCs have always wanted startups to monetise and generate free cash flow, but the reality of the market was such that startups needed scale to make this possible. They relied on funding to grow their cache of users and are now looking to capitalise on this base,” Naganand Doraswamy, founder of early-stage VC firm Ideaspring Capital, told us.

Doraswamy, who founded Ideaspring in 2016, claims that this is how tech has grown in the Silicon Valley ecosystem, too. He pointed out that India is going through the phase, which Silicon Valley saw in the late 90s when a few startups emerged and are now tech giants after three decades.

The Profitable Startup Brigade

Other investors believe that if anything, India is maturing faster and profitability is part of the maturity curve. Even younger startups are turning profitable faster because they are focussing on profits and not scale, says the cofounder of a Mumbai-based micro VC firm.

But a lot of this has to do with the sector and segment that the startup operates in. It’s not possible to eke out profits in ecommerce in the first two or three years, but in fintech or enterprise tech, this is very much a possibility.

B2B models are better suited to churn out profitable startups, especially if factors like customer segmentation and product-market fit are right. And this is particularly true for startups that are targeting small businesses, where the TAM is still high and untapped.

B2C startups still need to spend to acquire users but those which did this in the past two years are reaping the rewards. Take Groww for instance, which turned profitable on a base of 6.5 Mn+ users. In a conversation with Inc42, Groww claims that profitability is an outcome of its product, other B2C companies still have to focus sharply on their revenue modelling and reducing customer acquisition costs.

Who Gets The Credit?

But who is to be credited for this change in the outlook among startups? Is it just that investors wanted startups to focus on profits, or to put it differently, would this change have been possible without the global economic slowdown, tight liquidity and the funding winter?

As investors tightened their purse strings, realisation struck that they needed to focus on their bottom lines to extend their runways and get fresh funding. This resulted in the start of restructuring exercises across startups through layoffs and cutbacks.

The fact is that a clear and short path to profitability is a condition for growth capital in 2023, so perhaps this phase would not have come without market conditions. There’s been a flurry of claims by startups around profitability, which is meant to perhaps act as a lure for investors. Startups have relied on vastly different terminologies and parameters for profitability — from profit after tax to EBITDA and adjusted EBITDA to profit as of a single month or the most recent quarter.

“We know many of the larger investors are also stipulating milestone-based tranches for investing in startups. Most startups that have raised large rounds this year have to have demonstrated their path to profitability or the potential for an exit in the next couple of years,” the Mumbai-based investor added.

Exits are, of course, on the cards for many investors with IPOs plans being revived in 2024 and 2025. Listed companies face the most visible pressure from investors to show profits and in Zomato’s case, the profitability has come after a decade of fine-tuning the revenue structure and charging customers directly per order. The rationalising of costs associated with Blinkit’s quick commerce model has also helped Zomato in a major way.

Zomato’s two profitable quarters show that the company has capitalised on the revenue momentum in FY24 and seems poised to become a profit-making machine.

Will The Tide Turn? 

Of course, it’s too early to say whether the profitability streak of FY23 will continue in 2024 and 2025. Like many have pointed out, the profits are in many cases a result of startups slowing down expansion of operations and user base. The focus has instead shifted to maximising revenue. Will Indian startups be back to their loss-making ways if and when they have to scale both revenue and users?

“It’s very much possible that startups go back to their old ways, but one thing is that those which need VC money will know that investor confidence can shift on a dime and if you don’t show the results there are a lot of questions, like in the case of BYJU’s today,” according to a Bengaluru-based edtech cofounder and CEO.

There’s also a feeling among startups that profits are possible without raising mega rounds, especially because talent costs have been rationalised. In addition, startups are replicating the business strategies that are working — Zomato and Swiggy’s platform fees and commission changes this year, for example.

One potential issue for startups that just focus on profits is that they might find their profits stagnating in the long run. “It’s a tricky balance. This year is about profits, but perhaps next year many companies will reinvest this profit into growing and expanding. And then the market will be asking questions about how long before they hit profits again,” the founder quoted above observed.

Profitability is also on the agenda for startups looking to get listed in 2024 and 2025. Showing profits before the listing is a recipe for a successful IPO, and it’s a motivation for the likes of OYO, Swiggy, PayU among others.

Startups go through cycles all the time. This year, startups are in the midst of a market that demands they show profits, but perhaps this expectation will change next year. And if so, will startups forget some of the hard lessons that brought them to profits in the first place?

In Focus: 2023 In Review 

Our wrap of the year continues with a flurry of stories on everything from the most controversial stories and personalities of the year to taking a look at the state of layoffs in the ecosystem.

Sunday Roundup: Startup Funding, Tech Stocks & More

We’ll be back next week with another roundup as we close the curtains on 2023.

Don’t forget to stay tuned to our social media channels during this time of the year. Join Inc42 on Instagram, X/Twitter and LinkedIn for the latest news as it happens.

The post Startups In Their Profitability Era appeared first on Inc42 Media.


Tags:

No comments

Subscribe to: Post Comments ( Atom )
Powered by Blogger.