Profitability: Shallow Or Sustainable?
Amidst a funding crunch in the startup ecosystem, startups have begun sharing their profitability scorecards. Interestingly, this trend spans from giants like Zomato to startups such as OfBusiness, Unacademy, Meesho, Swiggy, Oyo, Pharmeasy, and more. These startups have adopted various metrics to claim profitability.
For context, metrics such as PAT (Profit After Tax), EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation), adjusted EBITDA, and performance over recent months or quarters have become focal points. This diverse set of metrics is being employed to catch the eye of investors and gain their favour.
Kitty Agarwal, Partner at Infoedge Ventures, highlighted that the push towards profitability in the startup ecosystem is largely driven by investor expectations. She noted that investors are now demanding improved unit economics and profitability, particularly from startups in later growth stages.
Startups have shifted away from boasting about metrics like Gross Merchandise Volume (GMV) or user base to capture investors' attention. Instead, the new focal points are PAT and adjusted EBITDA. The recent valuation markdowns by investors have prompted startups to adopt a more cautious approach and concentrate on refining their unit economics.
Investors such as Rahul Khanna, Managing Partner at Trifecta Capital; Gautam Gandhi, Partner at NYTCP (Chair); and Nidhi Killawala, Partner at Khaitan & Co., emphasised that both founders and investors have undergone a change in attitude. The evaluating parameters have been adjusted accordingly.
Apart from taking cost-cutting measures and shutting down non-profitable verticals, growth stage startups have been actively looking for revenue diversification and sacrificing scale.
A Bird's Eye View
Taking a broader perspective, VC firm PeakXV, with approximately 50 unicorns in its portfolio, has noticed a significant portion of them showcasing profitability or nearing profitability in recent filings. Despite experiencing a notably dry funding season, the firm has managed around 10 exits this year. Reports suggest that with these profitability trends across its portfolio and IPOs anticipated by FY25, the one of the leading VC firms in Southeast Asia is poised to secure a substantial number of exits in the coming years.
In the midst of this profitability trend, a critical question arises: Are the impressive figures on paper sustainable? The answer is, indeed, that they are real. However, concerns about their longevity remain. Is achieving profitability only viable through growth at the expense of scaling and discontinuing non-profitable verticals?
Consider Zepto, which just a month ago grappled with sustaining a viable cash flow. Critics speculated that it might need to raise funds at a lower valuation. However, defying these odds, Zepto recently became the year's first unicorn. It successfully raised approximately USD 200 million, valuing the company at USD 1.4 billion. Reports also indicate that Zepto has its sights set on going public in 2024 and is considering a pre-IPO funding round in the near future.
Unit economics have not been so sweet for the likes of Zepto. The space has been struggling to reduce delivery costs, maintain a positive cash flow, and more. It remains to be seen how these players, including Zepto, will defy the odds.
Experts opine that investors are now scrutinising profit margins, unit economics, order repartition rates, and customer acquisition costs, rather than solely focusing on GMV and user base figures. The coming quarters will reveal how startups navigate the path to sustainable profitability.
Note: Expert inputs in the story were taken at TiE Delhi-NCR's India Internet Day.
