Customer Money Better Than VC Money: Lessons On Profitability From India’s Successful Startups

The meltdown of WeWork from one of the fastest-growing tech companies to a Silicon Valley touch-me-not is arguably the tech story of the year. The US coworking giant’s much-hyped IPO was grounded before take-off and retail investors rejected it even after WeWork brought down its valuation to $10-12 Bn. In light of its earlier valuation of $47 Bn when Masayoshi Son-led Softbank last invested in the company in January 2019, that’s a huge discount and has tarnished the polished image of the company

The primary fallout was felt by investors who took a much closer look at their portfolio companies for another WeWork. With most unicorns basing sky-high valuations on fast growth rather than sustainable businesses, this can be called a wake-up call. Thankfully, some of India’s oldest and profitable internet businesses have the right lessons for the startups of today. 

At the TiE Global Summit 2019, held in New Delhi on 15 November, one of the biggest buzz words among investors was profitability. And to address this very vital issue, IndiaMART cofounder Dinesh Agrawal and Info Edge founder Sanjeev Bhikchandani and Nykaa founder Falguni Nayar CEO of Nykaa spoke about what helped them turn a profit in this business.

“The customer’s money is always better than an investor’s money because then you know you have a viable product” – Sanjeev Bhikchandani, CEO and founder, Info Edge

Speaking about his Journey of starting Info Edge, Sanjeev Bhikchandani said: “For the first three years of our company we were bootstrapped and we were profitable. We were profitable because we did not have a choice, we had to break even to survive. In 2001 we raised a small sum of money from venture capital (INR 7.5 Cr). Then Hitesh (Oberoi) who had just joined a few months before showed that we were earning a lot on each of our sales team. So what we had stumbled up on and what we started calling was our repeatable profitable unit.

So for any startup to turn profitable, it has to find its ‘repeatable profitable unit’ and invest more in those, Bhikchandani said, adding that “In the long run all companies are valued for their profitability. In the short and intermediate run, you can run on investor money. 

Dinesh Agrawal, who started IndiaMART in 1996, said that for them, real profits started showing only after 2015. 

“Most people think that by advertising or discounting you can attract buyers for a while, but for a long term attachment with customers, there has to be a product market fit, there has to be a quality of content,” Agrawal said.

IndiaMART went public in June this year.

Nayar, the founder and CEO of Nykaa said that there was no shortcut to the consumer wanting your business model. “The path to profitability involves first getting our operational costs down and getting marketing costs under control. Our marketing costs are just 7.5% of our sales.”

Nayar, who was a stock broker before starting Nykaa said that fund raising should not be seen as a way to inflate valuation.

All three founders agreed that startups, especially the consumer-facing businesses, burn cash to attract customers. But customers can switch to a competitor’s platform when the latter offer better discounts. This is one of the reasons that startups end up burning investors money on acquiring customers artificially. Such startups can only sustain as long they manage to get investors. After a point, investors will get cautious and stop investing at high valuations if they do not see a clear exit route.

Note: We at Inc42 take our ethics very seriously. More information about it can be found here.