Startups Play The Profitability Card


Is this a real turning of the tide for Indian startups or just skilful manoeuvring of numbers?

There’s a new buzzword in town: Profitability. Startups are announcing profitability to different degrees — from listed giants such as Zomato to the likes of OYO, PharmEasy, Meesho, MobiKwik, Unacademy and Swiggy.

Is this a real turning of the tide for Indian startups or just skilful manoeuvring of numbers to show some progress in the right direction?

Many are also asking whether the drip feed of advice from VCs about finding paths to profitability in the past 16-18 months has actually reached founders. We’ll unpack this latest trend in the Indian startup ecosystem this week, but before that, here’s a look at the top stories from our newsroom this past week:

Startups On Profitability Parade

There’s been a flurry of claims by startups and actual regulatory filings showing profitability in the past three months. And each of these companies has chosen 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.

It started with Unacademy in late April, when cofounder and CEO Gaurav Munjal told employees that the startup will ‘almost generate’ a profit at the group level in April 2023.

Debt-laden healthtech unicorn PharmEasy also claimed to have reached a positive EBITDA in April this year, just months before its many operational problems came to light.

One month later, Swiggy chimed in with claims of achieving profitability in the food delivery business and said Instamart was also close to “unit economics positivity”.

Come July, Paytm reported its Q1 FY24 numbers and as we said at the time, the fintech giant is knocking on the doors of profitability. IPO-bound OYO is said to have improved its Adjusted EBITDA margins in Q1 as well.

And now, in August, Zomato eked out its first net profitable quarter, while MobiKwik (PAT of INR 3 Cr in Q1 FY24) and Meesho (profitability at a consolidated PAT level as of July 2023) also made statements about their recent financial performance that cannot yet be verified independently.

The latter two have not filed their FY23 or FY24 financial statements, and neither have Swiggy, Unacademy or OYO. But it would seem FY24’s buzzword is profitability, and in many cases, getting there is seemingly more important than actually proving that you can stay there.

More Than A Buzzword?

Startups have long relied on vanity metrics such as GMV and user base to court investors, but the in-thing now is Adjusted EBITDA profitability or PAT, if you want to really seal the deal. Funding or valuations were once coveted, but profitability is THE buzzword today, valuations be damned.

Just look at PharmEasy which claimed to have had an EBITDA-positive in April, but is now struggling to raise capital from existing investors at a huge valuation haircut to service its existing debt.

So an EBITDA-positive month does not mean that startups have access to enough working capital to replicate this success across many months. And VCs are not betting on short-term profitability, but rather signs of how replicable it is.

Given this, the natural question is how secure are these profitability claims and can they be reproduced quarter after quarter?

For instance, even in the case of Zomato, the one company that has actually revealed its financials, there’s some merit to the question of whether the profitability status can be sustained.

Deferred tax of INR 17 Cr brought Zomato just barely out of the red. At INR 2 Cr, the Q1 FY24 profit for Zomato is 0.0008% of its consolidated revenue. It’s razor-thin margins that won’t necessarily stand up to market fluctuations or even a temporary blip like what happened with Blinkit.

Food delivery, in many ways, is a zero-sum market for Zomato and Swiggy. If one loses out on the order, it’s highly likely the order went to the other. So Zomato has to guard its rear from surprises in its operations when looking to protect its profitability.

Founders Find Focus 

Besides pulling back costs (helped by a heap of layoffs) and scaling out of loss-making verticals, many of them have also looked at revenue diversification and sacrificing volume growth for revenue (Swiggy and Zomato in particular).

Startup founders we spoke to are of the opinion that in many cases, companies have actually figured out how to balance scale with profits, while in the cases of others, it’s largely about curtailing costs significantly. Employee expenses took up a majority of this and that’s why the layoffs have proven beneficial to the bottom line of companies, as harsh as that may seem.

As the founder of a Delhi-based digital commerce startup told us this week, “Even a month’s profitability is better than having losses for a month. Today, it doesn’t matter if a startup gets there with some creative accounting as long as no laws are breached and there’s no manipulation of numbers.”

The founder added that the smartest entrepreneurs not only focussed their energies there but also got the help of their investors in pulling off these turnarounds, at least as far as the short term is concerned.

Just What VCs Want

Which brings us to how investors have pushed founders into this mode. Some may call it the whip and others guidance and mentoring. Last year, when Peak XV (then Sequoia), Beenext and the described the current crisis as crucible moments and worse than past slowdowns, we knew that VCs were squeamish about the next few months.

The spate of governance issues and frauds in the ecosystem have also dented VC confidence in some founders. In lieu of looking to fix multiple fires in their portfolio, VC firms have focussed on their biggest bets or, rather, the bets with the biggest upsides.

A partner and CFO of a global private equity platform told me on the sidelines of last month’s MoneyX, there’s very little portfolio management for firms to do these days.

In his opinion, most investors are focussing largely on compliance and governance because without the right processes and frameworks, startups can not make meaningful progress towards sustainable business models and profitability. “Just having a good CFO can become a huge boon for startups in treasury management or even simply cost savings through proper financial controls,” he said.

So essentially, the incentive offered by VCs has changed from scale towards sustainable scale. It’s only natural that founders are looking to get in sync with this changing tune. A partner at an early-stage VC firm told Inc42 this week, “Founders have sharpened their focus because there’s no other option. They have been told that this is the only way to raise funding and everyone still needs funding to grow.”

In other words, this is not the moment when Indian startups turned into cash generating machines, but rather they are beginning to at least move in the right direction.

Startup Spotlight: T.A.C Taps Ayurveda’s Big Moment

The beauty and personal care category is exploding in the D2C segment in India, with several brands looking to occupy smaller niches and then grow into bigger names with more products. For instance, the Ayurveda Co. or T.A.C has banked on ayurveda as the key USP and emerged as a significant challenger to the likes of Mamaearth, WOW Skin Science, Plum and others.

The company claims to have witnessed 4X YoY growth in FY23 to INR 45 Cr, and now it aims to grow this to INR 150 Cr in FY24. And all this with an omnichannel approach, and a high-touch approach to increasing retention on the retail front.

Here’s T.A.C’s Growth Story

Sunday Roundup: Startup Funding, Tech Stocks & More

  • Tech Giants Vs Import Rules: Major laptop makers Apple, HP, Dell and others have urged the Indian government to extend the deadline for import restrictions on electronic devices

That’s all for now. We will see you next Sunday with another weekly roundup, and till then, you can follow Inc42 on Instagram, X/Twitter and LinkedIn for the latest news as it happens.

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