While every internet startup is focusing on offering deep discounts and cheaper prices, their overall value is not sustainable.

Scale vs sustainability The profitability challenge in Indian startup space
Atom Startups Monday, September 17, 2018 - 12:59

With Flipkart being acquired by Walmart, there is a sense of urgency to scale faster in the Indian ecosystem. The trend that has emerged is startups wanting grow as big as they can and figure out profitability in the future. That maybe a viable approach for many startups, but not for the vast majority.

There are many startups that emerge from Indian soils that don’t see the light of day. The problem being that they’re not working on a sustainable business model.

A recent review of the Tofler and the Registrar of Companies data showcased that profitability remained bleak even after cost cutting for consumer-internet startups. Losses and revenue grew at the same rate for these companies at around 26% from 2015.

Cumulatively speaking, this industry space acquired losses of Rs 19,200 crore on revenues of Rs 26,090 crore for FY ending March 2017. While we may be looking up to these startups for inspiration, they’re still not out of the red-line yet.

PolicyBazaar, one of the few companies that is profitable in its space, believes that startups should focus on sustainable business model development. They’ve delivered 2X growth on a back-to-back basis, while being profitable.

“Being unicorn means nothing at all. You are at a certain valuation. But a company can have value only if it has profits. A unicorn status in itself is ephemeral. Startups by nature are risky ventures, trying to change user habits — discounts is a way to do that. But in the process, burnout is high. Investors help create that value of $1 billion or more, but also know it’s not a fixed deposit. It’s an expectation of high return that drives companies to become unicorns or even larger,” Yashish Dahiya, founder of PolicyBazaar told Economic Times.

While every internet startup is focusing on offering deep discounts and cheaper prices, their overall value is not sustainable. They maybe sticky in the short-run, but Indian consumers are quick to turn away if a better competitor arises. Cost-cutting, in these situations, becomes the next step. Even in these situations, employees start to look around when the quality of the service goes down. While many startups believe that they’re too big to fail, some look towards PE funding and going public as a viable option.

With pressures mounting up, you may have more situations like Housing, PepperTap and TinyOwl emerging from the Indian startup space. Companies that aren’t able to raise funding, gain profitability or secure a pivot, are forced to shut down.

Looking at alternative startup spaces, the tea-startup space in India is heating up. Here too lies a profitability problem, but margins are becoming better in the space. Once a standardized experience is set-up, these tea startups can explore all options.  

Chaayos grew 160% compared to Chai Point's 55% year-on-year, which suggests that demand in this domain is rapidly increasing. Indians love consuming tea and having a positive environment to consume it in. There is also a home-delivery aspect of the business that these companies are exploring. Chaayos is dominant in the North with Chai Point controlling the South.

Both companies have ample space to expand but are seeing losses decreasing as they’re growing. However, with revenues going up from Rs 36 crore to Rs 56 crore, losses have reached Rs 88 crore from Rs 54 crore (2016-17) for Chai Point. On the other hand, at a smaller base operation, Chaayos increased revenues to Rs 27 crore from Rs 10 crore, but only marginally increased losses at Rs 16 crore from Rs 14 crore. They may be smaller in size but are looking at profitability in a leaner manner.

“We have grown very strongly in past three financial years and shall continue to do so in the upcoming years. Loss as a percentage of revenue has seen sharp decline for two straight years and are on our way to break even on a month-on-month basis in 2018-19,” VCCircle quotes Nitin Saluja, Co-founder Chaayos as saying.

This showcases the difference in approach in a growing market such as the tea-startup sector in India. Ultimately, it is the Indian consumer that will decide the fate of these markets but it’s quite possible that these startups aren’t looking at the right metrics to succeed. For companies like Chaayos that are looking at second-visitor purchase or traffic per sq.ft, success seems to be dependent on a variety of metrics.

Lean practises, along with solid fundamentals, seems to be the way forward. Take for example travel marketplace TravelTriangle, which recently raised Rs 80 crore in a series C round led by growth-capital fund Fundamentum. It already has SAIF Partners, Bessemer Venture, and others as existing partners. TravelTriange looked at multiple metrics, while focusing on remaining profitable from the get go.

“When we started the business, investors asked us how we will make it work since the industry is crowded with online and offline players. But the venture was EBITDA profitable from the beginning,” VCCircle quotes Sankalp Agarwal, CEO TravelTriangle as saying.

Ultimately, the perfect recipe seems to be about how a startup describes its own success metrics. Profitability should be a long-term gal, but you have to focus on multiple factors to increase your chances of success. 

Views expressed are author's own 

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