Amid India’s vibrant start-up scene, a significant change has been taking place over the last year. As the world deals with the aftermath of a pandemic and economic fluctuations, the Indian start-up ecosystem is going through a substantial shift from focusing solely on growth to prioritising profitability. Startups and their investors are adjusting their strategies, redefining priorities, and adopting new business models and cost-efficient practices. Currently, the winning theme in the Indian startup ecosystem is ‘profitability.’ Having learned from past setbacks, both venture capitalists (VCs) and startups are recognising that achieving profitability is crucial for survival. Startups need to develop a clear plan for profitability to ensure their sustainability and scalability.
Indian Start-ups are facing funding winter
During the short period of economic improvement following the pandemic, startup funding reached its highest point at around $50 million in Fiscal year 2023. However, various macroeconomic factors led to a significant decline in total funding to $15 billion in Fiscal Year 2023. The most impactful factors included the global rise in the cost of capital and interest rates, along with a decrease in the value of technology stocks. The economic downturn in developed markets such as the USA and Europe also had a negative impact, and the deceleration in consumer internet growth further contributed to the overall slowdown. In summary, there was a 70% decrease in funding from FY22 to FY23.
Indian Start-ups are now focusing on their path to profitability
Start-ups in India from various industries are using strategies to achieve profitability sooner and reduce their expenditure. Tech companies that are publicly listed have shown significant improvement in their EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) margins over the past five quarters. For example, Zomato increased the fees it charges restaurant partners and improved the recovery of delivery costs from customers. This trend toward profitability is also evident in global companies. For instance, Airbnb raised fees for guests and hosts and implemented cost-saving measures in its workforce and marketing efforts.
A study conducted on 100 unicorns by Redseer indicates that startups have made substantial progress in improving their profitability in the fiscal year 2022. 50% of unicorns are expected to become profitable by the fiscal year 2027. However, around 20% of these unicorns may encounter challenges due to unclear business models, declining demand, and regular obstacles. Some of these startups may turn to new business models, get acquired, or shut down permanently.
The outlook is positive for profitable unicorns in the Indian internet sector, and as per the anticipation of Redseer’s study, these unicorns would generate five times more profit in FY27 compared to FY23. Apart from that, a reduction in losses for unprofitable ventures is also anticipated. Nevertheless, some of these unprofitable unicorns may experience a decrease in valuations and shift towards slower growth trajectories to achieve profitability. According to insights from the study, there will be more profitable unicorns across most sectors including FinTech, Finance Services, B2B and SaaS and e-Commerce in the next 3 to 4 years.
Increasing Revenue, Reducing Costs
Profitability of startups can be simplified to increasing revenue and reducing costs. Many platforms players in various sectors are focusing on gaining a larger share of the digital advertising market to boost their revenue. Readseer’s analysis has anticipated that by the fiscal year 2028, the digital advertising market would reach US$21 billion, with around US$7-8 billion allocated to alternative channels like eCommerce, Gaming, Content, etc.
Companies are actively working on improving Customer Acquisition Cost (CAC), which had surged during the competitive phase of acquiring market share. This involves employing detailed analytics to identify profitable product-market segments and assessing the lifetime value of customers. There is significant variability among different players in terms of customer service costs, indicating opportunities to decrease expenses through specific strategies related to demand management and cost per query.
