India, which is regarded as having the third-largest startup environment in the world after the US and China, has difficulties with profitability. Only 17 out of the 80 unicorns in India with publicly available data, according to a Tracxn analysis, are profitable.
In 2021, a unicorn was born every week, and there was a financing frenzy fueling the growth of the Indian start-up ecosystem. In 2023, the situation has significantly changed. With widespread layoffs and VCs tightening their purse strings against the backdrop of a fundraising winter, the ecosystem is currently vulnerable. Investors have placed enormous pressure on startup entrepreneurs to provide a route to profitability because they have run out of options.
“He is heading in the right direction,”
India, which is regarded as having the third-largest startup environment in the world after the US and China, has difficulties with profitability. Only 17 out of the 80 unicorns in India with publicly available data, according to a Tracxn analysis, are profitable. But there are more than 100 unicorns in India.
“Any company’s profitability curve is a J-shaped curve, if you look at it. According to the founder and CEO of Gupshup, Beerud Sheth, “that is typically the nature of any tech business, and a tech company being unprofitable is not wrong because for months or years initially it is going to be inherently unprofitable until it crosses the hump.”
With more than 1,000 crore in revenue in the fiscal year ending March 31, 2022, Gupshup is a profitable SaaS company.
The fact that many Indian tech companies are heading in the right direction and getting closer to profitability gives me optimism about the Indian innovation ecosystem, he continued. “Amazon was unprofitable for more than a decade before it crossed over to profitability.
Values: Tumbling now, bubbling then
In 2021, 43 unicorns were produced, although only 22 were produced the previous year. This year, not a single unicorn has been spotted yet. More concerning is the fact that valuations have also been declining. Recently, the values of the leading Indian startups have been reduced. Byju’s, an educational technology firm, had its valuation revised in March of this year from $22 billion to $8.4 billion. Swiggy, an online food delivery service, is now valued at $5.5 billion instead of $8.2 billion.
The decline in valuations is due to both poor corporate performance and the cost of borrowing, or interest rates. Interest rates were extremely low from 2008 to 2021, allowing businesses to borrow money, finance initiatives, and increase revenue. The situation has significantly changed since the Fed interest rates increased from nearly zero to 5%.
“Growth slows down when interest rates are high because it costs more to borrow money. Because the benchmark comparison is so high, the discounted cash flow or net present value is substantially lower. All the multiples, including the sales and earnings multiples, have suddenly decreased, and valuations are contracting globally. According to Beerud Sheth of Gupshup, companies that are not profitable will suffer greater damage than those that are lucrative or headed that way.
Unicorns over proficorns
In the face of a worsening funding winter, the unicorns in Sequoia Capital’s portfolio are now heavily focusing on profitability, pausing or even canceling new initiatives that typically have a long and uncertain gestation period for return on investment, brokerage firm JM Financial reported in a note.
The situation for D2C gets increasingly worse as VC interest shifts to the SaaS industry. According to a PwC India research, the SaaS sector now has the most active unicorns of any business with roughly 20. Fintech is next with about 16 active unicorns.
“Emerging D2C firms should be ready for strong competition from well-established brands backed by large financial resources, even while overall domestic consumption indices in India remain positive.
According to Sri Peddu, General Partner at Powerhouse Ventures, “new entrants must comprehend the capital-intensive aspect of developing D2C brands as well as the extended timeframe necessary to attain profitability while maintaining high growth.
Additionally, he noted that not all venture capital firms with a technological concentration are willing to engage in direct-to-consumer (D2C) brands, and that the sources of available funding may be relatively scarce.
When discussing profitability, Rajan Kohli, CEO of CitiusTech, another profitable Indian unicorn, said that while “success does not look the same for everyone,” a focus on developing strong fundamentals, a unique value proposition, client centricity, operating in market segments, a profitability mindset and effective cost management, as well as scaling strategically are all connected in making a company profitable.
It is obvious that both sides have a lot on the line. The benchmarks have shifted, and now being a legitimately profitable business—or a “proficorn,” as we like to call it—is more important than simply belonging to the coveted unicorn club.
