Why Startups Are Prioritising Profitability Over Growth

By Inc42 Media

SUMMARY

Several high-profile failures and underperforming IPOs globally have served as wake-up calls for startups and investors alike

Investors are becoming more discerning and cautious. They now demand clear paths to profitability before committing large sums of money

Some of the startups that have shown a continuous profitability curve are OfBusiness, Nykaa, Gupshup and Zerodha

In recent years, a significant shift has been observed in the startup ecosystem: a move from prioritising revenue growth to focussing on profitability. 

This trend is particularly noticeable in the Indian startup landscape, where the mantra of “growth at all costs” is being replaced by sustainable and profitable business models. This article explores the reasons behind this shift, supported by real data and insights into the latest trends.

Historically, startups have been obsessed with rapid growth and scaling. 

This approach was fuelled by the belief that capturing market share quickly would lead to long-term dominance and profitability. 

Consequently, startups often focus on top-line revenue growth, sometimes at the expense of hefty losses. Investors, too, were more willing to pump money into high-growth companies, betting on future profitability once a dominant market position was secured.

The Wake-Up Call: Learning From Global Failures

Several high-profile failures and underperforming IPOs globally have served as wake-up calls for startups and investors alike. WeWork, for example, saw its valuation plummet from $47 Bn to around $8 Bn within months due to concerns over its business model and profitability. Similarly, Uber and Lyft, despite their massive revenues, continued to post significant losses post-IPO, leading to investor scepticism.

Indian Ecosystem: The Profitability Pivot

The Indian startup ecosystem, traditionally influenced by Silicon Valley’s growth-centric model, has also begun to pivot towards profitability. There are several reasons for this shift:

  • Investor Pressure: Investors are becoming more discerning and cautious. They now demand clear paths to profitability before committing large sums of money. This trend is evident in the strategies of major venture capital firms and private equity players operating in India.
  • Market Maturity: The Indian market has matured, and there is a growing realisation that sustainable businesses are more valuable in the long run. Startups demonstrating a clear value proposition and profitability are likelier to succeed.
  • Regulatory Environment: Indian regulators have tightened corporate governance and financial transparency norms. This has pushed startups to adopt more sustainable and transparent business practices.
  • Economic Factors: Economic slowdowns and uncertainties, such as those experienced during the COVID-19 pandemic, have underscored the importance of having a profitable and resilient business model. Startups heavily dependent on external funding faced severe challenges during this period.

To understand this shift better, let’s look at some data and examples from the Indian startup ecosystem:

  • Zomato: India’s food delivery giant Zomato made headlines with its IPO in July 2021. Despite being loss-making, the company emphasised its path to profitability, and investors responded positively. As of early 2024, Zomato has significantly reduced its losses and is on track to break even.
  • Ola: Ola, a leading ride-hailing service, has been focusing on unit economics and reducing cash burn. By cutting down on discounts and focusing on core markets, Ola has moved closer to profitability.
  • BYJU’S: Edtech giant BYJU’S, while still investing heavily in growth, has made strategic acquisitions to enhance its profitability. The company has diversified its offerings and improved its revenue streams, aiming for sustainable growth.

Strategies for Achieving Profitability

Startups are employing several strategies to pivot towards profitability:

  • Cost Optimisation: Reducing unnecessary expenses and optimising operations is crucial. For instance, startups are renegotiating vendor contracts, automating processes, and adopting lean methodologies.
  • Revenue Diversification: Relying on multiple revenue streams helps mitigate risks. For example, fintech startups in India are expanding their services to include wealth management, insurance, and lending.
  • Focus on Core Competencies: Startups are narrowing their focus to core products and services that offer the highest margins. This approach helps in better resource allocation and enhances customer satisfaction.
  • Data-Driven Decision Making: Leveraging data analytics to understand customer behaviour and market trends allows startups to make informed decisions, improving profitability.
  • Strategic Partnerships: Forming alliances with other companies can help in sharing costs and accessing new markets. For example, ecommerce startups partnering with logistics firms to reduce delivery costs.

Case Studies: Profitable Indian Startups

OfBusiness

OfBusiness, a fintech platform founded in 2015, provides financial solutions to small and medium enterprises (SMEs). By leveraging data analytics and modern technology, it assesses creditworthiness and offers customised financing. This approach has led to the disbursement of loans over INR 10,000 Cr to more than 10,000 SMEs across sectors like manufacturing and healthcare. Partnering with financial institutions like RBL Bank and ICICI Bank, OfBusiness has expanded its reach and achieved a market valuation of $5 Bn as of 2023​.

 Nykaa

Nykaa, founded by Falguni Nayar in 2012, has become a leading beauty and wellness brand in India. It expanded from an ecommerce platform to a chain of retail stores, known as Nykaa Luxe and Nykaa on Trend. Listed on the Indian stock exchange in 2021, Nykaa has consistently focused on profitability through a diverse product range and strategic offline expansion. As of 2023, Nykaa’s market valuation stands at $4.9 Bn​.

Gupshup

Gupshup, established in 2004 by Beerud Sheth, is a leading conversational messaging and bot-building platform. It provides automated messaging solutions to businesses across sectors like banking, insurance, and ecommerce. Gupshup’s success is driven by its ability to facilitate real-time customer interactions, enhancing engagement and customer satisfaction. With a market valuation of $1.4 Bn in 2023, Gupshup’s profitability is a testament to its innovative solutions and widespread adoption​.

Zerodha

Zerodha, India’s largest retail stockbroker, is a prime example of a startup that prioritised profitability from the beginning. Founded in 2010, Zerodha focused on a low-cost, technology-driven model, which allowed it to offer competitive pricing while maintaining healthy profit margins. By avoiding the high-burn strategies of other fintech firms, Zerodha has been consistently profitable, earning the trust of investors and customers alike.

Benefits Of Focusing On Profitability

Startups focusing on profitability over mere revenue growth experience several benefits:

  1. Investor Confidence: Profitable startups attract more discerning investors who seek sustainable business models.
  2. Market Stability: Profitability ensures better resilience against economic downturns and market fluctuations.
  3. Operational Efficiency: Prioritising profitability encourages startups to optimise costs and streamline operations.
  4. Long-term Success: Sustainable profitability aligns with long-term business goals, ensuring steady growth and stability.

The Future Of Indian Startups

The shift towards profitability is expected to continue, driven by both market dynamics and investor expectations. Startups that can demonstrate a clear path to profitability are more likely to secure funding and achieve long-term success. This trend will lead to a more resilient and sustainable startup ecosystem in India.

In conclusion, the focus on profitability over revenue growth marks a significant and positive change in the startup landscape. By building sustainable and profitable businesses, Indian startups are not only ensuring their own survival but also contributing to the overall economic growth and stability of the country. This trend, backed by real data and strategic insights, sets the stage for a more mature and balanced entrepreneurial ecosystem in India.

Source: Inc42 Media