No growth at all costs

Start-ups must have a clear path to profitability

Start-ups are a growth engine for the  slowdown-hit Indian economy, at least two industry reports have reiterated recently. Consider the “Indian Tech Start-up Ecosystem”, the latest report from the National Association of Software and Services Companies (Nasscom). It is heartening to know that India has the potential to create more than 100 unicorns (a start-up parlance to describe companies with a valuation of $1 billion and above) in the next five years. According to the report, the country will have 95-105 unicorns, enjoying a cumulative valuation of $350-390 billion. At present, India has around 24 unicorns. While seven were added this year itself till September, another two to three could be added by the end of 2019. India is third in the unicorn pecking order, after the US and China. 

The other report by KPMG also celebrates the Indian start-up story. The report, “Fintech and Startups Fuelling India’s $5-trillion Economy”, highlights the role of start-ups in giving a growth impetus to the broader economy. It noted that despite the overall slowdown, there was no dearth of funding in the start-up economy. Government, the private sector, and academia — forming the golden triangle — are important players for boosting the start-up eco-system further, the report suggested.

It also brought out the difference in funding between traditional businesses and start-ups. Traditional businesses relied on banks for funding their capex, and that the growth plans are stuck with liquidity drying up. In contrast, capital (mainly by venture capital and highly valued tech firms) has continued to flow into the start-up world. Industry estimates peg fund infusion in Indian technology start-ups at $4.4 billion till September this year, up from $4.2 billion in the corresponding period last year. Early-stage funding also rose significantly — as much as 70 per cent year on year, according to Nasscom.

All this is encouraging news, but that’s just one side of the story. The harsh reality is that profitability remains rare among the internet-led businesses, more than a decade after the country’s biggest e-commerce company, Flipkart, was born. Growth without profitability may not be a sustainable model in the long run, as the start-up universe has witnessed time and again. There is no doubt that the narrative on the distance and the path to profitability has to become a bigger part of the story versus growth at all costs.

International investors backing start-ups typically target high valuations of the businesses they fund, so that they can exit profitably. Towards that end, investors often push start-ups to play the volumes game in sales while maximising the user base. That, in turn, is made possible by offering deep discounts, whether on a shopping site or a food-delivery platform. This explains high growth among start-ups with little focus on profitability. The fact is that if an investor wants to stay in business for a longer period, return on investment is the key. Also, without a road map for profitability, Indian start-ups run the risk of killing the spirit of entrepreneurship, while giving in to the valuation game of investors. Many Indian start-ups have fallen by the wayside, and a large number of founders have had to step down because of a business model targeting notional numbers rather than profitability. 

While start-ups have indeed emerged as a success story for the country in the midst a slowdown, the funding structure in this ecosystem may be more fragile than popularly believed. It’s a vibrant industry with around 9,000 tech start-ups in the country, and counting. But as a recent report pointed out, Gurugram-based tech-enabled logistics firm Rivigo was set to become one of the first Indian unicorns to turn profitable, planning to achieve cash break-even in the current financial year. It is important for the survival of the ecosystem that more and more start-ups become profitable. This will also help attract more investment and make the start-up ecosystem a real driver of economic growth.