With 70% drop in funding, startups in India begin reducing burn rate

Number of profitable unicorns is projected to grow across most sectors in 3-4 years, from 30 in FY22 to 55 in FY27.

With a 70 per cent drop in funding since FY22, Indian startups are in the midst of a funding winter, which is now forcing them to reduce burn rate and expedite their path to profitability. Consulting firm Redseer’s analysis of 100 unicorns projects the number of profitable unicorns to grow from 30 in FY22 to 55 in FY27. 

The strategy consultants expects 50 per cent of unicorns to become profitable by FY27, while 20 per cent will likely struggle due to regulatory challenges, plummeting demand, and unclear business models. They also expect some of the struggling unicorns to pivot to new models, get acquired, or close entirely.

The top four sectors expected to drive the highest pool of profit  are FinTech and financial services, B2B, SaaS, and eCommerce. During the same period, they also expect a decline in losses made by companies. However, many of these negative margin companies are expected to see funding changes, a drop in valuation, and a move to a much lower growth trajectory.

The Indian startup world has been on a roller coaster ride for the last few years owing to disruptions on a macro scale. While it experienced a sharp funding peak during FY22 totalling $50 billion,  a gradual onset of funding winter over the subsequent quarters led to a 70% drop in FY23 to $15 billion.

" The increasing cost of capital and interest rates, recession in developed markets, a decline in the value of tech stocks, and the slowdown in consumer internet growth have all been challenges for sustained funding. Consequently, startups are focusing on expediting their path to profitability and reducing burn

rates," said Mohit Rana, Partner at Redseer.

 There are about 100 unicorns and less than 400 public companies with a market cap of over $1 billion.  Ownership of founders in startups is also limited (0-20%) in 59% of private companies, as compared to public companies (50%+) in 65% of public companies.

“Listed tech companies have made significant improvement over the last five quarters. Paytm launched new products, expanded into new business segments, and upsold/cross-sold to existing customers to increase revenue per customer and reduce CAC. Zomato increased take rates from restaurant partners and delivery costs from customers," said Rana.

Similarly Policybazaar cut its losses by reducing customer acquisition cost related marketing expenses, while Delhivery took on backward integration by acquiring full stack solutions across the value chain. 

Listed tech companies have made improvements in the last five quarters

A similar path to profitability has been observed from global peers as well. "Uber increased take rates to 28% in 2022 - an increase from 15% in 2021, reduced incentives to drivers, and expanded revenue streams. Airbnb optimized and maintained cost discipline in workforce and marketing and increased fees from guests and hosts," said Rana.

Redseer predict that profitable unicorns in India could generate 5X the profit in FY27 as they did in FY22.