Indian start-ups' road to profitability

A small industry of sorts seems to have popped up which is thriving on layoffs now -- such is the scale of people being fired from startups. There are start-ups which are now helping companies in smooth lay-offs, making it less painfull for the employees. So why did things come to such a pass?   

Sceptics have for long been questioning the deep-discounting, high cash burn and growth-at -all cost models of Indian start-ups. But there was no stopping for them. Now, the recent funding slowdown and market scrutiny appears to have enforced some discipline among them.

On the first of August, Zomato reported a consolidated loss of 186 crore rupees for the quarter ended 30th of June. Thus, the online food delivery platform's losses have narrowed 48 per cent from the previous quarter's figure of about Rs 360 crore.

And how did Zomato achieve this? CEO Deepinder Goyal said that over the past few months, Zomato's focus on profitability has sharpened amid the change in market context and it is allocating resources with a long-term view on sustainable growth and profits.    

This goal comes along with sweeping changes. Having internally rebranded itself as ‘Eternal’, Zomato plans to move to a structure where it would have multiple CEOs running each of its businesses, which are Zomato, Blinkit, Hyperpure, and Feeding India. While key details are still missing, this appears to be an attempt to set up a corporate umbrella structure, where the parent company is able to diversify revenue streams and derive larger profits from multiple subsidiaries.  

On the similar lines, Swiggy downsized its cloud kitchens and laid off 900 employees citing its focus on growth and profitability. This year, Swiggy is introducing new private labels in the food business segment. While it is launching new cloud kitchens for these brands, it is also rationalising costs and seeking optimisation. In fact, Swiggy is reportedly being very cost conscious with this exercise.

In December last year, Swiggy co-founder and CEO Sriharsha Majety said that the first Covid lockdown forced the company to make hard choices, which accelerated it along the path to profitability. In fact, he said that Swiggy's contribution margin was healthier than pre-covid levels. He added that the food delivery category would turn profitable in the next two to three years.

In July, One97 Communications, the parent company of Paytm, presented the annual report for FY22 for the first time as a public-listed company. It said that the company's aim was to achieve operating profitability by the second quarter of FY23. At that time, Vijay Shekhar Sharma, the founder and CEO of Paytm, had said that there had been rapid growth in payments and a significant scale-up in the lending and payment devices businesses.  

Clearly, these three large start-ups, along with select other names, have at the very least reoriented their priorities towards profitability. But, what are the drivers of this transition and the challenges involved?

According to Karan Taurani, SVP, Elara Capital, most start-ups realise cash-burn alone will not bring multiples. They have thus taken a conscious step towards profitability. Sustaining profit along with growth will be the challenge. Level of market fragmentation key determinant for profitability. Higher outgo from customer's end inevitable. Customer consumption patterns will be impacted. 

According to Taurani, dominant start-ups in highly consolidated industry segments like food tech and e-commerce are best placed for pursuing profitability without significantly sacrificing growth. Finally, there is increasing regulatory scrutiny of internet companies, which is both a motivating factor for start-ups to pursue profitability with renewed vigour and a hurdle that will have to be overcome during that journey.