In a historic moment for the world’s third-largest startup ecosystem, India got its 100th unicorn earlier this week when Open, a neobanking platform for small and medium enterprises, raised $50 million at a valuation of $1 billion.
The landmark was celebrated by startup founders, investors and government officials alike.
These 100 unicorns have been aggressive in raising funds at high valuations as they sought to expand rapidly across sectors, verticals and geographies.
Yet, when it comes to profitability, very few have managed to crack the code.
According to data shared by data analytics firm Tracxn Technologies with Moneycontrol, only 23 of the 100 unicorns, or startups valued at $1 billion or more, have managed to achieve profitability for a financial year.
These startups have raised over $80 billion from investors to date, creating a total market value of more than $300 billion, the data showed.
The data is significant because some unicorns that have listed on stock exchanges last year have confronted an investor backlash for not managing to achieve company-level profitability.
Shares of Paytm’s parent One97 Communications Ltd, Policybazaar’s parent PB Fintech Ltd, and Zomato Ltd have fallen below their initial public offering prices since they listed.
Analysts at many securities and research firms have criticized the high cash-burning models of these unicorns. For instance, in a note in February, Macquarie Group said profitability for Paytm remains a “distant reality” because of its pricey employee stock option plans (ESOPs) and a “sub-scale” loan distribution business.
“Stock market investors, especially retail investors are FD (fixed deposit)-like investors. They are okay with 10% returns but that 10% should be consistent. Retail investors don’t understand risks. They want a 100% strike rate. If they invest in 10 companies, they want all the 10 companies to be profitable and all 10 to give them multi-bagger returns,” said A K Prabhakar, Head of Research at IDBI Capital.
“All these companies (unicorns) that got listed last year, I feel, they took away more than what they can chew. The kind of premium he charged for Paytm, and when he was questioned he said he offered a lot of things on the table, but for a loss-making company these kinds of comments don’t help and will have an impact on future listings (of new-age tech startups),” Prabhakar added, referring to Paytm founder Vijay Shekhar Sharma.
Private market investors, however, are not so perturbed about new-age startups’ profitability and remain bullish on such companies.
Siddarth Pai, Founding Partner at 3one4 Capital, which has backed unicorns like Darwinbox and Open, said investors and entrepreneurs should focus on companies’ paths to profitability rather than on absolute profitability.
“There are two things at which investors and the Board (of a company) look at. How quickly are you growing and are you converging your path to profitability or not. These are the two most important things,” Pai said.
“If the company stops growing and it doesn’t converge on a path to profitability, it becomes exceptionally hard for anyone to actually make an investment case. But if you have a company that’s turning profitable and growing very, very fast, it becomes a very interesting investment prospect,” Pai added.
Different metrics to judge
Ganesh, Serial Entrepreneur and Promoter at BigBasket, Portea Medical, HomeLane, and Bluestone, said fundamentals of new-age technology companies were different from those of traditional companies and so their valuations may not always go hand in hand with key financial metrics like profitability.
“You may not have a PE multiple or the company may not be EBITDA positive but that’s because their fundamentals are totally different and disruptive,” Ganesh said.
PE refers to price-to-earnings. EBITDA is short for earnings before interest, tax, depreciation and amortisation.
“These companies have changed the way consumers behave, the way they buy, the way they interact, the way they consume information and make a choice. All this has happened in the last five years, courtesy the internet, courtesy the pandemic, courtesy adoption of digitization and courtesy unwillingness to go physically to places. This tectonic shift has been brought by these new-age companies and therefore they are valuable,” Ganesh added.
Prabhakar contested Ganesh and Pai’s views. saying a private equity investor had a different mindset.
“A PE (private equity) investor knows that only 20% of his portfolio companies are going to be successful, which is not the case with public market shareholders. Here, they don’t have patience and want all their bets to become successful,” Prabhakar said.
The story and the infographic reflects the latest data available with Tracxn Technologies, which was shared with Moneycontrol. However, it can be noted that Indian entities of Mu Sigma and Razorpay are profitable according to their latest regulatory filings with the Ministry of Corporate Affairs.
It can also be noted that Groww’s India entity is profitable, while its US parent had clocked a loss of Rs 107 crore in 2020-21, according to a report by news agency Entrackr.
Further, while Freshwork Inc registered a quarterly loss recently, its India registered entity–Freshworks Technologies Pvt Ltd is profitable for FY21, according to its latest regulatory filing.This is a first of a three-part series taking a closer look at the data of India's 100 unicorns.