Despite pandemic, startups choose growth over profit

Hit hard by the coronavirus pandemic, startups scrambled to cut costs, laid off employees and even shut down some verticals, but a year on, most companies say growing fast is more important than being profitable, a survey has found.

About 77 percent of startups consider growth a focus area over profitability, according to a report from InnoVen Capital, a venture debt firm that surveyed 100 startups.

“On the face of it, it definitely surprised me, given that for a few months in 2020, survival and a shift to profits was the focus,” said Ashish Sharma, CEO of InnoVen Capital India, told Moneycontrol.

But it made sense, said Sharma. “Many startups were able to shed some fat because of the pandemic and become more cost-efficient. Once you do that, with capital still available, making growth your focus again, makes sense,” he added.

The survey also shines the light on an eternal debate in the startup ecosystem—growth versus profits. Consumer internet firms sometimes raise billions in capital to gain market leadership and scale, with profits often as a distant goal, even a mirage in some cases. Priorities keep shifting, depending on market sentiment, availability of capital and macro indicators.

To be sure, startups are more focused on being profitable than before. In 2019, only 15 percent of the startups said profits were a priority compared to 21 percent this year, the report says. But the focus on growth indicates aggression, a positive fundraising environment and a V-shaped economic recovery.

Sector-wise, about 90 percent of founders in enterprise software, digital media and social startups prioritised growth—the highest figure—while direct-to-consumer brands and ecommerce firms were more measured, with 60 percent focusing on growth, and 40 percent on profits.

In an encouraging sign, 42 percent of founders also said they expect to turn profitable within the next two years, while 23 percent said they were already profitable. As many as 29 percent said they would take two-four years, while six percent said they would take more than four years.

With more startups saying they are or will be profitable, this also gives them a better chance of securing an exit via an initial public offering (IPO) rather than mergers and acquisitions, the main source of exits so far.

More founders are beginning to consider an IPO as a likely mode of it—47 percent this year, up from 43 and 39 percent in the preceding two years. Of this, 30 percent are considering an Indian IPO, while 17 percent are considering listing overseas.

“Looking at going public is a good sign for the ecosystem, and is a result of the post-pandemic tailwinds. Despite the initial gloom and doom, we have been busier than ever with deals, and companies are showing both growth as well as scale that we have rarely seen this quickly in a market,” Sharma said.