Indian startups in Sequoia's portfolio shift focus to profitability, put brakes on new initiatives: JM Financial

The note from JM Financial comes against the backdrop of an event organised by Sequoia Capital called Sequoia Horizon

A majority of Sequoia Capital's portfolio unicorns and soonicorns (soon-to-be-unicorns) in India are heavily focusing on profitability, pausing or even cancelling new initiatives that typically have a long and uncertain gestation period for return on investment in the face of a worsening funding winter, brokerage firm JM Financial said in a note.

“It was evident that the current funding environment and the reaction of public markets since the beginning of the current rate hike cycle has resulted in a heightened focus on capital efficiency,” JM Financial said.

“Companies have paused or terminated (wherever applicable) all initiatives with a long and uncertain gestation period for return on investment and are also being remarkably upfront about their profitability potential and timeline. We hope that these companies continue this kind of engagement to not only educate public market participants but also themselves understand the difference between private and public market investors’ perspectives,” the brokerage firm added.

The note from JM Financial comes against the backdrop of an event organised by Sequoia Capital called Sequoia Horizon. The event provided an opportunity for public market investors and equity research analysts to interact with various portfolio companies of the venture capital firm that are getting ready for a potential initial public offering (IPO).

The event helped brokerages to ‘demystify’ the business models of some of these intriguing companies, while also providing a peek at their monetisation potential and path to profitability, the brokerage said. JM Financial evaluated nine Indian startup companies from Sequoia's portfolio, including CarDekho, Cred, Dailyhunt, Gupshup, HealthKart, Ixigo, Meesho, Porter, and Turtlemint.

SoftBank, another aggressive startup investor in India, held a similar event with JP Morgan in August 2022, where it connected 10 of its portfolio unicorns that were considering going public in three years with mutual fund houses.

Sequoia Capital's move to engage its portfolio companies with brokerages comes at a time when India's tech IPO market has seen only one new listing since 2022, compared to at least five in 2021. In addition, public shareholders have recently dumped loss-making new-age technology companies and raised concerns about their ability to become profitable.

JM Financial firm said one of the key takeaways from their conversations with companies was that almost all the companies were giving guidance not just on operating profitability but also included discussions around PAT (profit after tax) and cash flows. The firm said that Sequoia’s portfolio companies were demarcating profitable business segments vis-a-vis investment phase business segments to avoid heavy investments into ventures that need more time to grow.

JM Financial also said in the note that many of Sequoia Capital’s portfolio companies have realigned their focus on their TAMs (total addressable market). The brokerage cited Meesho's example and how the social commerce unicorn, currently one of India's most-valued startups, is targeting tier 2 and lower cities, while Dailyhunt is aiming to create engaging content for India's working class and Cred is targeting the top 1 percent of India for financial services.

“This understanding and clear focus on customer segments helps these companies optimise their customer acquisition costs as well as improve conversion by curating targeted products and services,” said JM Financial.

According to the brokerage, the funding winter has been a boon in disguise for many of Sequoia’s portfolio companies that are market leaders or a close second. JM Financial said that as smaller peers are focusing on cash conservation and are not engaging in aggressive disruptions to gain market share, market leaders are actually benefiting from their stronger brand recall and further deepening their scale moats through organic customer acquisition.

The brokerage firm also said that Sequoia’s companies that engaged in discussions with them demonstrated a careful evaluation of their potential approach to a public market debut in terms of an investor pitch, operating and financial metrics as well as cap table and timing.

“While equity markets might not be highly conducive for growth stocks at present, these companies are laying down the groundwork in order to launch their processes as and when market sentiment turns positive,” the brokerage said.