Profitability should be prioritised by startup founders as aggressive investors are reducing exposure towards high-growth ventures amid a funding winter, said founders of profitable unicorns, speaking at TiEcon’s India Unicorn Summit 2022.
“Profit comes first, the quality of the business from the point of view of asset quality and governance quality comes second, and growth is an outcome,” said Asish Mohapatra, Co-Founder, and CEO, OfBusiness.
Mohapatra said he believes that while building a company, founders should look for a team of people who prioritise profitability. “The DNA of the top team should be such that they think about profitability first. In the beginning, I had my designation as CPO (Chief profitability Officer),” said Mohapatra, speaking at the TiEcon India Unicorn Summit 2022.
Corroborating Mohapatra’s comments, Amitava Saha, founder and CEO of logistics unicorn Xpressbees, said founders should be diligent about how they spend the money they raise.
“We need to be very careful with every rupee being spent. It has to be led by example. In the early days (building Xpressbees) even after successfully building First Cry, I used to stay at extremely ordinary hotels when I had to travel. It didn’t matter that I'm a director or a CEO of a large company,” said Saha.
Xpressbees, which raised $300 million in a funding round led by Blackstone, TPG, and Chrys Capital at unicorn valuation earlier this year, claimed that the business is profitable and growing at a 70 percent on a CAGR (compounded annual growth rate) basis over the last 12 months.
However, the company’s filings with the Ministry of Corporate Affairs (MCA) for 2020-21 (FY21) showed that the company reported a loss of a little over Rs 60 crore during the year. Saha, today, said that Xpressbees turned profitable in June 2020.
Saha also said that Xpressbees has not used any of the funds it raised in February as the company does not need the capital immediately since it is profitable.
Interestingly, Bhaskar Subramanian, co-founder, and CEO of another profitable unicorn Amagi Media Labs, also said that his company, too, has not used any funds that it has raised.
“We don't want to build on the investors' money, we haven't touched the investors’ money as we are profitable since 2016,” said Subramanian.
The founders’ comments come at a time when funding to India’s startup ecosystem is slowing down amid a correction in global financial markets.
The three-panel speakers said that the conversations around fundraising have changed over the last few months.
“Funding for late-stage, high cash-burning companies has evaporated. People who have money are looking for cheap deals or are investing in very early-stage startups. Because the risk-reward ratio is very high,” said Mohapatra.
“Debt markets are ripe. While there is bad news for equity, the debt market is here to support you, especially if you are a profitable, late-stage, well-governed company,” he added.
Moreover, startups are also shifting their focus to profitability from growth. Many venture capital and private equity companies are also advising startups to cut costs and prepare a runway for the next 18 to 24 months.
Private equity and venture capital firms are also advising startups that need cash to survive to consider flat and down rounds, as valuations of high-growth tech companies across the globe are falling.
Amagi Media Labs’ Subramanian said founders should first focus on creating value and valuation will eventually follow.
“Valuation actually has no value, we only focus on customer value. Is the customer paying us, is the unit economics in the business existing, and is our gross margin intact,” Subramanian said.
Amagi Media Labs, Xpressbees, and OfBusiness are three of the country’s 23 profitable unicorns. India welcomed its 100th unicorn in May, and the tally currently stands at 102.
The shift towards profitability holds significance as many aggressive tech investors are reducing their exposure to high-growth companies and are focusing on profitable businesses.
Some of the world’s biggest venture capital investors including SoftBank Group and Tiger Global are also reducing their exposure to high-growth companies. Tiger Global and SoftBank reported record losses on their VC funds as tech valuations slumped across the globe.
Saha, however, argued that startups that are building sustainable companies would not get affected by this ‘much-talked-about funding winter.’
“If you are building the business the right way, I don't see it as a change. Leave some money on the table, so that everybody is happy. It should be a win-win situation for both the founders and the investors as they are someone who’ll be with you for a long time,” said Saha.
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