Startups seem to be showing results on the profitability front in the last two years, with venture capitalists and private equity firms tightening their purse strings and stressing on profit first rather than just growth.
In FY24, three unicorns turned profitable: Travel tech startup Oyo, Honasa Consumer’s Mamaearth, and food tech major Zomato. Also turning profitable were Lendingkart and Mensa Brands’ MyFitness (the latter was Ebitda profitable). In comparison, only two unicorns — Chargebee and Rivigo — had turned profitable in FY22, and only one startup, Digit Insurance, in FY23, according to Tracxn data.
Besides, eight other startups have reported profits in either the third or fourth quarter of FY24, and one in Q1FY25. Five of these nine— Delhivery, Myntra, MobiKwik, Meesho, and Urban Company — are unicorns. While Delhivery and PB Fintech turned profitable in Q3, Myntra posted profits in Q3 and Q4. Awfis and Sugar Cosmetics were profitable in Q4, MobiKwik in the first half of the year, Meesho in Q2, and Practo in Q4 (Ebitda level). Urban Company has posted profits in Q1 of the current fiscal.
Going ahead, according to Prasenjit Chakravarti, partner, Khaitan & Co, 20-30% of leading domestic startups are likely to turn profitable by FY25/26. “The recent profitability trend among Indian startups, particularly in Q3 and Q4 of FY24, is indeed a promising development. This also serves as a harbinger, indicating that the trend will likely continue for many other startups,” Chakravarti told FE.
For Anurag Ramdasan, partner, VC firm 3one4 Capital, the ballpark figure of companies turning profitable is even higher. He expects more than 40% of growth-stage companies to achieve their profitability milestones in the next two-three years. “However, it is unrealistic to set such expectations for early-stage companies, where product market fit and growth remain the primary indicators of value creation,” said Ramdasan.
Today, there is an evident shift from a “growth at all costs” approach to operational efficiency in the financials of startups, according to analysts.
“In every boardroom conversation, achieving profitability is a clear lever for startups. To come into public markets, a lot of investors will value profit,” Karan Taurani, senior vice president and research analyst, Elara Capital told FE.
Some startups like MyGate have been chasing zero cash burn. “Two years ago, the company took a call that it would aim for zero cash burn and cash break-even by December 2023. We achieved that,” Abhishek Kumar, founder and CEO, Mygate had told FE earlier.
Taurani said startups have come back on track also because they are getting the advantage in terms of operating efficiencies and economies of scale. This approach is here to stay, say analysts. However, they also warn that profitability should not come at the cost of overall health and long-term success.
Companies should be mindful of not cutting costs in areas impacting product quality and customer satisfaction. “That can lead to declining service standards and customer loyalty. They should also look to attract and retain workforce,” Chakravarti said.
Likewise, startups should avoid rapid scaling without adequate operational control as that can lead to inefficiencies and increased costs, undermining long-term profitability, said one expert.
