Here’s the deal: On one side, we have the younger generation championing startups that disrupt businesses and make it large. Meanwhile, on the other side, Gen X looks on with shock at the massive amounts of cash these startups burn in pursuit of growth, coupled with the lofty valuations they command. This makes us wonder, is it standard practice for businesses to burn cash during their early stages, or should they strive for profitability from day one?
We believe that the best way to answer this is to draw lessons from some of today’s biggest tech companies from the West that were once mere Startups fueled by disruptive business models and a fervent dream of achieving greatness. Here's what we found:
This tells us:
Each of these tech giants have been pioneers in their space. Their transformation from fledgling startups to industry behemoths underscores the notion that disrupting businesses, reshaping our perspectives, and influencing our behaviors and preferences come at a price. The most successful of them took anywhere from 4 to 18 years to break-even.
Having said that, the statistics above also debunk a common myth among founders: the belief that achieving profitability requires scaling back growth estimates. Contrary to this notion, all the above tech companies experienced rapid expansion in the immediate 5 years of breaking-even. Which means, the pursuit of profitability is not about adjusting your pace, but more about identifying the optimal market, pricing strategy, and cost structure for your products.
Now let's look at where the Indian Startups stand:
For the sake of comparison, we considered the state of profitability of 15 of the biggest Startups here in India. We plotted all these companies in a chart, beside the West's behemoths. Here's where we stand:
Here's what we learn from this chart:
Within our sample set of 25 companies, the median break-even point stands at 8 years. However, before adopting this as a benchmark for your startup, consider that companies like Zerodha and Microsoft achieved profitability right from year one, whereas others such as Tesla or Uber took significantly longer to reach that milestone, probably due to their intrinsic industry constraints. At its core, it’s crucial to recognize that businesses exist to generate dividends for their shareholders. Therefore, its best to set an upper threshold of 5 to 10 years as a sensible benchmark for breaking-even in your business.
E-commerce companies like Nykaa, Lenskart and FirstCry are right at the middle of the chart along with their western counterpart Amazon, having taken 9-10 years to break-even-- a healthy sign. Makes us wonder, what's wrong with Flipkart then (16 years and counting)? On the other hand, Ofbusiness- which is working in the B2B E-Commerce space has outperformed all its peers, taking only 4 years to break-even.
Startups like PhonePe, Oyo, Byju's, Ola and Paytm- all are out of time to break-even. While Oyo and Paytm have been working hard on their profitability, Ola and Byju's have shown worrying signs. No wonder, both of them are in the news off late for all the wrong reasons.
Food for thought:
Interestingly, the median age of the top 50 loss-making Indian Unicorns is also 8 years. This suggests that India's ecosystem is coming of age and also explains why there's so much focus on profitability by VCs off late. However, if we don’t witness improvement in these statistics over the next 2-4 years, it could signal concern for the ecosystem. Such a scenario would necessitate deeper introspection into how we evaluate promising startup opportunities and assess the serviceable obtainable market for these ventures.
This article is a part of the March'24 edition of our Startup Newsletter. Here's the complete publication:
