How decline in funding is making startups expedite path to profitability

Startup funding declined by 70 per cent from FY 2022 to FY 2023

startup-vc-investment-funding Representational image | Shutterstock

As startup funding declined by 70 per cent from FY 2022 to FY 2023, startups are aiming to expedite their path to profitability. They are also reducing burn rate and the number of profitable unicorns in India is projected to grow across most sectors in the next three or four years. As per a recent observation by Redseer Strategy Consultants, increasing cost of capital and interest rates, recession in developed markets, a decline in the value of tech stocks, and the slowdown in consumer internet growth have all been challenges for sustained funding for the startups.

“There are about 100 unicorns and less than 400 public companies with a market cap of over $1 Billion. While technology has an outsized impact on the economy, there is also a tendency for overvaluation in the startup world. Ownership of founders in startups is also limited (0-20 per cent) in private companies compared to public companies (50 per cent plus) in 65 per cent of public companies. As startups sail through rough waters, boards need to ensure future alignment and take more responsibility to guide and support founders during challenging times,” said Mohit Rana, Partner at Redseer.

He further pointed out that listed technology companies have made significant improvement over the last five quarters. Paytm launched new products, expanded into new business segments, and upsold or cross-sold to existing customers to increase revenue per customer and reduce CAC (Customer Acquisition Cost). On the other hand, Zomato increased take rates from restaurant partners and delivery costs from customers.

Pointing at global peers in the tech segment, this partner observed that a similar path to profitability has been observed from global peers as well, as Uber increased take rates to 28 per cent in 2022 - an increase from 15 per cent in 2021, reduced incentives to drivers, and expanded revenue streams.  Similarly, Airbnb optimised and maintained cost discipline in workforce and marketing and increased fees from guests and hosts.

As per the Redseer report, the number of profitable unicorns is projected to grow from 30 in FY22 to 55 in FY27. 50 per cent of unicorns are expected to become profitable by FY27, while ~20 per cent will likely struggle due to regulatory challenges, plummeting demand, and unclear business models. The report also observes that the struggling unicorns will pivot to new models, get acquired, or close entirely. However, on the other side, profitable unicorns in India could generate five times the profit in FY27 as they did in FY22. The top four sectors expected to drive the highest pool of profit in the coming years are FinTech and financial services, B2B, SaaS, and eCommerce.

As per Redseer, many of the negative margin startup companies are expected to see funding changes, a drop in valuation, and a move to a much lower growth trajectory. As per Rana, the path to profitability trickles down to enhancing revenues and decreasing costs. “While pushing ad revenues, backward integration, and increasing margins or take-rates can enhance revenue, optimising CAC, reducing returns, and customer service costs can slash operating costs. Many startup players are focusing on increasing their share of the digital ads market, which has a significant opportunity to drive revenues. Players can further reduce customer service cost while maintaining a high CSAT (Customer Satisfaction Score), only 10 per cent of companies have optimised their spend while maintaining a good CSAT,” said Rana.


📣 The Week is now on Telegram. Click here to join our channel (@TheWeekmagazine) and stay updated with the latest headlines