Path To Profitability: The Growing Maturity Of Indian Startups

To add to the sector's worries, mirroring global trends, Indian startup funding in 2023 was 67 per cent less than the previous year.

But beyond such headlines, there is a strong arc of silver lining: a small, committed and resilient group of smart startups have turned their balance sheets from red to black in 2023.

These include Delhivery (Rs 11 crore), Zomato (Rs 138 crore), CarTrade (Rs 40.3 crore), Fractal (Rs 194.4 crore), Groww (Rs 448.4 crore), Tracxn Rs 33 crore), and Indifi (Rs 5.1 crore). The above figures are net profits for the year 2023. And in the quarterly numbers at the beginning of 2024, MobiKwik, Meesho and Oyo also showed profits.

If we take a deep dive, we see the example of Incred, a seven-year-old NBFC and a unicorn where Dalmia Group Holdings is a seed shareholder. Its current profit run rate is about Rs 40 crore per month.

Gaurav Dalmia, chairman of Dalmia Group Holdings, “If the equity fundraising markets shut down for a year or two, it will simply stop growing; there will be no other challenge.”

“If more equity is available, it will grow within the segments it is in, and enter adjacent segments. Like all NBFCs it is leveraged. It now has a good credit rating; this takes 4-5 years to build. It is not likely to have any existential dilemma. All companies and investors must do such scenario analysis for their businesses,” Dalmia added.

Corroborating the good news above, a January 2024 Nasscom-Zinnov study titled, “Weathering the Challenges: The Indian Tech Startup Landscape” found that 60 per cent of startup founders they interviewed reported increased profitability and revenue in 2023. Furthermore, they are bullish about their future in 2024.

The report also stated that India continues to remain the third-largest tech startup ecosystem globally, with over 950 tech startups founded in 2023, contributing to a total of more than 31,000 startups in the last 10 years. The cumulative funding for these startups from 2019 to 2023 has exceeded US$ 70 billion.

Another report, this time from Redseer on India’s digital economy noted that 80 per cent of India’s startups are on the path to profitability.

Debjani Ghosh, President of Nasscom, said, “India’s tech startup ecosystem has truly matured. This growth is now anchored in a strategic shift towards improving business metrics and revenue streams.”

Pari Natarajan, Chief Executive Officer at Zinnov said “Despite funding headwinds – including valuation corrections, selective capital allocation, and regulatory changes - India's tech startup ecosystem continues to grow at an impressive clip.

The India startup story is no longer about just scale and innovation but also about efficiency and adaptability - all building blocks of sustainable value,” Natarajan added.

Shailesh Mehta, Mumbai-based serial entrepreneur and founder of Joybynature, which sells over 150 brands in the organic wellness space, said, “When money is taken from large investors, there is pressure to grow revenues multiple-fold, but if you are financially prudent and focused on core businesses, then you are on the path to profitability.”

Why Now?

There are a number of foundational reasons why startup companies have moved into black. Some of it is because of growth in revenue, improvement in the business environment, use of technology and cost reductions.

For example, the sharp improvement in the case of CarTrade can be attributed to the decline in its ESOP expenses or non-cash share-based payment expenses. ESOP expenses plummeted to Rs 27.94 in 2023 crore from Rs 185 crore during 2023.

Artificial Intelligence provider startup Fractal founded in 2000 by Srikanth Velamakanni and Pranay Agrawal moved healthy through a balance sheet number play of exceptional item gain. Groww’s growing user base, a three-fold increase in operating revenue and a sharp drop in total expenses helped the company move into the profit club.

Alok Mittal, founder of Indifi said that post the pandemic when MSMEs were looking at a rebound, they turned to companies like his for working capital. A two-time jump in operating revenue from Rs 96 crore in 2022 to Rs 197 crore in 2023 made the company profitable.

Finally, food aggregator Zomato reported a consolidated net profit of Rs 138 crore in Q3 2023 from a loss of Rs 347 crore in the corresponding period last year primarily through a healthy growth of 69 per cent in its operating revenue.

Beyond Numbers

But, beyond the numbers, what is heartening is that one of the cardinal reasons why startups are getting profitable is that they are increasingly using Deep Tech or advanced technological innovations to improve organisational efficiencies. This reduces operational costs as well as automates internal operations. The Deep Tech platforms include AI, Big Data and Analytics, Internet of Things, AR/VR and Blockchain.

Confirming this, the Nasscom-Zinnov survey also found that 25 per cent of the startups founded in 2023 were using Deep Tech. Interestingly, there is another trend where these start-ups are leveraging AI from the over 100 Generative AI start-ups that have come up in India in the last year.

Finally, some experts say that the 'funding winter' induced deep cash crunch have forced these startups to introspect and realize that 2023-24 is a make-or-die moment. With investors putting pressure on the founders, they either had to shape up or ship out.

Mehta of Joybynature said, “Growth in revenue at the expense of profits is a sure-shot way to failure. Founders and investors are increasingly realising this.”

Dalmia summed up the way forward and said, “Our economy is doing well. Niche businesses are doing well. There is growth across industries. At the same time, there is a funding crisis. As is often said in geopolitics, ‘Never waste a crisis’.”

“Companies with sound business models should use the market conditions to their advantage and gain market share. Plus, startups should not dissipate the energy incumbents typically do not have. That is the basis for their relevance,” Dalmia added.