From growth at all costs to sustainable growth: the maturing of Indian startups

Bengaluru: In the pre-pandemic years, Indian startups and their investors were obsessed with this one chant: GMV. That metric—gross merchandise value—measures overall sales by value, not accounting for the massive discounts offered, delivery charges, or the burden of returned orders. It was a celebration of growth at all costs. Fuelled by a seemingly unending supply of investor money.

But as the pandemic took its toll on startups another metric emerged: Unit economics. Investors, now with a tighter hold on their purses as startup losses ballooned, wanted to know how much a company earned on every rupee or dollar it spent. Profitability, once shirked by startups as a distant objective, became the focus.

Several startups were laid to rest during the funding winter that followed. But the tribulations of the past few turbulent years are easing, as India’s startup ecosystem settles into a more stable pace of sustainable growth.

Several Indian startups, including Rebel Foods, Purplle, Dehaat, and Urban Company, are seeing a more sustainable pace of growth and narrowing their losses as they focus on improving their unit economics and growing into the valuations they were bestowed with during the pandemic years, when capital was more easily available.

“I think there is a positive change in the overall shape of business thinking. Companies today are proactively looking to grow in a sustainable fashion, and this is happening across all stages,” said Dipanjan Basu, co-founder of early-stage venture capital firm Fireside Ventures.

He added that many companies are looking to get their unit economics right from the start, although they will continue to focus on growth.

Sustainable growth

Cloud kitchen startup Rebel Foods’s operating revenue rose by 39% to ₹1,195 crore in 2022-23, modest considering it had nearly doubled in the year prior. For FY24, the company reported operating revenue of ₹1,420 crore—a 19% year-on-year growth. But, importantly, it narrowed its net loss—to ₹378 crore in FY24 from ₹657 crore in FY23.

“We were able to significantly better Ebitda margins from higher SKSG (same kitchen sales growth) and improved margin profiles, and benefit from economies of scale,” co-founder Ankush Grover told Mint.

Ebitda, or earnings before interest, taxes, depreciation, and amortisation, is a key measure of operational efficiency.

Grover added that large food categories were addressed from a single piece of infrastructure, and that technology continued to be a strong enabler in terms of simplification and eliminating inefficiencies. In January, Mint exclusively reported on Rebel Food’s ambition to list on the stock exchanges next year.

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Earlier this month, beauty retailer Purplle posted a 43% increase in its revenue from operations to ₹680 crore and nearly halved its loss to ₹124 crore. That contrasts with its financials in FY23, when its operating revenue surged 116% and its loss widened 13% from the year before.

“We have focused on several key levers that have contributed to reducing burn and improving overall efficiency. Some of these initiatives are in the areas of order processing, logistics, warehousing and marketing. We have also achieved stability in manpower costs, which has played a crucial role in maintaining financial discipline,” Purplle’s finance chief Vijit Anand told Mint.

The company has also been harnessing technology to streamline its operations.

“These efforts, which began two years ago, are aimed at improving both the top and bottom lines, ensuring that operational leverage kicks in for sustainable growth,” Anand said.

Agritech startup Dehaat has clocked a steady 40-50% increase in revenue in recent years. It came in at ₹2,700 crore in FY24, with losses halving from the previous year.

“Over the past two to three years we have added a lot of geographies such as Madhya Pradesh, Maharashtra, Haryana and Rajasthan on the input side and established our presence across multiple countries in exports,” co-founder Shashank Kumar told Mint. “Growth has been part of the trajectory for us, and we’re now reaping the benefits of scale across businesses, allowing us to significantly improve our bottom line.”

“In today’s funding climate, you have to earn the right for the next round regardless of the stage you are at. It’s no longer FOMO-led investing,” said Prashanth Prakash, partner at Accel. 

“You need to demonstrate that you have really moved the needle in some dimension to get funded and show that you are able to do more with less capital. This automatically brings in the right kind of discipline and frugality for startups, and we are seeing that reflected in the latest numbers.”

IPOs on the horizon

Other startups such as Infra.market, Oyo, BigBasket and Swiggy also have been placing greater emphasis on profitability, their FY24 financials indicate. Some of these are expected to launch initial public offerings (IPOs) in the near term.

One of these is hospitality startup Oyo, which posted an operating revenue ₹5,389 crore in FY24, a 1.4% decline from the previous year. However, it recorded its first-ever full-year profit of ₹230 crore after posting a net loss of ₹1,286 crore the previous year.

The company has consistently focused on reducing burn in recent years, albeit with slower revenue growth. While Oyo added 5,000-6,000 hotels and vacation homes during the year, the two businesses need more time to achieve their full revenue potential, with growth expected to become evident going forward, a spokesperson for the company said.

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“Several startups that have gone public in recent times have been profitable,” said Basu of Fireside Ventures. “There is a general understanding that companies that are profitable are more highly valued so many of those that are looking to IPO in the near term are trying to replicate that.”

The pandemic hype

Startups raised huge amounts of capital during the pandemic, clocking high cash burn rates, but saw their revenues grow at 90-100%, which some investors cautioned would be unsustainable in the long run. Indian startups raised a combined $38.5 billion in 2021, but this fell to $25.8 billion in 2022 and $10.8 billion in 2023, according to data from Tracxn.

Only a few startups are able to attract funding in the current climate, with investors increasingly favouring only those that can deliver a healthy pace of growth at 30-50% with less cash burn, or with a clear path to profitability.

However, early-stage startups are still expected to show a higher pace of growth so that investors can determine if the market they are addressing is large enough.

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“For several companies, we understand that the pandemic valuations were just unrealistic through any lens. This has resulted in multiple problems, including raising the next round of funding. However, it has been more than three years, and the markets have changed for the better,” Basu said.

Basu expects the current financial year (2024-25) to be a continued period of growth for consumer-facing businesses. “In the second half of the year, startups will look to consolidate and establish leadership in their respective fields, which could potentially lead to more sustainable growth.”