Indian startups are shedding the extra flab they put on during the days of easy money. Layoffs and cost restructuring are the only ways out for them now. They are shifting from growth to profitability now
Why have these startups been giving deep-discounting, high cash burn, and growth-at-all-cost models to Indian start-ups? But there was no stopping for them. The recent funding slowdown and market scrutiny appear to have enforced some discipline among them.
Zomato reported a consolidated loss of 186 crore rupees for the quarter ended June 30th. Thus, the online food delivery platform’s losses have narrowed by 48 percent from the previous quarter’s figure of about Rs 360 crore.
CEO Deepinder Goyal said that over the past few months, Zomato’s focus on profitability has sharpened amid the change in market context and it is allocating resources with a long-term view on sustainable growth and profits.
This goal comes along with sweeping changes. Having internally rebranded itself as “Eternal”, Zomato plans to move to a structure where it would have multiple CEOs running each of its businesses, which are Zomato, Blinkit, Hyperpure, and Feeding India. While key details are still missing, this appears to be an attempt to set up a corporate umbrella structure where the parent company is able to diversify revenue streams and derive larger profits from multiple subsidiaries.
On a similar note, Swiggy downsized its cloud kitchens and laid off 900 employees, citing its focus on growth and profitability. This year, Swiggy is introducing new private labels in the food business segment. While it is launching new cloud kitchens for these brands, it is also rationalising costs and seeking. optimisation. In fact, Swiggy is reportedly being very cost-conscious with this exercise.
In December last year, Swiggy co-founder and CEO Sriharsha Majety said that the first COVID lockdown forced the company to make hard choices, which accelerated it along the path to profitability. In fact, he said that Swiggy’s contribution margin was healthier than pre-COVID levels. He added that the food delivery category would turn profitable in the next two to three years.
Obviously, these large start-ups, along with select other names, have at the very least reoriented their priorities towards profitability. But, what are the drivers of this transition and the challenges involved?
According to Karan Taurani, SVP, Elara Capital, most start-ups realise that cash-burn alone will not bring multiples. They have thus taken a conscious step towards profitability. Sustaining profit along with growth will be the challenge. The level of market fragmentation is a key determinant for profitability. Higher outgo from the customer’s end is inevitable. Customer consumption patterns will be impacted.
According to Taurani, dominant start-ups in highly consolidated industry segments like food technology and e-commerce are best placed to pursue profitability without significantly sacrificing growth. Finally, there is increasing regulatory scrutiny of internet companies, which is both a motivating factor for start-ups to pursue profitability with renewed vigour and a hurdle that will have to be overcome during that journey.