In the summer of 2015, I was having an exciting discussion with my client who had just incorporated a new technology start-up. I was, and still am, an old schooler and asked him what’s path for profitability and breaking even. He was amazed and immediately stopped me there and said we are playing the valuation game. He said his plans are to grow at 5x in revenues that year and 3x in the next and by then, he assumed, that the company’s valuation would grow to 10x. I was intrigued, I pursued the discussion further and asked him whether he planned to make profits, as my basic understanding was businesses should make profits sooner than later. He almost ridiculed me and said valuation is THE THING for start-ups, and profitability is not even considered when you are growing (by growing he meant exponential increase in revenues but later I knew growing could also sometimes mean exponential increase in losses, Refer Swiggy’s results below[1]!)

Swiggy’ Financial Results

Particulars FY 2017-18 FY 2018-19 Revenue increase Losses Increase
Revenues 418 crores 1128 crores 1.69 times 4.95 times
Losses 397 crores 2363 crores

The key words used in our discussion were valuation, exponential revenue and cash burn whereas I felt the key words should have been cost, profits and sustainability. Because you focus on the latter three the former three would take care of themselves.

Late 2015 and early 2016 was special in the Indian start-up space because during that period (June 2015 to June 2016) 1191 start-ups were funded by various investors, whereas in the same period next year only 870[2] start-ups were funded and the downward trend is continuing ever since. If you consider the above numbers the sweet spot was clearly between June 2015 to June 2016 which saw high entrepreneur confidence and so was the investors’ patronage in those entrepreneurs. This confidence, or over-confidence if I may say so, resulted in huge capital flow to these start-ups without giving much thought on sustainability, unit economics and market conditions. The investors and owners were focusing on scalability, market capture assuming that once they have both then sustainability and profitability would follow forever.

This free capital flow, well almost!, had an impact in two areas, one a humongous increase in salaries of the employees, two a manifold increase in marketing expenses. Salary pay outs to the employees in some of these start-ups were unheard of. Imagine a fresher from an IIT was being placed for around 20 lakhs[3] and more! And reading those numbers, I definitely cursed my profession, as I was able to earn a fraction of what these Engineers could. I wanted to ponder more on this and decided to get in touch with many of my friends who were working at start-ups. I asked them if their humongous salaries were justified. They neither justified nor denied but said its basic economics of demand and supply in play. To impress investors and get better valuations, the start-ups had to project that they had the best talent, but the best talent came with astronomical pay-outs as talent pool from IITs and other top colleges were limited but demand for them was way more than that. The pay-outs were so huge that one of my friends working in a start-up, of course, said he was actively pursuing to move to Europe and he found, to his amazement, that his company was paying more than some of the European companies (post conversion of INR to EUROS). Have you heard, lest even imagined, that before? How cool is that! I thought. The conversation with him didn’t end there, I asked if he was already earning so much why was he pursuing another job, he bluntly said you are deemed dumb if you don’t change job every 2 years. Gone are the days of employee loyalty and camaraderie!!

With increased investor money invested at unimaginable valuations, (for instance, OYO’s value increased 10 times from USD 1 Bn to USD 10 Bn in less than 2 years[4]), came a greed of owning entire market, at whatever costs. Some of the start-ups like Zomato had more than 35%[5] of their revenues spent for marketing (including deep discounting). The assumption behind these spends was once you acquire a customer, he will stay with you even after the benefits (discounts, referrals, cash backs etc) were over and the mantra was to acquire customers at all costs. Give away freebies, deep discount your products/services, make them indulgent to an extent that they get addicted to it and will stay with you forever. Customer acquisition cost or CAC, Lead generation, % lead conversion became the parameters used for measuring marketing team’s performance. After so much spending on the customer, is he loyal to the product? The answer is anybody’s guess. I still look at OLA’s and UBER’s prices before I book my ride. I take the one which gives me the best price and wish the other well.

Have these two biggest costs resulted in any significant assets for the start-ups i.e., in terms of scalability and customer retention? It would be Yes and No. Yes, for scalability, as it has been the biggest asset of a technology start-up which was built by the super pricey, and skilled, employees. Is the cost justified? Again, anybody’s guess. It was justified in the case of FlipKart which got acquired at a premium. Talking about FlipKart, it will be one of the rarest acquisitions where a huge premium was paid for an effectively loss-making company. In India, an acquisition like FlipKart has not happened after that and in all probability, will not happen again.

The marketing spends effectively made to acquire and retain customers has not materialized as planned. Customers are loyal to the points and the cashbacks they earn, and the day it is stopped customers start looking elsewhere. In the end it renders all painstaking marketing efforts and marketing spends in acquiring them as good as the share certificate of a badly wound start up.

So, what went wrong for these start-ups? Many reasons can be attributed to them. The most important one is probably the start-ups didn’t focus enough on unit economics (profitability per unit of sale of product/service) as they should have. Second, the entry barrier to businesses that these start-ups had was very low and investors with increased risk appetite invested in a similar company to gain more market share which created a competitive situation rendering customer acquisition and retention costlier. Another reason could be that they thought the market was large and ever expanding but in reality, it was the existing customers who moved from the erstwhile companies to start-ups only for the benefits of it. Once the start-up taps dried, they either moved back to erstwhile option or to another competitor.

Is the start-up story over? NO and it shouldn’t too! They have given us some amazing products and services which we could not have imagined even a decade ago. Also, a country like India, with burgeoning youth population, needs employment which can be amply provided by these Start-ups. For start-ups to flourish they should start focussing on two key aspects: 1. building sustainable business model i.e., focus on their top products/services which have considerable, if not inelastic, demand and also ensuring scalability of the same, 2. focusing on profitability i.e., junk deep discounting or unnecessary cashbacks policy and instead emphasize on creating more value addition to the products/services which helps to significantly improve the bottomline. These two suggestions are easier said than done but as far as the business is concerned they are imperative because profitability & sustainability is the ultimate measure of a venture’s success and NOT valuation!

This article is the opinion of the author and purely represents his views.

[1] Source:

[2] As per data compiled by

[3] Source:

[4] Source:

[5] Source:

Author Bio

Qualification: CA in Practice
Company: Vishranth & Karthik
Location: Bengaluru, Karnataka, IN
Member Since: 07 Jun 2020 | Total Posts: 1

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April 2021