Indian Startups and Business Models

Indian Startups and Business Models

Unicorns are the order of the day. It sometimes appears that unless you can boast of a billion dollar valuation, you have not really arrived at the start-up party! The pandemic did spark talk of cockroaches - start-ups who are able to survive tough market conditions, much like the cockroaches of urban legend who can survive even a nuclear blast! However, the resurgence of technology start-ups, particularly in India, over the last year has revived the debate over start-up valuations and real value.

Consider this: even today, we prefer to deal with people who are well behaved, who are able to respect others and stand up for the set of values and principles they espouse. This axiom of social engagement is relevant even in the 21st Century. In the same vein, startups, many of whom undeniably cater to needs that were hitherto not addressed at all or unsatisfactorily, still need to get their business basics right! Profitable business models, stake holder value creation and share holder returns never really went out of fashion.

How long will investors allow them to subsidize offerings to customers, sacrificing profitability in the name of metrics that weigh on valuation? Their bluff will be called sooner rather than later and when it does happen, many a founder will be left wondering what they did wrong and how they can get it right the next time.

Even a giant like Amazon has seen a huge valuation surge only after Amazon Web Services started generating meaningful revenues and margins. Despite owning the world's largest e-tailer platform, the stock was quoting below 20$ as late as 2013 since profitability was a question mark. It rocketed up nearly ten times since.

Of course, many say that the India ecosystem is unique, things work differently here et al. However, the basics of an emerging business and its prospects are bound to be relevant here too. Valuations were problematic for Flipkart and Zomato in the past, and since October 2021, the platform companies that went IPO have seen their valuations shrink considerably too.

The drying up of easy liquidity is certainly the overriding factor, but the fall has been particularly steep for those who have emphasized growth over profitability. After all, early stage investors are answerable to stake holders and cannot forever fund the subsidizing of customer acquisition. Retail investors take a cue from them too.

While Indian startups have done a great job of establishing their brands - some of them globally - they need to seriously start thinking of their next paradigm. They need to create organisations that will survive the next few decades through meaningful business models. There will definitely be a few which will make it and a lot of them which will not. Then, traditional brick and mortar entities are levelling the digital playing field too. Surviving a few tough years, in which growth might have to be balanced with net earnings, will be crucial.

As Charles Darwin said, it is the fittest - not the biggest but the ones that adapt best to their environment - who survive. That has not changed since time immemorial either.

- Deepak Naragund, Jun 2022