Startups try to conserve cash, turn profitable as funding dries up3 min read . Updated: 14 Jul 2020, 05:37 AM IST
Many startups have curtailed their expansion plans and tailwinds for online adoption are helping to build profitable revenues in the short-term, as the pressure from investors rises
Startups are undertaking measures including slashing fixed costs and marketing expenses, and diversifying revenue streams, in a bid to turn profitable, as they gear up for a prolonged funding winter.
Many startups have curtailed their expansion plans and tailwinds for online adoption are helping to build profitable revenues in the short-term, as the pressure from investors rises.
Some of the measures have helped a few startups achieve profitability at an EBITDA level in the June quarter.
Technology platform for MSMEs Instamojo said that it became EBIDTA profitable in May, with its gross margins jumping from 35% to 60%, during the June quarter.
“By March-end, we took some serious business calls and undertook several cost cutting measures. Two-thirds of our employees had to take salary cuts, we had to renegotiate infrastructure costs including office rents and pulled the plug on digital advertising which was 40% of our acquisition costs," said Sampad Swain, co-founder and CEO, Instamojo.
EBITDA level indicates the profit made before paying the expenses, taxes, and depreciation costs.
The pandemic has forced offline merchants to move their businesses online, which has resulted in more signups, with Instamojo now acquiring 1500 merchants daily, versus 1200 in pre-covid times, Swain added.
Online travel aggregator ixigo, which reinstated salaries of its employees recently, cut its digital marketing budget and re-negotiated contracts with vendors to reduce fixed costs. In April and May, when travel bookings took a massive hit, ixigo worked on automation to reduce customer redressal costs and increase unit economics.
“Covid-19 has taught companies to be more efficient, especially on marketing and operational costs, and rationalise spends. We cut our marketing spends completely and were still able to retain more than half of our active user base," said Aloke Bajpai, co-founder and CEO, ixigo, which aims to turn profitable this financial year.
Conversations around unit economics and profitability are gaining more importance than ever for investors.
"Lately, EBITDA profitability has gained a lot of importance in deal evaluations especially in current circumstances. Lenders want to work with businesses which demonstrate growth & scalability in a sustainable manner," said Ankur Bansal, co-founder and director at venture debt firm BlackSoil.
Investors, who have been pushing portfolio firms to conserve cash and focus on profits, believe that short-term salary cuts is not real profitability and counter-productive in the long-term.
“We see some smaller startups achieving profitability prematurely because of a renewed focus by mid-stage investors on unit economics, or to stay afloat since capital is getting scarce. We have been investing more capital in our companies with good unit economics so that they can grow faster and use the pandemic to further consolidate market position," said Anand Prasanna, managing partner, Iron Pillar, a VC investor.
Point-of-sale (PoS) solution provider Innoviti Payment Solutions said that they focused on automation to reduce costs - helping its customer support team address grievances to the closest merchant in their locality; and expanded existing value-added services to all merchants, increasing gross margins per PoS terminal.
“During lockdown, we focused on aspects, which otherwise gets difficult, with a growth mindset […] With an aim to increase gross margins per terminal, we re-jigged our entire supply chain and spread existing VAS services to all terminals on priority, aiding us to increase margins per terminal," said CEO Rajeev Agarwal.
As startups focus on turning profitable, growth has taken a clear hit.
In certain covid-impacted sectors, growth is not possible, hence there is a shift towards managing costs. [...] increasing runway is the most important thing right now," said Anup Jain, managing partner, Orios Venture Partners.
Mid-size startups including wellness platform, HealthifyMe, which had an international footprint, are turning focus back to India business in spite of registering profits.