Evaluating New Age Startups: Profitability Vs Growth

Bulleted

Text

Key Insights

Startups prioritize growth, but venture capital investors expect large returns, which requires rapid user growth and pricing power.
Growth versus profits is a constant balancing act, depending on the business type (e.g., Ecommerce vs. SaaS).
The Startup Glide Path framework guides the balance between growth and profitability across different stages (Early, Mid, Late).
Early-stage startups focus on PMF and growth over profits, while late-stage companies prioritize profitability and established revenue lines.
The Indian Tech Startup IPOs of Q1'22 saw a crash, raising questions about the growth versus profitability equation, but the problem is valuation.

1/13

2/13

3/13

4/13

5/13

6/13

7/13

8/13

9/13

10/13

11/13

12/13

13/13

2. Startups = Growth “A startup is a company designed to grow fast” Paul Graham - YCombinator

3. Startups are Risky: Most Die, Few Change the World • Traditional finance (debt) ruled out • Enter Venture capital 3

4. Venture Capital Model – Power Law Fund Life ~ 7 yrs | 1/10 Success Probability | Large Outcomes (100X) 4 Returns don’t follow Normal Distribution, Skewed towards Outliers stocks, human life expectancy, avg height venture capital, music sales, video games

5. Large Outcomes (100X) Imply • Large TAM • Rapidly shifting user behavior – new habits, repeat usage • Fast growth / distribution • Command pricing power 5

6. Growth v/s Profits is a Constant Balancing Act Depends also on business types – Ecommerce v/s Marketplaces v/s Social Networks v/s SAAS v/s CoreTech

8. Early Stage (Seed – Series A) • Focus on PMF • Cash Burn funds Growth • Early Monetization Experiments • Growth over Profits! Mid Stage (Series B – Series D) Late Stage (Series E – IPO) • Achieve Networks Effects • Revenue Lines Emerge • LTV > CAC • +ve Unit Economics • EBITDA +ve • Stable Product • Established Revenue Lines • Profitable, Generating Cash • Financial Budgets & Forecasting

9. Indian Tech Startup IPOs Q1’22 Crash?? Is the Growth v/s Profitability equation to blame?

10. Experiential / Platforms • Defensible competitive advantage • Less competitive, no offline equivalent • High Gross Margin • SAAS, Social Networks, CoreTech Transactional • Digital equivalent of offline process • Competes with offline, omnichannel • Low competitive advantage • Low Gross Margin, No/low pricing power • Ecommerce, Marketplaces, Payments Startups Business Models – Diff Types

11. Problem is Valuation, Not Growth vs Profits • Post 2008 QE, Easy liquidity -> Hot Money into Assets • Mismatch b/w Public vs Private Market Valuations • Few IPOs look premature, ahead of time • Markets will resolve this eventually, correction is due 11

12. Credits • http://www.paulgraham.com/growth.html • https://www.nfx.com/post/new-rules-growth-profitability/ • https://fabricegrinda.com/playing-with-unicorns-episode-3-how-vcs-evaluate-startups/ • https://tradebrains.in/upcoming-ipos-indian-startups-2021/ • https://www.youtube.com/watch?v=cvaDvnp2USA • https://timesofindia.indiatimes.com/business/india-business/ipo-listings-see-rs-2-lakh-crore-erosion-techstartups-account-for-half/articleshow/89103838.cms 12

13. https://twitter.com/amitranjan https://twitter.com/amitranjan Thank You... https://webyantra.com https://webyantra.com