Is Profitability A Distant Dream? The Reality of 33 Loss-Making Startups And Their Quest To Launch An IPO To Pass On The Burden To Retail Investors
India's startup sector is a battleground of ambition and valuations, where many companies have risen to unicorn status, attracting substantial investments. However, the financial underbelly of this success story reveals a disconcerting trend; this success story may, in some cases, be a mirage. A closer look at the financials of many of these high-profile startups reveals a stark reality - a significant number of them are plagued by losses that seem unsustainable. What's more concerning is that some of these companies are quick to eye an Initial Public Offering (IPO), appearing to be in a rush to pass on these losses to retail investors. The Securities and Exchange Board of India (SEBI), the regulatory body overseeing the securities market, has a critical role to play in protecting the interests of investors. While SEBI has established guidelines and regulations for companies looking to launch IPOs, some have questioned whether these regulations are stringent enough, especially regarding the profitability requirement.
The Mirage of Startup Inc. Rise
India’s startup ecosystem has witnessed a phenomenal rise, marked by the emergence of numerous unicorn companies, each boasting impressive valuations; however, beneath the surface of this success lies a stark reality – a significant number of these startups remain mired in losses and are struggling to remain in the black.
Despite their impressive valuations, the financial performance of some of India’s most valued startups is a profitability paradox that continues to puzzle investors.
The Startling Numbers
As per the financial data for FY23, a staggering 33 out of 55 leading tech startups in India reported cumulative losses of INR 22,720 Crores, thus raising significant questions about the sustainability of the unicorn model in the Indian market.
Top Loss-Making Startups
Among the prominent loss-makers are Flipkart India, CRED, Info Edge, Mamaearth (which launched an IPO yesterday) and Paytm, which have all seen their losses increase in FY23.
Notably, Info Edge, the parent company of Naukri.com, went from posting a net profit of INR 1,288.2 Crores in FY22 to a net loss of INR 70.4 Crores in FY23.
Top Loss-Making Sectors
The loss-making trend is not confined to a single sector – Fintech, EdTech, eCommerce, Consumer Services, Cleantech, Travel Tech, Real Estate Tech, Logistics, and Health Tech all have their fair share of startups in the red.
The Profitability Paradox
Several factors contribute to this profitability paradox. In the primary consumer-facing sectors like eCommerce and Consumer Services, companies grapple with challenges like a lack of product differentiation, high customer acquisition costs, low customer retention, lower repeat ratios, and substantial advertising expenses. These hurdles make it exceedingly challenging for companies to steer toward profitability.
Unicorn Profitability Concerns
While founders and investors defend the strategy of investing capital for several years in building distribution and engagement before monetization, the question that lingers is, how long should a company burn venture capital (VC) money without becoming profitable?
VCs and investors today are increasingly concerned about unsustainable burns, with the cost of raising money from limited partners (LPs) rising and affecting the investment cycle.
The Rush Toward IPOs
Hence, going public allows these companies to raise substantial capital from retail investors and institutional buyers, providing a way to mitigate their financial struggles.
Passing on Losses to Retail Investors
Startups, by their nature, often operate with a burn rate, which means they continue to incur losses as they invest heavily in growth, market expansion, and customer acquisition.
While this strategy is acceptable during the initial stages, it becomes a cause for concern when these loss-making companies decide to go public because, by doing so, they are effectively transferring the financial burden onto retail investors who may be less equipped to absorb the risks associated with such companies.
SEBI’s Role and Concerns
The Securities and Exchange Board of India (SEBI), the regulatory body overseeing the securities market, has a critical role to play in protecting the interests of investors.
While SEBI has established guidelines and regulations for companies looking to launch IPOs, some have questioned whether these regulations are stringent enough, especially regarding the profitability requirement.
The Profitability Requirement and SEBI’s Approach
SEBI has traditionally required companies to demonstrate a track record of profitability over the past three years to be eligible for an IPO. This requirement aims to ensure that companies going public have a certain level of financial stability and sustainability.
However, there have been instances where SEBI has granted exemptions or relaxed these regulations for certain companies.
Why SEBI May Turn A Blind Eye
Several factors might explain why SEBI appears to turn a blind eye to loss-making startups going public:
1. Market Optimism: India’s stock markets have seen buoyant investor sentiment, with a strong appetite for IPOs, and is this the reason why it incentivising SEBI to accommodate more companies, even those with less-than-ideal financials?
2. Competitive Edge: SEBI’s flexibility in granting IPO approvals may also be driven by a desire to keep Indian markets competitive and attractive for startups in a global domain and may be an effort to maintain India’s status as a hub for startup investments.
3. Innovation Focus: India is keen to foster innovation, and some believe that SEBI’s leniency might be a way to support innovation in the tech sector, even if it means temporarily overlooking profitability, but where does one draw the line?
4. Economic Growth: SEBI’s leniency might also be seen as a means to drive economic growth, job creation, and overall market expansion.
The Snapshot Of Top Loss Making Startups
1. Flipkart India – The B2B arm of Flipkart, saw its standalone net loss balloon over 42% to INR 4,845.7 Crores in FY23 from INR 3,404.3 Crores in FY22.
2. CRED – Led by Kunal Shah, this popular startup saw its losses grow by 5% to INR 1,347.4 Crores in FY23 from INR 1,279.5 Crores in the previous fiscal year.
3. Info Edge – The parent entity of Naukri.com reported a net loss of INR 70.4 Crores in FY23, a stark contrast to a net profit of INR 1,288.2 Crores in FY22.
4. Mamaearth – This startup slipped into the red with a net loss of INR 150.9 Crores in FY23, a sharp contrast to a net profit of INR 14.4 Crores in the previous fiscal year, primarily due to a one-time loss of INR 155 Crores.
5. Paytm – Despite reducing its net loss by 26%, Paytm still reported a substantial loss of INR 1,766.5 Crores in FY23, down from INR 2,396.4 Crores in the previous fiscal year.
Top Loss-Making Sectors:
This loss-making trend is not limited to a specific sector. Let’s explore the prominent sectors and their struggling startups.
a. Fintech:
- Rupeek – Reported losses of INR 281.565 Crores.
- OneCard – Suffered losses amounting to INR 405.6 Crores.
- Paytm – INR 1,776.5 Crores in losses.
- CRED – INR 1,347.4 Crores in losses.
- Acko – Reported losses of INR 738.5 Crores.
- PB – INR 487.9 Crores in losses.
- RapiPay – INR 93.2 Crores in losses.
- MobiKwik – INR 83.8 Crores in losses.
- UnsuranceDekho – INR 51.5 Crores in losses.
b. Enterprise Tech:
- Info Edge – INR 70.4 Crores in losses.
- LEAD – Reported losses of INR 321.9 Crores.
- Classplus – Suffered losses amounting to INR 256.6 Crores.
- Testbook – INR 129.8 Crores in losses.
d. E-commerce:
- Mamaearth – INR 150.9 Crores in losses.
- Flipkart – Reported a net loss of INR 484.7 Crores.
- Udaan – INR 2,075.9 Crores in losses.
- Licious – Suffered losses amounting to INR 528.5 Crores.
- Moglix – INR 196.6 Crores in losses.
- iD – Reported losses of INR 32.8 Crores.
- True Elements – INR 18.6 Crores in losses.
- Beardo – INR 6.1 Crores in losses.
- Bigbasket (B2B) – Reported losses of INR 1,785.4 Crores.
- Bigbasket – INR 1,535.2 Crores in losses.
- Zomato – Suffered losses amounting to INR 971 Crores.
- Urban Company – INR 312.4 Crores in losses.
f. Cleantech:
- Recykal – Reported losses of INR 25.7 Crores.
- ATHER – INR 84 Crores in losses.
g. Travel Tech:
- Cleartrip – Suffered losses amounting to INR 676.5 Crores.
h. Real Estate Tech:
- Homelane – Reported losses of INR 173.5 Crores.
i. Logistics:
- Delhivery – INR 1,007.7 Crores in losses.
- Porter – INR 157.7 Crores in losses.
j. Health Tech:
- TATA 1mg – Suffered losses amounting to INR 1,254.8 Crores.
The Last Bit,
The Investor’s Perspective And Need For Caution
Investors, particularly retail investors, need to be cautious and conduct thorough due diligence before investing in loss-making IPOs. While some startups may indeed evolve into profitable ventures, there is an inherent risk associated with companies that are yet to turn a profit.
The rush of Indian startups to go public, despite their losses, raises questions about the true health and sustainability of these businesses.
The role of SEBI in allowing such companies to launch IPOs without a strong profitability track record has raised concerns within the investment community; while there may be valid reasons for SEBI’s approach, it is essential for retail investors to be aware of the risks involved when investing in such startups.
The true test lies in whether these companies can ultimately evolve from loss-making entities into financially sound and sustainable businesses; however, the question remains:
Can these loss-making startups find a way to transform into profitable ventures, or is profitability truly a distant dream in the world of Indian tech startups? Only time will tell.
