Chasing Profitability Over Valuation

Challenging market conditions have led to more focus on unit economics than valuations

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Up until two months ago, too much significance was being given to valuation. Even though many founders kept their eyes on the road to profitability, valuation was celebrated more than strong business models. For instance, India is home to 105 unicorns. But only around 25 per cent of those startups are profitable, which was often ignored.

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Conventional performance indicators such as cash flow were put on the back burner by many.

For some founders though, even when market conditions were favorable, profitability was the focus. For instance, for OfBusiness, a B2B commerce platform that turned unicorn last year post $160 million funding round by SoftBank last month, becoming a unicorn startup was never a goal. "As a matter of principle, we decided not to chase valuation, but we decided to concentrate on real value creation and profitability. We always believed that when you are creating real value for the ecosystem, and your stakeholders or investors, valuation is something that is bound to follow," Nitin Jain, co-founder, OfBusiness, told Entrepreneur India.

"In hindsight, the decision to not let other unicorns or valuations affect us was actually the turning point. Our valuation in the past year went from $250 million to $1.57 billion, but again it's just a vanity metric. The real metric will always remain the benefits that we generate as part of the bottom line for our SMEs and for ourselves," he said.

Valuations and unicorn status were never part of the roadmap for edtech startup LEAD as well. "We always thought in terms of how many students we can serve and the quality of learning outcomes we can deliver for them. And there was a faith that if we are able to serve millions of students, with the right learning outcomes, commercial success will follow. And if commercial success follows that valuation will follow," said Sumeet Mehta, CEO and co-founder of school edtech unicorn LEAD.

Baskar Subramanian, CEO and co-founder, Amagi believes that customer validations are much more important than company valuation. "For a company that has been growing and growing quite well, I'm really happy with 100 per cent growth that has been happening from a customer standpoint. Valuation is driven by market and needs of the market are very different. For us, the focus is on a billion-dollar revenue company, not a billion-dollar valuation. This is just a pit stop in the middle of all of this. So we don't see it as a major milestone," he said, while talking about turning a unicorn.

Even though these founders have been clear about building a strong foundation, fundamentals did get diverted for many. Now, with market conditions becoming unstable, will we see a course correction in terms of many players chasing valuation? VCs say that now only startups with strong business fundamentals can establish trust with VCs

"While unit economics at the beginning of a startup may be negative, we look for the path to positive unit economics with a sound business plan. Focus on the fundamentals may have diluted and built frothiness in the market recently, but it's back now and is here to stay. This is actually good for the overall ecosystem," said Sateesh Andra, founding partner and MD of Endiya Partners, in an earlier interview.

Sharing his thoughts on the kind of companies that are likely to get invested first in this current scenario, Anurag Ramdasan, partner, 3one4 Capital said, "There has been a fundamental shift in focus towards higher discipline in businesses and looking more at unit economics, LTV/CAC etc. This is a stark contrast to the growth focus of last year."