With funding for Indian startups dropping by 70% since FY22, they are currently facing a funding winter. This has resulted in startups reducing their burn rate and accelerating their path to profitability. According to consultancy firm Redseer, their analysis of 100 unicorns projects that the number of profitable unicorns will increase from 30 in FY22 to 55 in FY27.
The strategy consultants anticipate that 50% of unicorns will be profitable by FY27, while 20% may face challenges due to regulatory issues, declining demand, and unclear business models. They also expect some of the struggling unicorns to pivot to new models, be acquired, or shut down entirely.
The top four sectors predicted to generate the most profit are FinTech and financial services, B2B, SaaS, and eCommerce. During this period, they also anticipate a decrease in losses made by companies. However, many of these companies with negative margins are expected to experience changes in funding, a reduction in valuation, and a shift towards a much slower growth trajectory.
The Indian startup ecosystem has been through a tumultuous period in recent years due to macro disruptions. While it experienced a significant funding peak of $50 billion in FY22, a gradual onset of the funding winter led to a 70% decline in funding to $15 billion in FY23 over subsequent quarters.
“The increasing cost of capital and interest rates, the recession in developed markets, a decline in the value of tech stocks, and the slowdown in consumer internet growth have all posed challenges for sustained funding. Consequently, startups are focusing on expediting their path to profitability and reducing burn rates,” said Mohit Rana, Partner at Redseer.
There are approximately 100 unicorns and less than 400 public companies with a market cap over $1 billion. In 59% of private companies, founders’ ownership is limited to 0-20%, compared to public companies where founders’ ownership is 50%+ in 65% of cases.
“Listed tech companies have made significant improvements over the last five quarters. Paytm launched new products, expanded into new business segments, and upsold/cross-sold to existing customers to increase revenue per customer and reduce customer acquisition cost. Zomato increased take rates from restaurant partners and delivery costs from customers,” said Rana.
Similarly, Policybazaar reduced its losses by cutting customer acquisition cost-related marketing expenses, while Delhivery achieved backward integration by acquiring full stack solutions across the value chain.
Listed tech companies have made improvements in the last five quarters.
A similar path to profitability has been observed from global peers as well. “Uber increased take rates to 28% in 2022 – an increase from 15% in 2021, reduced incentives to drivers, and expanded revenue streams. Airbnb optimized and maintained cost discipline in workforce and marketing and increased fees from guests and hosts,” said Rana.
Redseer predicts that profitable unicorns in India could generate 5X the profit in FY27 compared to FY22.