Part one of our special series Unicorn Healthcheck looks at the financial health of India’s billion-dollar startups, we look at how losses and valuations stack up at these tech-first businesses.
The Indian unicorn startup ecosystem has experienced significant setbacks due to the Russia-Ukraine conflict and Fed rate hikes that started in early 2022. In May 2022, the Nasdaq saw its worst single-day plunge since the pandemic caused the world's top venture capital funds to lose billions overnight. The resulting tech rout turned new-age tech firms into risky investments, and India's unicorns were hit hard. The companies were driving fast without the necessary brakes, prioritising growth over profitability. As a result, eye-popping losses were reported, with the top five loss-making unicorns losing a combined total of 18,500 crore for FY22, while their combined valuation was over two lakh crore.
The main issue facing these billion-dollar companies is cash burn. For the purpose of this analysis, the focus will be on the unicorns with the worst unit economics, specifically the ones that spend more than two rupees to earn a rupee of operating revenue. During our research, we found that burning Rs 1.5 to Rs 2 to earn every rupee was the “standard practice" at most unicorns based on FY22 reported earnings. Revenue multiple measures a startup's valuation to the revenue it generates. Simply put, it tells us how overvalued these startups are.
ShareChat is burning nearly Rs 10 to earn a "single" rupee of revenue and is valued at 113 times its revenue in FY22, but the most overvalued unicorn is Open, which is valued at 195 times its FY22 revenue. Of the 50-odd unicorns that have declared their FY22 numbers, only half a dozen have reported a profit.
COVID-19 fuelled over-estimations and funding for these billion-dollar startups, but with funding drying up, unicorns are now course-correcting. From growing at all costs to finding profits by reducing cash burn and cutting out all expendable costs.
Unfortunately, that has also meant layoffs. Years of hiring ahead of revenue have led to last-ditch downsizing. Over 20,000 jobs were cut in 2022, with Byju's and its edtech peers leading the list with nearly 9,000 layoffs. This year, in January alone, startups have cut 4,000 jobs.
However, there is a silver lining. For the first time in seven years, founders have shown a preference for profitability over growth. A recent report by Innoven Capital shows that 55 percent of the founders started to prioritise profitability in 2022 compared to just 17 percent in 2021.
Six out of ten founders are now striving to achieve EBITDA profitability in the next two years.
So while India's billion-dollar startups have experienced significant setbacks due to various factors, with cash burn being a significant issue. However, there is hope as founders are now focused on turning profitable rather than growing at all costs.
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