Evaluating New Age Startups: Profitability Vs Growth
The document discusses the balancing act between growth and profitability for startups. It notes that startups are designed for fast growth initially, but must eventually achieve positive unit economics and profitability. The document outlines a "startup glide path" where early-stage startups focus on growth over profits, mid-stage startups work to achieve network effects and emerging revenue lines, and late-stage startups aim for profitability and cash generation. It also analyzes different business models and their varying abilities to achieve competitive advantages and pricing power. While recent Indian tech IPO crashes may be blamed on prioritizing growth over profits, the document argues the real problem is a mismatch between private and public market valuations.
Evaluating New Age Startups: Profitability Vs Growth
- 1. Evaluating New Age Startups: Profitability Vs Growth
- 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
- 7. The Startup Glide Path Framework
- 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-tech- startups-account-for-half/articleshow/89103838.cms 12