As dazzled and mesmerised, India Inc. appears as Vijay Shekhar Sharma eyes the country’s largest, a 3 Billion dollar IPO for Paytm, which boasts itself of being the 2nd most valuable start-up in India with a valuation of 16 Billion dollars,  what a lot of people fail to realise, is that it has not made a penny in profits since its inception, which is 12 years. The unicorn booked a net loss of INR 1500 crore in 2018, which swelled up 70% to INR 4000 crore in 2019. Oyo, the next most valued at 10B$, reported a net loss of INR 2400 crore in 2019, 6 times higher than the previous year’s, and has never been profitable in its lifetime. The biggest Indian unicorns might have all garnered impeccable valuations but have never been profitable on the balance sheets. The inference and implications of this statement speak a lot about start-ups’ conditions in the status quo. At a point in time when large scale monetary investment pumps drive the degree of growth you are creating, the value creation in the start-up is backboned on investing large sums of money and not inherently on the sustainable capacity of the business to generate value through efficiency. 

 

Profitability, as a concept, is reflective of a business’s ability to earn on the revenue which it has generated after deducting the costs and expenses incurred to generate that revenue. That is to say, a start-up with profitability reflects efficiency, in as much as they are able to generate a percentage of profit for each dollar of input expended. 

If an entrepreneur follows the logic of creating value through capital, they are trying to create short-term value, hoping to flip the business through an IPO. The problem with this all-in ‘hope’ mindset then necessarily becomes that start-ups have the propensity to fail as often as to succeed. They consistently raise rounds and rounds of billions of dollars, invest all of it to drive value, and raise again once unprofitable, making it a vicious circle, until this circus either culminates into an IPO or wrapping-up. When we magnify successful unprofitable start-ups turned MNCs like Amazon, we grossly overlook the plight of thousands of failed start-ups that bled and ruined investors, hoping to turn debt mountains into super-profits in the long run, which never happened. Katerra, a tech construction start-up, highly aggressive expectations to blow the market, backed by Softbank, Celestial capital, Greenoaks capital, and a number of other firms, with a total invested capital of 1.7 Billion dollars, went bankrupt. Quibi, the American, streaming future prodigy, backed by big names like JP Morgan Chase and Goldman Sachs with a total invested capital of 1.75 Billion dollars, shut down mere six months after its launch. LeSports (1.7B $), Arrivo (1B $), Solyndra (1.33B $), the list is endless. Driving value by capital is not an investment; it is a gamble. To that extent, putting billions of dollars into a start-up to drive value is no different than a game of craps in the casino. The only difference is that craps at a casino still have a 50 per cent probability of you winning, whereas according to a report by Forbes, 75% of start-ups that receive heavy investments fail.  

 

The pandemic has made us well aware of the horrors of a dynamic & uncertain business environment. It also serves as a glaring testimony that there are some things you can never foresee or predict. That is to say, every bet one makes thinking it to be a safe bet might not be that safe. Every dollar one invests, thinking it will surely be a good investment, might not actually turn out to be so. At that point in time, a re-adjustment in the start-up philosophies of Indian start-up culture, to not see investments as a free donation line to drive value solely and as a card to get out of loss heavy quarters, but as a liability aimed towards achieving sustainable growth and profitability, driven by a constant assessment of the efficiency derived from every dollar invested, to make growth, and thus success, sustainable, is extremely imperative, and urgent.