Profitability, unit economics to be Indian startups’ mantra in 2020

While the talks of focusing on unit economics began in 2019, the startup ecosystem around the world took it seriously only in the latter half of the year when Japanese conglomerate SoftBank was jolted out of its dream as two of its portfolio companies, WeWork and Uber, failed it.

The poor performance of both the US-based companies during their initial public offering, which saw their valuations plummet like a pack of cards, had its effect globally, and India wasn’t untouched by it.

Photo credit: Fancycrave

The first half of 2019 was cheery for Indian technology startups as multiple new unicorns with a billion-dollar valuation popped up on the back of global investors parking their money in Asia’s fastest-growing economy. However, in the second half of 2019, “course correction” became the buzzword among the VC ecosystem, more so as the country was going through an economic slowdown, and the truth about WeWork and Uber’s inflated valuations came out in the open during their IPO.

After the Japanese conglomerate bailed out WeWork with US$9.5 billion rescue package in October, its Indian star portfolio company, Oyo, valued at around US$10 billion, began cost-cutting and restructuring. Many other startups like Swiggy, Z0mato, and Paytm among others also realized that it was time to move away from cash-burning practices.

This shift set up the tone for the year ahead. At KrAsia, we looked at a few prominent trends that have already begun to shape 2020.

1. Focus on unit economics

As investors change their stance on companies burning cash to chase growth, major Indian startups across sectors are now shifting their focus to better their unit economics.

William Bao Bean, general partner at SOSV, the second most active seed-stage investor globally, believes the market this year should get a bit more rational in terms of splurging money.

“Companies that splashed a lot of money don’t really have money [to burn] anymore,” Bean told KrAsia in a recent interview. “There’s going to be a focus on net revenue, reducing losses, and then a real focus on unit economics.” He believes the market imbalances caused by the big checks that VCs wrote over the last few years won’t go away, but they’ll be reduced.

According to the investors and analysts KrAsia talked to, the changing macro global trends like the US-China trade war, WeWork’s unexpected performance, and Indian macro trends such as policy changes and economic slowdown might bring some sanity in the investment scene.

“Capital is lesser of a moat now, a development which might help the best companies surface up better,” said Pratik Poddar, principal at Nexus Venture Partners. “There will be a focus on companies that are thinking about unit economics and long-term sustainability. Competition is going to reduce because tens of companies in the same space will not get funded,” he added.

Anil Joshi, managing partner at Unicorn Ventures, said investors are indeed cautious about unit economics and the kind of cash burn that’s happening. However, he said, companies that are able to earn revenue while spending money on growth will still find VCs who are willing to invest.

2. The year of exits

While the Indian startup ecosystem doesn’t have many exits that it can boast of, a few companies over the last couple of years have given investors some hope.

According to Hans Tung, managing partner at Singapore- and US-based venture capital firm GGV Capital, Flipkart’s acquisition by Walmart for US$16 billion, IndiaMart’s initial public offering at Bombay Stock Exchange, and Oyo’s recent share buy-back have changed people’s perspective that exits need not happen only through IPOs.

3. India’s hottest sectors

4. B2B, the flavor of the year

5. Changing entrepreneurial landscape