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
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4. Venture Capital Model – Power Law
Fund Life ~ 7 yrs | 1/10 Success Probability | Large Outcomes (100X)
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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
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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
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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
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13. https://twitter.com/amitranjan
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