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Evaluating New Age Startups:
Profitability Vs Growth
Startups = Growth
“A startup is a company designed to grow fast”
Paul Graham - YCombinator
Startups are Risky: Most Die, Few
Change the World
• Traditional finance (debt) ruled out
• Enter Venture capital
3
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
Large Outcomes (100X) Imply
• Large TAM
• Rapidly shifting user behavior – new habits, repeat usage
• Fast growth / distribution
• Command pricing power
5
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
The Startup Glide Path Framework
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
Indian Tech Startup IPOs Q1’22 Crash??
Is the Growth v/s Profitability equation to blame?
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
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
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
https://twitter.com/amitranjan
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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