Impact of the profitabilty on the funding

First, even for B2B startups, profitability is not a singular event—it is merely a milestone and reaching that point doesn’t necessarily mean that you have wedded yourself to it. Once you reach profitability, you can choose to go back into the red and invest aggressively into growth. Reddy cites the examples of GreyTip, Threadsol, and GreyOrange as being representative of such startups.

The other point that Reddy makes is that “profitability increases the chances of another round of funding”.

Struggles Ahead

However, this is not readily borne out from Blume’s portfolio itself. Apart from the three startups named above who got profitable and got funded, there are at least three other startups who got profitable but haven’t raised a follow-on round of funding. While it is moot if these three startups—Exotel, E2E, and WebEngage—haven’t raised a follow-on round simply because they chose not to, a closer look at their numbers is illuminating.

Take WebEngage for example. In FY 2015, the company had an operating income of Rs 6 crore and EBITDA (earnings before interest, taxes, depreciation, and amortization) of Rs 1 crore. In FY 2016, the topline grew handsomely to Rs 10 crore but the company had a loss of Rs 4 crore loss. If the company hadn’t raised a bridge round of a matching sum of Rs 4 crore in the form of a compulsorily convertible debenture, it might have struggled to stay afloat. Thus, the startup now faces the challenge of having to raise a follow-on round or temper its ambitions and sacrifice growth to remain profitable.

Similarly let’s take a look at Exotel, a cloud telephony startup. In FY 2015, Exotel had an operating income of Rs 10.6 crore and a healthy EBITDA of Rs 2 crore. In FY 2016, the topline seemingly surged to Rs 27.7 crore but this figure includes a pass-through revenue of Rs 17 crore that went to their telecom service providers for telephony and data transmission charges. If you exclude this, Exotel’s effective net revenue is a more modest Rs 10.7 crore and more importantly, it saw a loss of Rs 3 crore for the year.

While the startup didn’t raise any additional capital, it seems to have financed this loss by dipping into its reserves (RoC filings show the company’s net worth at a negative Rs 800,000 currently). So, like in the case of WebEngage, Exotel has reached a meaningful topline exceeding Rs 10 crore but has slipped into the red to reach this figure. It is therefore almost inevitable that the company has to now raise more money or risk going under.

So it would be fair to say that reaching profitability doesn’t seem to have helped either Exotel or WebEngage to attract the next round of funding, at least until this time. And the fact that these companies have since digressed back into losses implies that they face hard choices in the road ahead in the event that they don’t raise a follow-on round sooner rather than later.

Analyzing the dimensions

Of course, one dimension that shouldn’t be disregarded for these companies is that they have largely raised a seed round and not necessarily a full Series A funding round. How does this profitability imperative play out for companies that have raised larger Series A rounds?

To answer this question, we spoke to Parag Dhol of Inventus Capital Partners.

These were the figures that Dhol shared from his portfolio.

Starting from its first investment in September 2008, Inventus has invested in 21 companies in India.

9 of those companies reached profitability (at the profit before tax level).

4 of those achieved it while growing significantly/having access to subsequent rounds.

5 became profitable because of the lack of alternatives – Series B/C not being available.

Dhol points out that “profitability did not lead to (funding) nirvana for any of them, yet!”. That said, Dhol doesn’t feel that profitability and growth are binary choices and instead sees the growth-profitability dynamic as a spectrum.

 

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