What investors should focus on while investing in startups?
When it comes to startups, the great debate over profitability Vs growth seems to be continuing. The debate, interestingly, continues both from the startup owners’ point of views and from the investors’ perspectives as well.
When it comes to startups, the great debate over profitability Vs growth seems to be continuing. The debate, interestingly, continues both from the startup owners' point of views and from the investors' perspectives as well. If deliberations at an interactive session organised by the Bengal National Chamber of Commerce & Industries (BNCCI) in Kolkata are anything to go by, it is not a question of choice, it is a question of balance. Hence, growth is necessary not only in starting years, but in ongoing also. Whereas, profitability differs from sector to sector, which makes the growth rate and profitability outlooks in terms of the number of years different from sector to sector. To be successful and remain in business, both profitability and growth are important and necessary for a company to survive and remain attractive to investors and analysts. Profitability is, of course, critical to a company's existence, but growth is crucial to long-term survival. The speakers at the panel discussion on 'startup focus - profitability or growth' included some of the best brains like Prof Santanu Ray, Manjit Nayak, Director of STPI, Digbijoy Chakraborty, CEO, Sunetch Venture and Somenath Chatterjee, CEO PKS Capital Advisory LLP.
Mind you that for India, startups have always been significant drivers of economic and business activity. The biggest driver to their success has been the policy environment created in the country. With some of the government's recent announcements, startups have got that big push which leads to endless possibilities for growth for India. India has the fastest growing startup ecosystem with investments in technology peaking the scale. The good thing is that the funding opportunities to startups have been enhanced through the fund of funds scheme with an overlay of Rs10,000 crore and the recently launched startup India seed fund scheme with an outlay of Rs 945 crore. The aspiring entrepreneurs must cash in on this and take the startup ecosystem to the next level.
But what should the investors look at while coughing up their money for startups - growth or profitability? Experts are of the view that both profitability and growth are important in today's parlance. Without growth the future profitability would not come. Companies need to be on the growth trajectory. But it's equally important for the startups to look at the operating profits. A growing company may not be earning any profits yet, but may nevertheless provide a great investment opportunity. Some other times, a lack of profitability can be a huge red flag that something is wrong with the firm. Determining and focusing on profitability at the beginning, or startup, of a company, is essential. On the other hand, growth of market and sales is the means to achieving that initial profitability. Identifying growth opportunities should become the next important item on any company's goal list after a company moves beyond the startup phase. Therefore the decision to lay more thrust on growth of profitability varies and should vary from time to time and from startup to startup. There is no 'one size fits all' strategy for funding startups.