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Profitability Equation: Key Factors That Set Successful Unicorns Apart from the Rest


Profitability Equation: Key Factors That Set Successful Unicorns Apart from the Rest


By: Prof Avinash Ghalke and Prof Rohit Prabhudesai

India has the 3rd largest unicorns globally, after the United States of America (USA) and China. These 100+ unicorns, with a combined valuation exceeding $350 billion, are always in the news – as the drivers of India’s growth story, during IPL advertisements, for launching their founders into billionaire status clubs, and more importantly, for their overall ubiquitous presence in everyone’s everyday life. However, the not-so-talked-about side of this story is that only a quarter of these unicorns report profits. With investors’ patience growing thin as days go by, this unicorn club is vertically split, albeit unevenly, into two categories – those making profits and those incurring losses.

Early investors in unicorns may wish to consider divesting their holdings to secure their gains. This can be achieved through strategic sales or initial public offerings (IPOs) in public markets. Private market activity is currently less pronounced, leading to increased focus on public markets. However, public listing alone does not guarantee continued success, as investors favour companies that demonstrate profitability. Therefore, unicorn firms should prioritise generating profit to maintain their market appeal.

It has been a general understanding in the startup space that companies need venture funding and have to bear losses in the initial years in order to grow. However, profitable startups challenge this assumption of the unicorn leaders. Their success proves that a focused approach works, and you don’t need to do too many things to succeed. Venture capital is not always necessary, as even a bootstrapped startup can become a unicorn and generate sustained profits. These are the general findings of what successful unicorns get right in the Indian market.

Getting the economic logic right

CRED, a leading unicorn valued at $6.5 billion, has invested more than 2000 crores solely on marketing activities in the last three years, creating unique themes and generating a lot of buzz for itself. However, during the same period, the company’s cumulative losses have exceeded 3000 crores.

On the other hand, we have Zerodha, a leader in discount brokerage that started in 2010. Interestingly, it has achieved remarkable growth in its profits and customer acquisition numbers each year without spending much on advertising. Although Zerodha eliminated the marketing function from its value chain, it serves as an extreme example that customer acquisition costs must match the firm’s market size and revenue capacity. Excessive capital spending raised from venture capital firms to create brand awareness or promote a product can lead to significant losses. While one can argue that firms are still building the market, there has to be a clear path to profitability envisioned for the firm.

Circle of competence 

Successful unicorns have a clear understanding of the market segment they are targeting. This may seem obvious, but it is not always the case. For instance, Zerodha focused on the discount brokerage segment, catering to those who wanted to trade but could not due to the complexities involved in the process. Dream11 is a fantasy sports platform, while Razorpay provides payment gateway services. The clear definition of the boundaries of operation and the development of a value proposition has led to their success.

On the other hand, Ola, which started as a ride-hailing business, has now ventured into the electric bike arena. This has led to the company fighting two battles simultaneously, resulting in a huge waste of resources, attention, and losses on both fronts.

This is not to say that emerging opportunities should not be tapped into. Diversifying revenue streams from complementary products and services is an important way to mitigate risks. Even successful unicorns venture into other arenas, such as Zerodha’s foray into mutual fund offerings. However, it is still within the defined boundaries of their operations, as Zerodha always aimed to educate the average Indian and remove barriers to trading. Furthermore, Zerodha took years to refine its core segment of discount brokerage services, and only when it stabilised after years of profitability did it start offering something new. The timing of diversification matters, and first-mover advantage is not always guaranteed to be successful.

Differentiated Offering

Firms without a differentiator cannot outcompete rivals. No matter how good their value proposition is, it’s a scenario of competitive parity and not a competitive advantage if it is the same as rivals. It is difficult to generate profits as consumers do not perceive the distinctiveness to choose the firm’s offering each time the product or service is used. Successful unicorns have created uniqueness that is not offered by rivals. Payment gateway is an arena where differentiation is difficult to create, for it is a B2B business. Still, Razorpay’s success has been its unique offering to its clients – the speed and simplicity of use became a key feature for its success. Zerodha’s simple-to-use, no-frills platform has been instrumental in its sustained profitability journey since it began.

As the successful examples in the Indian unicorn space show, profits are very much possible, provided the unicorns focus on the key points. Otherwise, in the event of a funding winter and lack of profitability, the sustainability of their operations will be in jeopardy.


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