Investment major “Softbank” cautions the startups against throwing away money in their bid to expand operations, but will the spendthrift startups mend their ways?
There has been much talk about how start-ups make their money; how they look at repaying the capital funds that they receive when most of them are not even generating revenues to meet routine running costs.
While experts and observers argue that most of modern day Indian start-ups rely on the major capital fund influxes that they received in the last couple of years and mainly in 2014, the view of major venture capital firms and seasoned economists is no different.
The focus of most start-ups is on increasing operations and reaching out to a greater clientele. The companies often cut their profits to compensate their growth ambitions. Although at the onset, it seemed like a revolutionary idea to first consolidate a considerable customer base and then look at ways of increasing revenues, the companies are now is getting increasingly worried about paying back the investors and increasing return on capital.
It is no hidden fact that the cab aggregator OLA, one of the torch bearers among Indian start-ups is losing money every time it provides a subsidized cab ride to the customers. The reason for the high Net Loss is that OLA pays its drivers more than they charge their customers.
Although the dynamics for different industries are different, this is the strategy that most modern day startups have modeled their businesses on. The companies aim at acquiring a clientele as vast as possible. This was at least the primary concern of start-ups till now. This year has shown us a marked movement from this tendency. The start-ups are now really saving up on their running costs, advertising campaign budgets, and promotional subsidies or in a nutshell what we know as their total “cash burn rate”. The companies are really taking steps to reduce the cash burn rate.
This is also the reason why many start-ups have recently fired employees that were hired in the rapid expansion phase.
There are many factors to contribute to this development. With funding, now becoming increasingly hard to get and the “payback period” for many start-ups kicking off, these new age tech companies are now realizing that they need more than just stunning technology and bold concepts to make ends meet. AT the end of the day, the business has to be viable and the startups in India are thankfully waking up to this realization.