Startups and profitability: sticking to the basics

Published February 3, 2020
B2C can take a decade to go for their Series A financing. — AFP/File
B2C can take a decade to go for their Series A financing. — AFP/File

It’s a risky business, the world of startups. Steep rises and, if things don’t go right, steeper falls.

Getting in the rat race to raise more money and spending it aggressively on customer acquisition/retention and scaling the team to manage that until your last penny runs out. Sounds like the textbook case of a perfectly competitive market from Microeconomics 101, except for maybe one thing: they don’t break even and, hence, can’t be considered efficient per se.

This is how most of our favourite startups scaled up, be it Airbnb, Uber or Paytm from the neighbouring country. All over the world, the rise of consumer startups has come at the cost of investor money: the more you have, the higher the chances of success.

The financiers bet millions of dollars on ideas and give the founders the freedom to not be preoccupied with such trivial matters like sustainability.

While B2C startups may churn out valuations worth billions of dollars based on their top lines, B2Bs can take up to a decade to go for their Series A financing

But the problem with that is eventually they run out of money, or patience.

So what happens then? Well, those who don’t adapt accordingly either fall into oblivion or divest, while some lucky ones get bailouts bigger than what the International Monetary Fund offered us.

But away from this world of glamour lies another batch of startups, maybe not as sensational or popular. However, what they offer is perhaps even more exceptional: sustainable business (or at least the promise of it). Enter the world of business-to-business companies that is relatively obscure and doesn’t usually feature the headlines for raising heavy sums of money.

Unlike consumer startups that have to spend aggressively on promotion, sometimes by signing up celebrities or putting posters on the billboards, B2B companies stay away from this extravagance.

There is a stark difference between their valuations as well. Where B2C startups are churning out billions of dollars of valuations, based on the top line, and quickly progress to that unicorn status, B2Bs can take even up to a decade to go for the Series A funding.

Sure, the idea of disrupting a market of hundreds of millions does have a ring to it, which is why many embark on its pursuit. But many a time, the sounder approach is to just stick to the basics: build a solid product, grow organically and sustainably and, most importantly, go for that good, old profitability.

While Pakistan may not have the kind of success stories (or anywhere close to even a fraction of that kind of funding) as those in the United States, India or China given the massive unbanked population and still limited penetration of decent internet connections, such barriers are relatively fewer for software-as-a-service startups.

SaaS, by nature, is not bound by geography, thus offering the potential to tap on to a truly global market. But that comes with competition from all fronts, and players that have years of headstart.

But what’s the difference between underlying fundamentals of B2B software startups compared to the consumer ones? “The unit economics is more sound: you can’t keep growing by just reducing the price, so the margins are higher,” says the founder of Khareed.pk, Haroon Sethi.

This is not to say that B2B startups don’t have their own set of challenges. “The sales cycle is quite as closing a client can take anywhere around 10-18 months, and there can be days when there is nothing but to wait for meetings and follow-ups,” says Sethi.

Khareed originally started as an e-procurement portal to cater to the small and medium enterprises but pivoted given their lack of tech adoption. And that comes with its own costs. “The entire universe of local SMEs willing to buy such a service is quite small, so we had to move towards larger businesses (the likes of banks and cement companies). But that market is high-touch, they require meetings instead of a simple online presence,” the founder says.

As the post WeWork world shapes, which has already resulted in multiple scale-downs and companies laying off staff in droves (which hit close to home when Careem axed over 150 jobs last week), many investors are rediscovering conventional wisdom about profitability. And waiting for them are a bunch of B2B startups, probably just there to say “told you so”.

It doesn’t come off as a surprise then that enterprise startups accounted for over half of the seed investments by Y-Combinator, one of the largest accelerators at that stage, breaking years of dominance of consumer-focused companies.

Does that mean there is going to be a shift in the mindset of local financiers as well? According to Mr Sethi, if this attraction towards SaaS continues in developed markets, the trend will eventually come to Pakistan. “Given the scale of our market, we are naturally followers. So what happens in the United States is probably going to be adopted by investors after a certain lag,” he says.

Published in Dawn, The Business and Finance Weekly, February 3rd, 2020

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