Cash burn with High Growth v/s Profitable with Moderate Growth?

Although after this, Pharmeasy has taken some steps to curb excessive expenditure & the result has been visible in the latest numbers estimated. As of April 2023, the company has become operationally cash flow positive.

In this article, we take a look at 2 different business models & try to understand, from an investor's perspective, which startup would be a better option.

A prime example of a Cash Burn model with high growth is Pharmeasy. The company has been investing heavily in marketing, customer acquisition, and expanding its operations across various cities in India. As for FY22, the company had to spend ₹1.27 to earn ₹1 of revenue which made it costly & generated losses. High op. The cost was primarily due to offering discounted prices, convenience, and a wide range of healthcare products with an aim to capture a significant market share and establish its dominance in the online pharmacy sector. However, this approach has resulted in significant cash burn as the company focuses on aggressive growth and market expansion. Let's take a look at some stats:

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​Although after this, Pharmeasy has taken some steps to curb excessive expenditure & the result has been visible in the latest numbers estimated. As of April 2023, the company has become operationally cash flow positive.

Now let’s take a look at a model which might be delivering moderate growth but is profitable.

Zoho Corporation, based in Chennai, India, is a prime example of a profitable startup with a moderate growth model. Zoho has taken a bootstrapped approach since its inception in 1996, relying on its own revenue to fund its operations and growth. The company prioritized profitability and self-sustainability from the early stages, focusing on organic growth and cultivating a loyal customer base.

Zoho adopted a customer-centric approach, providing affordable and comprehensive software solutions to small and medium-sized enterprises (SMEs). The company's products gained popularity for their usability, customization options, and competitive pricing, attracting a dedicated user base.

By maintaining profitability, Zoho achieved financial stability and avoided the need for external funding or relying on venture capital investments. The company grew steadily over the years, expanding its product offerings, investing in research and development, and expanding its global footprint.

Let's take a look at Zoho’s financials:

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Also, let's have a detailed look at the expenses incurred by Zoho over the past 2 years:

On the one hand, investors might be lured by the fact that a start-up with a higher growth potential might generate higher returns as well, irrespective of how much cash burn it is incurring while on the other hand an investors who like to take safer bets might want to invest in a startup that archives moderate returns but is profitable for a longer period of time. It all depends on the appetite the investor has to earn returns. At the same time, we have seen how VCs in India at one point in time had gone crazy, running behind high growth as growth drove higher valuations. Let's understand this with the help of an example:

Flipkart: Flipkart, an e-commerce giant in India, is a classic start-up to-star story. VCs such as Accel Partners, Tiger Global, and Naspers invested substantial amounts in Flipkart, driving up its valuation over time. It grew from a start-up to being valued at $ 21bn in a decade where investors have reaped >1300 returns.

However, in spite of having mounts of losses, with negative margins and losing money every quarter, it was acquired at a valuation of $21 bn, representing a price loss multiple of 12x.

Take another example, where while concentrating valuation, investors & VCs have invested huge sums of money but it resulted in losses as the fundamentals weren’t that strong. For instance, PepperTap is a popular marketplace for people to order groceries online at a cheaper price. The company raised a funding of $51.2 mn. Unfortunately in 2016, pepper tap closed down its business. The reason stated was that they had spent very big sums on acquiring new customers & were losing money on every order due to heavy discounts, as high as 70%. Another big reason was their implementation of a Zero-inventory model. They only collated. inventories from grocery stores & updated their offerings. Due to an uncontrollable supply chain, the product faced inventory glitches.

On the other hand, consider the other extreme, Consider a start-up that is profitable every year with positive cash flows. Given the success of Flipkart, one may prefer the cash-burning model but the other business has some unique advantages.

To further make your concepts clear, we have prepared a comparison study that would assist you with your investment decisions:

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Ultimately, the decision to invest in a cash-burn startup with high growth potential or a profitable startup with moderate growth depends on your specific circumstances, investment goals, and risk appetite. It is essential to conduct thorough due diligence, evaluate the startup's business model and market conditions, and align your investment strategy accordingly.