Startups should bring down the cost of acquiring customers and should make money organically rather than splashing on advertisements if they are to weather the much-talked-about funding winter, Infosys chairman Nandan Nilekani told Moneycontrol in an interview aired on August 15.
“One thing that has definitely happened—and I can say first-hand by watching some of the actors—is money has been spent in a pretty generous manner to acquire customers,” said Nilekani.
“If you get a high cost of customer acquisition, because you use some advertising or something, and you have low organic growth, then the eyeballs you get is nothing. For every 50 guys, one becomes your customer. Now of the customers that you get, only 20 percent are retained, so the funnel is so difficult, it’s very difficult to make money there,” Nilekani added.
He quoted the example of edtech unicorn PhysicsWallah, and how its founder and chief executive officer Alakh Pandey has kept customer acquisition cost low by focusing on self-made videos, unlike some of its peers—Unacademy, Byju’s and Vedantu—that have spent millions on television and other digital advertisements.
Nilekani also said all the large consumer internet companies like Google, Facebook (now Meta), Amazon, AliPay, WeChat, Baidu and ByteDance, among others, are hugely profitable and so startups have to reach a point where they get their unit economics right and start making money.
“Making money is the best defence against any of this (funding winter),” said Nilekani.
“Now people say we have to grow very fast, so we will make losses till we grow… Okay there’s some argument there, but that doesn’t mean you don’t focus on getting the unit economics right very early in the game. It’s also about using your capital very sparingly and very thoughtfully,” Nilekani added.
Infosys co-founder’s comments on profitability for startups and unicorns come at a time when all eyes in the ecosystem have been on this measure.
Venture capital and private equity firms, investment bankers and veterans like Nilekani are advising startups and unicorns to prioritise profitability over growth in the wake of investments into India’s startup ecosystem, currently the world’s third-largest, falling significantly after two consecutive years of heavy funding amid a slowdown in global financial markets.
Many startups are scrambling to prepare a runway for the near term. Nilekani, however, said that he expects “great companies” to be born out of this era as he cited the example of how Facebook came out of the global financial crisis and Amazon rose from the dotcom bust.
“Great companies will emerge from this situation. These entrepreneurs are very smart and superb and ambitious and this experience of this VC (funding) winter will also make them much more aware of the cost of capital and how to stretch the money you have and how to win clients, customers smartly without blowing up a lot of money. So I think the lessons will come and out of this will emerge some phenomenal companies. I am very convinced about it,” Nilekani said.