AI startups in India are grappling with significantly lower margins compared to the SaaS era, according to Harshit Kumar, Vice President at Kalaari Capital. Speaking to ET Tech, Kumar emphasized that founders must shift focus from growth-at-all-costs to unit economics and capital efficiency to build sustainable businesses. The remarks come as venture capital flows into AI startups surge, but profitability remains elusive for many.
Kumar highlighted that the cost structure of AI startups is fundamentally different from that of SaaS companies, which enjoyed gross margins of 70-80% during their boom. "AI startups don’t have those kinds of margins," he stated, attributing the disparity to higher infrastructure costs, including cloud expenses and GPU dependencies. These costs, he noted, compress profitability even as revenue scales, making it harder for AI startups to achieve the same financial metrics as their SaaS predecessors.
The venture capitalist advised founders to prioritize "unit economics"—a measure of profitability per customer—over rapid scaling. "Founders need to think about how much capital they are burning to acquire a customer and whether that customer is actually profitable," Kumar said. He warned against repeating the mistakes of the past, where startups chased growth without a clear path to profitability, leading to corrections in funding markets.
Kalaari Capital, a prominent early-stage venture fund in India, has been actively investing in AI startups. Kumar’s comments reflect broader concerns in the Indian startup ecosystem about the sustainability of AI-driven businesses. While AI adoption is accelerating across sectors like healthcare, fintech, and enterprise software, the high cost of training and deploying models remains a barrier to profitability for many startups.
Kumar also stressed the importance of capital efficiency, urging founders to explore ways to reduce costs without compromising on product quality. "AI startups need to be smarter about how they deploy capital," he said, suggesting that founders should consider partnerships with cloud providers or optimize their models to run on cheaper hardware. This approach, he argued, could help improve margins over time.
The remarks come at a time when Indian AI startups are raising record amounts of funding. According to industry reports, AI startups in India raised over $1.2 billion in 2023, a significant jump from previous years. However, Kumar cautioned that funding alone is not a measure of success. "Investors are looking for startups that can demonstrate a clear path to profitability," he said, adding that founders must focus on building scalable and sustainable business models.
Kumar’s advice aligns with a broader shift in the venture capital landscape, where investors are increasingly prioritizing profitability over growth. This trend is particularly evident in India, where the funding winter of 2022-23 forced many startups to rethink their strategies. "The days of easy money are over," Kumar noted, emphasizing that AI startups must adapt to a more disciplined approach to survive and thrive.
Kalaari Capital, founded in 2006, has been a key player in India’s startup ecosystem, backing companies like Dream11, Myntra, and Cure.fit. The firm has raised over $650 million across multiple funds and continues to focus on early-stage investments in sectors like AI, fintech, and enterprise software. Kumar’s role as Vice President involves identifying and nurturing high-potential startups in these domains.