(The Weekend Insight) - Why Indian Startup Metrics Look Healthy Even When Businesses Aren’t

In today’s deep-dive, we confront one of the most uncomfortable truths of India’s startup boom. Not fraud in the cinematic sense, not suitcases of cash or forged balance sheets - but something far more common, far more accepted, and far more dangerous: the engineering of financial ratios to manufacture confidence.

Indian startups don’t usually fabricate numbers. They polish them. Metrics are redefined, timelines stretched, and costs repositioned until financial statements tell a comforting story - even as the core economics quietly deteriorate. On the surface, growth looks strong and losses feel manageable. But follow the cash, and the illusion starts to break.

This behaviour didn’t emerge in isolation. Between 2014 and 2021, venture capital flooded markets at an unprecedented pace. Capital was abundant. Patience was scarce. Growth became the only acceptable language. A company growing 2x was seen as stalling. A company growing 4x was celebrated. Somewhere along the way, metrics stopped reflecting reality and started functioning as survival tools.

India’s peculiarity is that most of this manipulation lives in the grey zone. The accounting is often technically defensible. Auditors sign off. Boards nod along. Nothing looks illegal - until cash flows, working capital, and unit economics are reconstructed honestly. Then the picture falls apart.

The first lever founders learned to pull was profitability optics - especially EBITDA. As IPO ambitions grew, “adjusted EBITDA” became the metric of choice. Flexible enough to exclude almost anything inconvenient, it allowed companies to remove ESOP costs as “non-cash,” brand spends as “one-time,” and shared overheads into central buckets. Individual business units could now be shown as profitable even while the company bled at a consolidated level.

What is striking, in hindsight, is how rarely boards intervened. Adjusted EBITDA decks were reviewed, not challenged. Independent directors signed off on narratives they would later distance themselves from. In growth years, governance became a formality, not a safeguard. The job of the board shifted from protecting the company to protecting the story.

On paper, this worked beautifully. In the run-up to recent IPO filings, many companies reported sharp EBITDA improvements. But something didn’t add up. Cash refused to follow profits. Cash flow from operations as a percentage of EBITDA collapsed to nearly 65% for newer IPO cohorts, compared to almost 90% in earlier cycles. Profitability had improved, but only in spreadsheets.

Part of the problem wasn’t manipulation alone. It was metric drift. Ratios that once made sense were stretched far beyond their usefulness. EBITDA, designed for asset-heavy businesses, was now applied to consumer startups with heavy working-capital drag. GMV mattered when take rates were stable, not when discounts swallowed margins. Contribution margins were showcased without CAC payback timelines. Metrics didn’t just get gamed - they aged out, but nobody stopped using them.

Revenue became the next theatre of illusion. In sectors like edtech, revenue recognition was aggressively pulled forward. Multi-year subscriptions were booked upfront even though cash trickled in slowly. Deferred payment schemes were framed as growth. Channel stuffing inflated topline numbers at quarter-end while receivables quietly ballooned. Growth looked healthy. Debtor days told a different story.

Byju’s became the most extreme version of this playbook. At its peak, the company reported explosive revenue growth driven by upfront recognition of long-duration course fees. On paper, scale looked extraordinary. In reality, collections lagged badly. Large portions of reported revenue hadn’t been collected at all. When auditors forced reconciliation, statutory losses exploded, exposing a chasm between reported performance and economic truth.

The illusion didn’t stop there. Byju’s excluded ESOP costs and selling expenses from adjusted profitability metrics. When these were reintroduced, losses ballooned dramatically. What investors believed was scale turned out to be deferred risk.

Unacademy demonstrated a subtler failure mode. In FY24, the company highlighted a sharp reduction in losses. What received less attention was that revenue had declined. The improvement didn’t come from operating leverage or product strength. It came from contraction - layoffs, marketing pullbacks, and retrenchment. Loss reduction was framed as discipline. In reality, it was retreat.

Employees, meanwhile, were not reckless - they were misinformed. They stayed because decks said profitability was near. ESOPs looked valuable. The promise was always the same: one more year and the business would stabilise. When cash finally spoke, the correction wasn’t just financial. It was personal.

Consumer platforms and marketplaces layered in another metric: GMV. Large, impressive, and conveniently disconnected from profitability, GMV became the hero number. Platforms spoke about scale while take rates quietly compressed. Discounts, returns, and delivery subsidies were scattered across cost lines, keeping gross margins superficially stable even as contribution margins deteriorated.

Quick commerce perfected this narrative. Revenue growth surged. Headlines celebrated momentum. But net order value as a percentage of gross order value declined sharply as discount intensity rose. Margins compressed. Losses narrowed only because capex was deferred, not because unit economics improved. The business looked better, until cash discipline tightened.

Fintech added yet another distortion. In zero-MDR payments, market share became a vanity metric. PhonePe commands nearly half of India’s UPI volume, yet its core payments business remains structurally loss-making. Revenue growth comes from adjacent businesses that are still small relative to the payments engine. EBITDA optics improved. Absolute losses didn’t. Dominance was mistaken for durability.

Then there were cases where ratios failed entirely to flag governance failures. BharatPe’s financials looked ordinary until a forensic audit revealed tens of crores siphoned through shell vendors. Expense ratios didn’t warn anyone. Working capital looked fine. Cash balances appeared healthy. The lesson was brutal: clean ratios do not guarantee clean governance.

GoMechanic collapsed for a similar reason. Consolidated numbers masked divergence at the unit level. Most service centres were real. Some were not. Ratios averaged away the lie. Only when auditors examined unit-level data did the illusion collapse - overnight.

Contrast this with companies like Delhivery. Its numbers are uncomfortable but largely unembellished. Revenue declined. Losses widened. While concerns remain around unit economics, the company resisted the temptation to cosmetically engineer profitability. The pain is visible - and therefore honest.

Why did founders do this? The easy answer is greed. The more accurate answer is pressure. During the peak VC years, punishment was rare and rewards were enormous. Founders could manipulate narratives for years, raise capital, sell secondaries, and face scrutiny only at IPO - if at all.

Most didn’t see themselves as fraudsters. They believed the numbers would eventually become real. That scale would fix unit economics. That one more round would buy enough time. It’s the same rationalisation that powered global failures like WeWork.

But bad unit economics don’t heal with scale. Inflated revenue only delays reckoning. Adjusted profitability only postpones pain. When cash runs out or regulators intervene, the truth surfaces - often violently.

After 2021, conditions changed. Capital tightened. Public markets demanded predictability. Investors began asking a simpler question: not EBITDA, not contribution margin - but cash.

One pattern now triggers instant skepticism: companies showing sharp margin improvement in a single year without matching cash improvement. Real efficiency compounds gradually. Cosmetic efficiency jumps.

Zomato’s post-IPO journey reflected this shift. Contribution margins improved only after discounts were dialled down. Growth slowed. The market realised that profitability was a throttle, not a destination. Growth and margins could not coexist at the previously promised scale.

Paytm’s reckoning was harsher. Regulatory pressure exposed how fragile its revenue mix really was. Ratios that once looked acceptable became irrelevant once the business model itself was questioned.

In edtech, the collapse was visceral. Byju’s didn’t fail because growth slowed. It failed because trust evaporated. Ratios hadn’t predicted the collapse because they were designed to hide it.

This time, scrutiny isn’t just market-driven. Regulators have learned. Auditor resignations now trigger alarms. Revenue recognition is dissected line by line. IPO draft papers are pulled apart with forensic intensity. The tolerance for narrative engineering is materially lower.

What ties all these stories together isn’t malice - it’s delayed accountability. Founders assumed time would fix the math. Investors encouraged the belief. Auditors stayed within technical boundaries. Boards optimised for valuation optics. Everyone assumed the future would smooth the edges.

It didn’t.

The ecosystem is now paying the price. IPO-bound companies face forensic scrutiny. Private startups face down-rounds or shutdowns. Layoffs are triggered not by demand collapse, but by arithmetic finally asserting itself.

The lesson isn’t that ratios are useless. It’s that ratios detached from cash, governance, and regulatory reality are dangerous.

The last decade rewarded storytelling. The next will reward stewardship. Founders who survive won’t be the best narrators of ratios - they’ll be the most disciplined custodians of cash.

The next generation of Indian startups will likely be quieter, slower, and far less exciting on paper. But they may also be sturdier. EBITDA will matter less. Cash will matter more. Growth stories will be shorter - but real.

Every illusion in the Indian startup ecosystem eventually breaks at the same point: when cash refuses to cooperate.

The illusion phase is ending. What replaces it will decide whether India’s startup ecosystem finally matures - or simply repeats the same mistakes with better spreadsheets.