[Matrix Moments] What are profit pools and how can one navigate the value chain

The pandemic and the recent global trends have shifted the way companies think about profit pools, especially in the early stages. But what has really changed? And how can we go deeper into the value chain to understand the right profit pool in an industry?

Avnish Bajaj, Founder and Managing Partner, Matrix Partners India, and Rajinder Balaraman, Director, Matrix Partners India talk about how the pandemic has led to an increased focus and more content at the same.

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“I don’t think we’ve spoken about profit pools that much at Matrix until very recently. Come to think of it, it has also become kind of a global trend. I’ve started reading a lot more content around this. But what changed? Why has everyone started talking about profit pools?” asks Rajinder.

Avnish explains that while people with consultancy backgrounds have discussed the same, it hasn’t been applied correctly. He says, “In venture capital and in early-stage startups, I could argue that it’s an overkill to talk about profit pools when you don’t even know about product-market fit.”

He adds that there are typically three stages of a business - the early product-market fit, scalable product-market fit, and scalable profitable product-market fit. Thus, profitable pools come at the third stage.

Taking the example of Bhavish Aggarwal, Co-founder and CEO, Ola, Avnish says “As the business was growing and scaling, I could see him going deeper into the value chain of the industry, and seeing where the profit lies.”

When it comes to the older and the experienced founders, many observe that they have found a different way of looking at things. These founders don’t take the market risk and they generally chase deep profit pools. “I remember Sachin Bansal at our event saying I have chosen to be in financial services because there are profit pools,” Avnish recalls.

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He added that globally, the company swing between profits and capital. Capital as a strategy often doesn’t play out as at that time, companies start burning a ton of money. So, they start coming back to make money.

“And it’s not that simple. At that stage, you have to step back and ask ‘where is the profit in my industry’? And if you haven’t started, start with the profit pool and the MOT. Maybe build gamification, but start thinking profit pool backwards because you can’t create them later,” suggests Avnish.

But are profit pools any different from profit margins? Avnish believes there are two differences – one is at an industry level, and the other is at a company level. Profit pools are at a company level, and profit margins are industry structure related.

“I think one is a point of time and the other is more historical,” says Avnish.

Listen to the podcast here.