Platform Businesses- Scale & Win

Background

If you drove on India’s highways in the 1990s, you might remember the first time you had to stop at a toll booth. It felt odd to pay not for a product, but for access. Yet that small toll was the price of efficiency - a smoother, faster road that saved hours of chaos. Today, the toll roads that matter most aren’t built from asphalt and steel. They’re digital.

Every time you order dinner on Swiggy, hail a cab on Ola, or book a hotel on OYO, you are crossing a toll gate. You don’t notice it, but there is a platform collecting rent, orchestrating the flow, and owning the rails on which modern life runs. Think of it this way, we are shifting from something much more tangible, physical to something much more digital, from factories and warehouses to digital distribution, from physical to intangible.

For investors, these toll roads are both exhilarating and unnerving. They can be loss-making for years, yet scale faster than any brick-and-mortar business ever could. According to our thought process at Xylem Investment Research, the real challenge is not spotting platforms, but identifying which ones can sustain network effects without burning capital endlessly. The ones which will mint the most rent for the longest and eventually benefit with economies of scale are the ones we at Xylem want to participate in.

We believe in onboarding these toll roads early, at a nascent stage, when there is disbelief and low traction and eventually surf the wave of returns which kick in the path to profitability.

Anatomy of a platform

All metaphors aside, a platform business is an economic rail built by an enabler to let providers and receivers meet, transact, and return. The platform doesn’t produce the good or service; it coordinates it. Its job is to remove friction in:

1. search (discovery),

2. trust (ratings, guarantees),

3. coordination (matching, routing, scheduling)

4. settlement (payments, refunds)

and to monetize that orchestration via commissions, ads, subscriptions, logistics fees, and ancillary financial services.

There are 3 parties to this:

1. The enabler - The one who creates an online platform (Zomato for example)

2. The actual provider - The one who will perform the service (Retaurants/ Cloud Kitchens)

3. The consumer - The one who wants the service (Us)

Think of the toll road again: it doesn’t own the trucks or the cargo, it simply enables smoother passage. Platforms work on the same principle. They orchestrate demand and supply, & turn into an ecosystem themselves.

This simple triangular relationship is what distinguishes a platform from a traditional linear business. To illustrate: Zomato enables food delivery, but the actual food is prepared by restaurants, and the end-user is the consumer. Zomato earns its revenues by connecting the two, facilitating trust through ratings, logistics, and payments, and charging fees and commissions for this facilitation.

From an investment lens, three traits separate platforms from traditional businesses:

1. Near-zero marginal cost of adding users - once the digital infrastructure is built, onboarding another customer or partner costs very little.

2. Network effects - every new participant makes the platform more valuable for the next one.

3. Scalability through density and data - whether it’s delivery nodes for quick commerce or seller listings on a B2B marketplace, platforms thrive when they compress inefficiencies and increase frequency, turning scale into superior unit economics.

At Xylem, we see platforms not as “asset-light” fantasies, but as density engines - businesses that turn fragmentation into order, and friction into flow, often creating monopolistic economics in markets once thought too messy to organize.

Terminology check

What a platform is:

● A multi-sided market with at least two distinct user groups whose interactions the platform facilitates.

● A system where match-quality and network density improve value for both sides over time. ● A business where data > better matching > higher frequency > more monetization surfaces.

What a platform is not (common misreads):

● Pure logistics operators are infrastructure networks, not platforms. (Delhivery).

● Single-brand e-commerce with owned inventory only is primarily retail (own D2C).

● Sites with little engagement, weak search integrity, and no economic participation (univestable).

What's in it for investor’s?

1. Winner-takes-most dynamics:

In most categories, only one or two rails ultimately dominate because once a platform captures both consumer mindshare and supplier participation, it becomes the default choice. While multi-homing may persist, the majority of demand flows disproportionately to the platform that offers the deepest liquidity and the most reliable experience.

2. Front-loaded expense structure:

The early years of a platform’s life are dominated by expenses for trust-building, onboarding supply, evangelising consumers, and subsidising early behaviour. All of these costs are routed through the income statement as operating expenses such as marketing, incentives, engineering, and product development. Unlike factories, which capitalise and amortise their physical assets, platforms expense the build, making the business appear loss-making even when the network is strengthening.

3. Operating leverage from density:

Once density is achieved, the economics flip dramatically. Discounts normalise, average order values rise, ad marketplaces deepen, and logistics costs per transaction fall because routing and batching improve with scale. As a result, contribution per order turns positive, and with fixed costs absorbed, each new customer adds only a small variable cost while the rest flows straight into EBITDA.

4. Low maintenance capital expenditure: Platforms do not require heavy reinvestment cycles. The bulk of their ongoing spend is on product upkeep, data science, and incremental improvements, all of which are expensed. Even where physical assets like dark stores or hubs exist, their expansion follows demand density in a flexible manner rather than lumpy factory-style capex cycles.

5. Financial leverage as an amplifier:

Some platforms take on debt during their burn phase. Once contribution margins turn sustainably positive and operating cash flows improve, repayment of this debt magnifies equity returns by layering financial leverage onto operating leverage.

6. Value migration as the central theme:

As consumer behaviour migrates from offline to digital, the indispensable platforms become the natural toll roads of the new economy. The crucial insight is that scale is not the plan; indispensability is the plan. Once indispensability is established, scale and profitability are the inevitable consequences.

Why do investors fear platforms?- Case studies

Zomato (Eternal)

Zomato was all of it & had all of it

Multi-phase evolution: Zomato has expanded from listings and reviews into food delivery, ads, subscriptions, B2B supply (Hyperpure), and quick commerce (Blinkit), each layer improving match quality and monetization.

Large runway: India’s restaurant consumption is far lower as a share of food spend compared to the US or China, making the gap a structural growth opportunity rather than a headwind.

Unit economics turnaround: Losses from discounts and weak batching flipped to contribution gains as average order values rose, discounts normalized, delivery costs fell with density, and ad and subscription revenues scaled.

Blinkit’s frequency moat: Quick commerce requires upfront burn, but grocery’s higher frequency accelerates cohort stability and density, compressing payback periods and creating durable city-level profit pools.

Hyperpure as a lock-in: Supplying restaurants with inputs increases wallet share, stabilizes availability, and monetizes both sides of the platform, strengthening Zomato’s ecosystem economics.

Retailers being retailers cursed the share, analysts published downgraded price ratings, yet what was prone to happen, happened. This fantastic phenomena we eagerly watch like a hawk at Xylem PMS is called leverage.

Policy Bazaar (PB fintech)

Policy bazaar though initially loss making was the best way to play online insurance.

Discovery rail: Policybazaar is India’s dominant digital marketplace for insurance and loans, creating value by aggregating options, simplifying comparison, and enabling assisted purchase.

Renewal-driven moat: Insurance is recurring by design, and once Policybazaar captures the first policy, it often owns the renewal relationship, making lifetime value rise sharply after year one.

Cohort compounding: While CAC payback can look long initially, it consistently improves by vintage as renewal rates strengthen and servicing costs per policy decline with scale.

Multi-layer monetization: Earnings are not limited to commissions, cross-sell across product lines, financing adjacencies, and embedded protection deals steadily expand contribution.

Quiet compounding story: Because renewal economics flow through gradually, early P&Ls understate true value. For investors, this is a long-duration compounding platform where scale is measured in persistence, not subsidies.

Once again, a classic story of losses to EBITDA & PAT positive.

Platform businesses are not just tests of economics, they are tests of psychology. In the early years, they bleed cash, subsidise behaviour, and report quarter after quarter of losses. For most investors, this triggers loss aversion, the behavioural bias that makes the pain of losing twice as powerful as the joy of equivalent gains. Headlines amplify the negativity, and the availability heuristic ensures that memories of failed startups dominate thinking, even when the data shows improving fundamentals.

Another trap is time inconsistency. Investors want steady, linear progress; platforms deliver step-changes. They look flat for years and then inflect violently. Impatient capital exits too early, mistaking delayed compounding for failure. On the flip side, when inflection becomes obvious, the reflexivity of markets accelerates optimism: rising prices attract more believers, capital becomes cheaper, and scale feeds on itself. The irony is that investors often buy high in euphoria and sell low in despair, the exact opposite of what platform economics require.

At Xylem PMS, we view this behavioural mismatch as opportunity. The biases that push most investors away from platforms at their nadir are the same forces that allow disciplined capital to enter at attractive valuations. Understanding loss aversion, time inconsistency, and reflexivity isn’t just theory, it is a practical edge in capturing the wealth-creation journey of platforms before the market consensus catches up.

The J-Curve of Platforms- From Panic to Parabolic Returns

Every platform story passes through a J-curve. The early years are dominated by losses, heavy discounting, and opaque unit economics. To the market, the business looks broken. Stock prices languish, sometimes halving or more, as investors extrapolate early burn into perpetual unprofitability. Yet under the hood, what is really happening is scale accumulation, cohorts are stabilising, contribution margins are improving, and operating leverage is quietly building.

When scale and density finally tip the model into contribution-positive territory, the market response is hockey-stick re-rating. The P&L goes from red to black, free cash flow emerges, and suddenly what was once “untouchable” becomes a market darling. The stock chart mirrors this behavioural shift in the form of a J-curve: deep drawdowns at the bottom, followed by violent rallies as investors rush back in.

● Zomato (Eternal Ltd) fell from euphoric IPO levels into the ₹40s amid panic about losses and Blinkit. Within less than two years, it re-rated almost 7x to ₹300, once contribution per order flipped, discounts normalised, and investors saw the operating leverage in quick commerce.

● PB Fintech (Policybazaar) followed a similar arc. Written off as an “unprofitable insurance broker” at ₹400, it compounded over 5x to ₹2,200 in two years once renewal economics and profitability were evident.

The Xylem Research Team calls this the “panic-to-profit inflection”, the moment where the narrative lags the numbers. It is exactly at the bottom, when panic dominates and investors cannot see past reported losses, that the best entry opportunities appear for a Portfolio Management Service.

How to capture the bottom:

Every platform business goes through three phases:

● Investment phase: heavy burn, weak unit economics, and apparent endless losses.

● Inflection phase: stabilising cohorts, improving contribution, and early signs of leverage.

● Compounding phase: profitability and cash flows scale faster than revenue.

The trick for investors is spotting the inflection phase while it is still disguised by aggregate losses. Here are the general signals that apply across all platforms:

1. User Stability Improves

Early users or partners start showing repeat behaviour, higher retention, and more consistent transaction frequency compared to initial cohorts. This shows the platform is becoming habit-forming.

2. Unit Economics Approach Break-Even

Contribution per transaction moves steadily toward positive territory, even if the overall business is still loss-making. This suggests fixed costs are being absorbed and density is working.

3. Marginal costs are lesser in proportion to inflows

The cost of acquiring new users or partners is recovered more quickly over time. A business that once needed two years to break even on a cohort may need only one year or less as efficiency improves.

4. Reduced Incentive Dependence

Discounts, subsidies, or incentives per transaction decline while transaction frequency holds steady. This indicates the platform is winning on convenience and indispensability, not just on price.

5. Operational Cash Flow Shows Signs of Life

Cash flow from operations begins to improve or turn positive, even before net profit does. This is often the earliest financial signal that the platform’s economics are stabilising.

The J-curve rewards patience and conviction. For platforms, panic is the entry point, indispensability is the moat, and scale is the catalyst for hockey-stick returns. At Xylem PMS, we build exposure at precisely these inflection points- when fear clouds vision, but density quietly builds the toll road of tomorrow.

End Note

Platform businesses are messy at the start but magnetic over time. They turn red ink into operating leverage, front-loaded pain into compounding gain, and fragmented markets into orderly rails of commerce. For investors, they are not easy, they demand patience, conviction, and the ability to see beyond today’s losses into tomorrow’s density.

At Xylem PMS, our approach is built on looking where others flinch: dissecting unit economics, testing cohort stability, and waiting for indispensability to show itself. Platforms are not quick wins; they are long toll roads where every new user, merchant, or transaction quietly adds to an eventual monopoly-like pool of wealth.

For those who can endure the noise and resist behavioural biases, platforms offer one of the rarest rewards in markets: the chance to buy inevitability at the price of doubt.

If you'd like to discuss your portfolio or explore how Xylem can help you navigate this market, consult with us here.