Mumbai-based quick commerce platform Zepto has raised $200 million in fresh capital at a valuation of $1.4 billion, making it the first unicorn to be minted in India in almost a year. New investors StepStone Group and Goodwater Capital, existing backers Nexus Venture Partners (where StepStone is a limited partner) and GladeBrook Capital, and individual investor Lachy Groom participated in this round.
The timing of Zepto’s fundraise is significant given the slump in investments into growth- and late-stage startups on the one hand and the correction being witnessed in the quick commerce segment on the other. The startup had last raised $200 million in May 2022, at a valuation of $900 million.
The latest fundraise gives Zepto firepower in a highly competitive segment, where the company is jostling for position with the likes of Zomato-owned Blinkit, Swiggy Instamart and Tata-owned BigBasket. The other key player in the segment, Reliance Retail-backed Dunzo, has seen a sharp downturn in its consumer business and is struggling to close new financing to clear pending dues.
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Speaking to ET, Zepto cofounder and chief executive Aadit Palicha said that the company will primarily use the funds to invest in growth while going for Ebitda profitability in the next 12-15 months. He added that Zepto is planning to expand its presence in existing markets, and also aims to invest more in its add-on offerings such as Zepto Cafe, which delivers beverages and snacks in 10 to 20 minutes from its dark stores. Zepto has partnerships with quick service restaurant chains such as Chaayos and Blue Tokai to this end.
Higher bar for funding
“I don’t think capital is not available in the current environment; it’s just that the bar for accessing that capital is much, much higher. You can still find very high quality investors like StepStone who will invest, but the bar is that much higher,” Palicha said.
Just over the last week, overall funding in startups totalled a meagre $22.5 million—an 83.5% decline from $136 million in the same period a year ago. In terms of deal volume, there were seven deals during the week, compared to 57 a year ago.
Palicha added that Zepto may look to go public in about 24 months, as it wants to remain Ebitda profitable for about three quarters before hitting the public markets.
The roughly two-year-old firm operates in seven cities and runs about 220 dark stores. It plans to increase its store count by about 40% by the end of the current financial year and its average order value is in the range of Rs 430 to Rs 470.
Notably, for the June-quarter, Zomato-owned Blinkit recorded an average order value of Rs 582, up from Rs 528 in the same quarter last year. For other players, that metric would be in the range of Rs 350-450.
A balancing act
Over the last year, all the players in the quick commerce segment have been attempting to improve unit economics amid a tightening liquidity squeeze. A note from Swiggy’s largest investor, Prosus, in June said that the food and grocery delivery company’s losses for calendar year 2022 expanded primarily on account of its increased investments in the Instamart vertical, which peaked during the year. Platforms such as Big Basket’s BB Now have also been trying to increase operational efficiency.
Palicha told ET that the path to profitability was a key ask from investors during discussions for the latest fundraise.
“Investors are pretty happy with our growth—we are one of the fastest growing consumer internet firms in the country. But, of course, as the base gets bigger and bigger, the growth will normalise. So, people were very happy with growth but they were most interested in profitability,” he said.
Earlier this month, while declaring its June-quarter earnings, Zomato said that Blinkit had turned contribution positive in June (meaning, it had been able to generate money after deduction of fixed costs from sales that month), and said it expected adjusted Ebitda to break even for the quick commerce business in the next four to five quarters.
However, even for Blinkit, the exercise of adding 100 dark stores—mainly in locations where some of its existing stores have reached maturity level—could potentially have a bearing on its profitability targets.
Also read | At Rs 2 crore, Zomato turns profitable for first time this quarter
During Zomato’s earnings call earlier this month, Blinkit CEO Albinder Dhindsa said, “Getting to sustainable positive contribution at a business level was the first step, but there’s a lot that needs to come together in order to get to adjusted Ebitda break-even. Doing that in conjunction with the store expansion plan (about 100 net new stores in FY24) is going to be challenging, but the team is very determined to deliver on growth and profitability over the next few months.”
Dhindsa added that the company was focussing on growing its business both in terms of the number of customers and their monthly wallet share. “…if we do that successfully, profitability will be the outcome,” he said.
Zepto’s strategy
Zepto’s playbook is similar. “The focus was never to cap scale to reach profitability, and we have 3Xed (meaning the company’s topline has tripled) from June 2022 to June 2023. We have grown rapidly and hit Ebitda profitability on the way… The idea is to keep growing at a rapid clip even as we pursue profitability,” Palicha told ET.
The startup also wants to keep its focus steady on products that yield higher gross profits. Fresh produce is one such category, Palicha said, where the average margins are higher than categories such as dry commodities.
Quick commerce companies are also looking to add more categories to lift their average order values (AOV). AOV is the average value of orders made by a user on a platform. Over the past few months, while Swiggy Instamart has added products such as electronics and stationery, Blinkit has started offering beauty and personal care products, books, printing services, and is even planning to add home services on the lines of Urban Company.
Zepto, too, is looking to expand into categories such as medicines and electronics, and double down on Zepto Cafe. But the core focus will remain on grocery, Palicha told ET.
At least one rival has taken a leaf out of Zepto’s playbook. Swiggy, which is primarily into food delivery, also piloted Instacafe, along the lines of Zepto Cafe, earlier this year.
“Grocery is the mother of all categories and our idea is to keep going deeper and deeper into it… the easiest thing is to keep adding stores and SKUs, but it’s more important to go deeper and deeper with the same locations… so tomorrow, when you turn on customer acquisition, the fundamentals are already strong,” Palicha told ET.
