Daybreak - What's making investors go googly-eyed for Zepto?

Episode Date: June 30, 2024

When it entered the quick commerce scene for the first time in 2021, Zepto was a disruptor. Now, it is the third largest company in the market after Blinkit and Swiggy Instamart. Recently, it secured its biggest funding ever at a US$3.6 billion valuation, mainly from its existing investors.Venture Intelligence, a data provider told The Ken that the US$660 million funding is largest bet made by VCs in Indian startups this year. And now, The Ken's sources say that Zepto is planning to raise another round from “top-tier global VCs” at a US$5 billion valuation.What did Zepto do to get all this attention from investors?Tune in.Also listen to:Daybreak: Why we date, marry, or breakup with Swiggy Instamart, Blinkit, Zepto & BigBasketTFTY: How to get people to listen to you when you have no authority or title?

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too? It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording.

Intermission launches on March 23rd. To get an alert as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. Exactly a year and three weeks ago, I had declared on daybreak that quick commerce was dying in India. Companies like Dunzo and even Blinket were shutting down their dog stores. Analyst and experts thought that 10-minute deliveries were becoming a relic of the pandemic.

How wrong everybody was. Quick commerce in India right now is on steroids, especially Zepto. Even back then, it had stood out because it was going against the grain. While everybody was rethinking the 10-minute delivery business, Zepto stuck to its guns about getting you your delivery within minutes. And a year later now, look how it has been. paid off. Zepto is the third largest company in the quick commerce market in India. It recently secured its biggest funding ever at a $3.6 billion valuation, mainly from its existing investors.

Venture Intelligence, which is a data provider, told again that the over $600 million funding is the largest bet made by VCs in Indian startups this year. And now, our sources told us that Zepto is planning to raise another round from top-tier global VCs at a $5 billion valuation. And next year, the company is planning to go public. So what did Zepto do to get all of this attention from investors? Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nick Dar Sharma, and I don't chase the news cycle. Instead, every day of the week, my colleague, Rahal Philipos and I will come to you with one business store. that is worth understanding and worth your time.

Today is Monday, the 1st of July. If you're a regular listener of Daybreak, you will probably already know a fair bit about the quick commerce scene in India right now. Blinket has emerged as the market leader with a 40% share. Then it is Swiggy Instamort, followed by the hero of today's story, Zepto. But before I get on with the story, let me just remind you that a few weeks ago, we had released a super fun and interesting Friday special episode of Daybreak on 10-minute delivery apps, how they're shaping us and how we're shaping them.

It features our in-house quick-commerce expert and writer of our most popular newsletter, the NutGraf, Praveen Kopalakrishna. You have to listen to it in case you missed it. I'll link it to the show notes of this episode. So, where were we? Zepto, right. So what has gotten everybody's, Especially investors so excited about it.

You see, even when it came into the picture the first time, Zepto was a disruptor. It was the one that made 10-minute deliveries a thing in India. Now, at number three, behind Swiggy Instamort, it seems to be very rapidly closing in on that gap. The company is also preparing to go for an IPO sometime next year. Meanwhile, it is doing all the prep work. It is meeting investors outside the private circle.

It has also been conducting road shows and engaging with fund managers and brokerages such as Goldman Sachs and HSBC securities. This is important because it is these firms which typically provide the buy, hold or sell recommendations on listed companies. And they have published notes on Zepto. The Ken Sakrita Bhala spoke to Zepto's 23-year-old founder, Adid Palichia, and he told her that Zepto is not focused on competition because it has already captured a significant market share. An analyst at a domestic brokerage told us that for now it is a give-in-take sort of a situation. They said that for analysts, especially those who raid Zomato, it is an opportunity to assess Zepto which basically competes in the same space as Blinket.

And for Zepto, it can gauge what kind of valuations it can get. Another reason behind this investor enthusiasm is that quick commerce has shown viability in India. Everywhere else in the world, it has struggled to grow and kind of burnt the hands of many VCs. But most VCs backing Zepto now likely foresee Quick Commerce to be at a point where e-commerce was in the early 2010s. They expect going all in will eventually lead to big exits. Just like how Tiger Global, the VC giant, invested more than a billion dollars in Flipcard between 2010 and 2015 and saw three times the returns. All of this goes back to Zepto's decision to go against the grain. It stayed true to its commitment of 10-minute deliveries.

This was also because its investors supported it and they continue to raise their stake in the company. Sajit Pai, who is a VC at Bloom Ventures, told again that Zepto's latest fundraise is a coming together of a whole bunch of essential factors, a well-run business, benchmarkable metrics, high-quality founders, positive sectoral perception, and of course, a large market. Pai says that the global growth funds see this as a once-in-a-cycle opportunity to go all in. Stay tuned for more on this. Okay, so consider this scenario.

You just started your first job at a new company. You're doing quite well, so you get tasked with leading a project. How exciting? But now, you have so many dependencies on people from different teams to make this happen. And absolutely no authority or title whatsoever to demand it of anybody. You're starting to notice that many of your senior colleagues are judgmental of your skills and expertise to run the project. You're facing resistance to get people on board. This continues to happen week after week after week.

And you start to wonder if you're not being taken seriously enough. Well, this isn't a hypothetical scenario. A listener had written in with this exact problem. In the latest episode of the first two years, an early careers podcast from the Ken, I explore influencing without authority with the brilliant Dr. Nasheter, Duce Holheim. She's a psychologist and author, and she's worked with psychopaths in maximum

security prisons. So it's safe to say that she knows a thing or two about building rapport and trust with difficult people, I guess. Basically, she's a pro at making connections, and we explore so much in our short time together, including what's this coveted thing called influence, why you need it for people to listen to you, and what makes someone follow your leads. It's free and streaming everywhere. The link is in the show notes. I am Aksha Chandrashakran, host of the first two years. Thank you.

And now I'll let you get back to the conversation between my wonderful colleagues, Snigda Rahil. More than $600 million that Zepto raised in its latest funding round was mainly from its existing investors. Let's take a look at some of them. The first seed funds that Zepto founders got were from Y Combinator or YC, the Silicon Valley-based early state startup aggregator. This was back in December 2021. A founder who did not want to be named told Akrithi that Palicia, who had dropped out from Stanford, very quickly became the blue-eyed boy of YC's partner, Anu Hari-haran, who, at

the time, was heading its YC continuity fund. YC backed Zepto from Seed to Series D round. It also helped Zepto connect with investors. including Gladebrook that backs the likes of Airbnb and Uber. Nexus and Gladebrook have been investing in Zepto since the Series A round in 2021. Now, when early investors continue to participate in new rounds, it proves their desire to maintain their stakes as the company raises more funds. So you see, when these investors pour substantial resources into an international player like Zepto,

it shows that they are confident that it will succeed. For context, nexus' investment into Zepto's latest round of funding represents approximately 20% of its latest fund size. In 2022, during the economic downturn, when investors were very careful with spending, it was Gladebrook that encouraged Zepto to go against the wind. Paul Hudson, the founder and chief investment officer at Gladebrook, said that Gladebrook advised Zepto to raise more capital open more dark stores and essentially run a more aggressive playbook when others would not.

So, how did it all play out? I will tell you in the next segment. Cut to 2024 and Zepto has claimed a yearly gross merchandise value of $1 billion as of much, with 75% of its stores becoming profitable last month. The company also restored profitability sooner, reducing the time from 23 months to 6,000, months. In contrast, Blinket reduced this time from six months to two. Also, Blinket and Instamart have pushed for extensive expansion with their presence in about 25 cities. Zepto, meanwhile, has focused only on 10 key cities. Also, the biggest factor of all, which I mentioned earlier,

is that Zepto has consistently delivered on its promise of 10-minute deliveries. It managed to stick to it through the initial excitement, then the skepticism, and then the eventual widespread adoption. To draw a comparison, Swiki Instamart initially aimed for 20 to 30 minute delivery time frame before adjusting its approach to 10 to 15 minutes like Blinket and Zepto. The other factor that's also played a significant role is India's unique grocery market dynamics that are unlike any other place in the world. Metro cities here are getting denser and along with them, the middle class is expanding. It is a huge market. Glenn Brooks, Paul Hudson, who is also one of the

five members on Zepto's board, explained it to us. He said, when you're building a quick commerce company in the US or Europe, you're competing with Walmart, Costco or Target. Those companies have scale advantages. In India, on the other hand, 90% of the grocery market comprises of local Kiranas or Mormon pop stores and they are not able to extradct. the scale benefits like a Walmart. And this is the opportunity that American VC firms seem to have identified here. And last but not the least, what also made this funding round stand out is that Zepto was not actively looking for investors. Hudson, in fact, told us that the company had to say no

to many. They wanted to keep the round internal so that the existing investors could chip it. They also wanted to close the round soon and were not looking at maximizing. valuations. But here's what Sri Ram Sundarajan, a professor of marketing and venture capital at Santa Clara University, said to us, good founders do not raise funds when they want to. They raise them when they can. In Zepto's case, they have managed to convince their investors over and over again about the company's execution. In fact, co-founder Palicha further substantiated this point by telling the ken about the goal of building a $50 billion dollar public, profitable and world-class company. But while all of this I'm sure has painted a very rosy picture of Zepto in your head,

here are some things worth considering. An analyst at a Mumbai-based brokerage firm told us how public market analysts are brutal. They analyze every line item in the financials. And Zepto's narrative of being run by two Stanford dropouts, is a good story, but does quick commerce business have the ability to give returns? Another analyst said, and I'm quoting them, it reminds me of Nica when it became public. The story being sold was that of an exceptional 50-something entrepreneur who single-handedly changed the beauty market. Where is the stock now?

End quote. Meanwhile, Satish Mina, an independent e-commerce analyst, said, and I'm quoting him again, I believe from here on, growth will slow down and the pie will not grow as fast. Like we saw in e-commerce, even in quick commerce, players will be fighting to acquire the same customer. End quote. While we'll have to wait and watch whether that turns out to be true or not, until Zepto goes public. For now, Zepto's giant funding round only means game on.

Daybreak is produced from the newsroom of the Ken, India's first subscriber. focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. To subscribe, head to the ken.com and click on the red subscribe button on top of the Ken website. Today's episode was hosted by Snigda Sharma and edited by Rajiv CN.