How Did Zomato and Swiggy Reach That Status?

We have only two Indian unicorns in food sector – Zomato and Swiggy. Their valuations have crossed $1 billion mark. There are a couple of more start-ups in this sector that are potential candidates for future unicorns, writes our consultanting editor Rajat K Baisya.

Post liberalization, we have seen how globalization has spread, and giant digital companies like Google and Facebook emerged in the global economy. Now we are witnessing a start-up revolution worldwide, and India is not falling behind in comparison to other countries in terms of the number of start-ups. Although the USA tops the list in terms of the number of start-ups in a given year, India’s position is fifth in that list. However, the success rate of Indian start-ups is low for various reasons.

The ideas that we pursue are primarily copies of ideas tested abroad and thus lack originality. We only had start-ups in ‘me-too’ categories. But even then, we still created many success stories. The global start-up movement has created few unicorns with an estimated market worth or valuation of over one billion dollars even before listing on stock markets. Globally we have around 800 unicorns, and in that comparison, India has around 50. Out of those, let us see if there are any Indian unicorns in food sector. In the race of valuation, growth and scale-up are considered more important than making a profit.

Most of the e-commerce ventures are reporting huge losses, but in terms of valuation, they are skyrocketing, attracting new investment, which fuels further growth. The growth of start-ups will create a new generation of crorepatis. It will also help in reducing the concentration of wealth amongst few high net worth individuals (HNI) by reducing the Gini coefficient, which measures inequality. Start-ups will make new billionaires, which we are witnessing, but their numbers are not many. Those who have invested in these start-ups, which are unicorns, have become rich overnight and are joining the elite club of HNI of crorepatis.

Zomato Indian Unicorn in Food Sector
Zomato was founded by Deepinder Goyal and Pankaj Chaddah, both of whom are from IIT, Delhi

Unfortunately, we have only two Indian unicorns who are in the food service and delivery business. They are Zomato and now Swiggy, which has a valuation that crossed 1 billion USD. Both of them have got several rounds of funding already and are still not making any profit. Food delivery giant Swiggy (Bundl Technologies Private Limited) has reported its revenues for the financial year 2019-20 at Rs 2,776 crore, a 115 percent increase over the previous financial year. The company further reported a net loss of Rs 3,768 crore during the same fiscal. Swiggy’s performance in terms of earnings is a little better than Zomato. What is interesting to note is that our processed food industry did not have this achievement to become a unicorn.

Zomato is backed by a series of investors such as Tiger Global, Temasek, Ant Financial, and many more. It has already received funding of 2 billion USD. The latest fund size they received was 250 million USD. The latest valuation of Zomato is 5.4 billion USD.

The reason is very simple in the sense that they have not been able to show the remarkable growth that investors are looking for and consider as most valuable. In the old economy making a profit was considered the most desirable performance criteria in addition to growth and market share. But in the digital era, only growth and scalability are considered the most desirable criteria for funding and valuation. Businesses are changing hands based on this criterion only. In our processed food category not only the failure rates are higher, but also growth is low and thus are not investors’ favorite. HNIs, like Ratan Tata, Azim Premji, have invested in food service delivery start-ups. Azim Premji also invested in processed food start-ups in India.

Swiggy Indian Unicorn in Food Sector
Swiggy was founded by Sriharsha Majety, Nandan Reddy, and Rahul Jaimini, in 2014, has come a long way since its inception

It is interesting to note that in the food processing sector, we have so far only two Indian unicorns, Zomato and Swiggy, and both are in food service sector. The Indian foodtech unicorn Swiggy has come a long way since its inception in 2014. Founded by Sriharsha Majety, Nandan Reddy, and Rahul Jaimini, the food aggregator had in 2018 become India’s unicorn in this sector. Swiggy received USD 100 million from China-based Meituan-Dianping, and Naspers in 2018, and a string of investments boosted the company’s valuation to over $1 billion.

Swiggy received USD 100 million from Meituan-Dianping, and Naspers in 2018, and a string of investments boosted the company’s valuation to over $1 billion. In 2019, the company invested Rs. 31 crores in Mumbai-based ready-to-eat food brand Fingerlix.

In 2019, the company invested Rs. 31 crores in Mumbai-based ready-to-eat food brand Fingerlix. But how did Swiggy reached that status? Answer is by a string of investments to the tune of 800 million USD. The control of the business is now no longer with the founders. In fact, Rahul Jaimini, one of the co-founders, left the company last year and holds only 1.6% of the equity. Sriharsha Majety, the company’s CEO, holds 4.48 %, and Nandan Reddy has 2.01 %. Together the founders hold 8.12 % of the equity in the business. They have all become crorepatis now after going through series of dilutions on the new valuation. You can see that to get over 1 billion USD in valuation, the funding received was about 800 million USD. Global investors have cast their nets aiming for gains from a few superstars to compensate for many that fails. This is the new rules of the game in business now.

Zomato is a leading food tech company that basically has the option of listing several restaurants on its portal. The users can pick their order and get it delivered to their doorsteps.

This venture, which currently operates in 1000+ cities across India and has gone to operate internationally, began as a company called Foodiebay. The founders of this company were Deepinder Goyal and Pankaj Chaddah. This company is also not making any profit. Food delivery aggregator Zomato reported a consolidated loss of Rs356.2 crore during the quarter ended June 30, 2021, as against Rs 99.8 crore a year ago in the same period. It is backed by a series of investors such as Tiger Global, Temasek, Ant Financial, and many more. A company that was founded in 2008 has already received funding of 2 billion USD. The latest fund size they received only seven months ago was 250 million USD. Deepinder Goyal, Zomato’s co-founder, now holds 7.7%, and Pankaj Chadda’s holding is 1.75 %. The latest valuation of Zomato is 5.4 billion USD. In July 2021, they had a successful IPO.

There are a couple of more start-ups in this sector that are potential candidates for future unicorns. But interestingly enough that all these are food service companies and not brick and mortar food processing companies. Other companies with the prospect of emerging as a unicorn in this sector are all from the food service category. They include the names of Biriyani by Kilo, Faasos, Fresh Menu, Eatongo, Dine Out, Innerchef, etc. These examples will be an eye-opener for those who are struggling with brick and mortar models of start-ups in food processing and also for those who are working propagating this concept and holding webinars everyday to tell us that there is a big opportunity in the processed food sector. This breed needs to be market-focused on knowing what is happening in the market. The new ventures in brick and mortar models will have to survive by selling to organised retail stores, including global online retailers like Amazon.

Attaining the status of a unicorn in terms of valuation does not ensure long-term success. Ultimately business has to be made profitable. Through the series of dilutions as well as through exit following the IPO route, investors are making money. But can that go on indefinitely? That is the question. We had seen earlier, post-nineties, a series of dot-com failures. But at the turn of the century, we are witnessing both the boom and bust of dot-com companies and in that race, few more will emerge as giants in history like Google and Facebook. Many unicorns of today will also go bust in their race to emerge as global giants tomorrow.

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Author is the chairman of Strategic Consulting Group and served as Professor and Head of the Department of Management Studies, IIT Delhi. His research areas are marketing, strategy, project management and international business and he is an internationally well known consultant in these areas. Prof Baisya is also the president of Project & Technology Management Foundation and can be contacted at editor.at.pfionline.com