How Zepto emerged as India's 111th unicorn startup despite funding winter

While the Indian startup ecosystem continues to face funding winter and elite startups started shifting focus on achieving profitability and focusing more on sustainability, there’s one startup founded by two young boys that emerged as a unicorn startup.

Amidst the challenging phase of a funding winter in the Indian startup ecosystem, a notable transformation is unfolding. While many startups are grappling with funding challenges and shifting their focus towards achieving profitability and sustainability, there is one exception. 

A startup co-founded by two young entrepreneurs emerged as a unicorn despite these adversities. In late August 2023, Zepto surprisingly became a unicorn after raising $200 million in a fresh funding round at a valuation of $1.4 billion.

Zepto's addition to the unicorn startup club was unexpected, as it was the only Indian startup to achieve this status at a time when funding in the Indian startup ecosystem had decreased by 70% compared to the previous year, primarily due to global economic fluctuations and a shift in investor focus.

Let's take a look at Zepto's journey, its founders, and how it unexpectedly became India's 111th startup to achieve a valuation of more than $1 billion, popularly referred to as a unicorn startup.

How did it start?

Zepto was founded in 2021, a year after COVID hit India, by two 21-year-old boys, Aadit Palicha and Kaivalya Vohra. The founders witnessed a surge in demand for grocery delivery apps since the pandemic’s inception.

During COVID, people were restricted from going out even for grocery shopping, and that’s when Aadit realised that the other companies were delivering groceries very late and sometimes 6 to 7 days late.

Initially, It started as a platform that used to deliver grocery items from local kirana shops to consumers. It’s worth mentioning that during their early days, they delivered groceries to customers. As soon as they started growing, they realised they had to change their operating model to a dark store model to streamline the entire delivery process.

Since then, Zepto has grown not just as one of the fastest grocery delivery platforms but also as a competitor for existing companies like Grofers and Bigbasket. The reason, according to Aadit, Zepto has grown so fast is that they have the best product for every consumer in India. 

Today, The startup is delivering in 10 cities, including Mumbai, Delhi, Bengaluru, Pune, Hyderabad, Chennai, Noida, Kolkata, Gurgaon, and Ghaziabad.

Who are the founders?

While Aadit Palicha was born in Mumbai, Maharashtra, on October 15, 2001, and grew up in Dubai, He went to the United States to study at Stanford University. 

Prior to getting into the university, he had worked on several projects and startups to gain business experience. At 17, Palicha founded his first startup, GoPool, a mobile application that was used to help Dubai parents find and schedule carpools to school.

In June 2020, Aadit and Kaivalya Vohra, the current CTO, founded Kiranakart, a startup that used to tie up with local Kirana stores to deliver groceries to customers in 45 minutes. 

After operating for ten months, the duo decided to shut down the operations as they could not find the product-market fit. Just two months after closing, Kiranakart, Palicha and Vohra founded Zepto, which literally changed the whole game of the online grocery delivery segment.

When did Zepto raise its first round of funding?

Zepto raised around $730,000 in its first round and began its operations in April 2021. 

In October and December of the same year, they raised $60 million and $100 million, reaching a valuation of $570 million from investors, including Glade Brook Capital, Nexus, and Y Combinator, and individual backers Lachy Groom, Neeraj Arora, Manik Gupta, among others. 

The company came into the limelight when it raised $200 million in May last year at a whopping valuation of $900 million.

This is because most quick commerce startups shut down within a few years of their operations due to cash flow problems, lack of demand for their products or services, and poor management. Cash flow issues can stem from inadequate funding, poor budgeting, or inventory management challenges. 

How did Zepto survive in this competitive space?

While many quick commerce startups shut down following the funding winter, Zepto was not among them. This is because the founders strategically expanded Zepto's presence while carefully managing its cash-burn strategy. 

"Even with this capital, we want to maintain our discipline, avoid complacency, and push hard to hit EBITDA positivity. In that journey, the biggest drivers of P&L improvement for us are based on technology and product. We are building one of the best supply chain product stacks in the country today, and we are investing heavily in customer-facing products as well. This technical excellence is in our DNA, and I'm excited about the next phase of building," Kaivalya Vohra, co-founder and CTO of Zepto, said earlier.

Needless to say, many elite startups did not focus on sustainability and spent heavily on expanding their reach. Aadit Palicha previously stated that they are very mindful and disciplined regarding expansion and growth. 

During their unicorn round, The founders said they would focus more on strengthening its presence in existing operational areas like Bengaluru and Delhi.

"This business is about execution, and we are succeeding because our execution is strong. Our culture of deep frugality and worshipping customers has gotten us here, but there is still much for us to achieve. We are in this to build a generational company, and it truly feels like this is just the beginning," said Aadit Palicha, co-founder and CEO of Zepto.

How does Zepto deliver in under 10 minutes?

Zepto’s 10-minute rapid delivery is made possible through a combination of advanced technology and a strategically optimised network of micro-warehouses, also known as 'dark stores'. 

These dark stores are essentially mini-warehouses scattered across various locations, stocked with a wide range of products, reducing the time taken to pick and pack the items for each order. 

When a customer places an order through the Zepto app, the process is immediately set in motion. The order is picked up by the online delivery system, and the pickers and packers at the nearest dark store are notified. 

These individuals are responsible for quickly gathering the items from the customer's order. Concurrently, a delivery partner is assigned to the order. The efficiency of this process is such that within a minute of the order being placed, the packer is ready to hand it over to the delivery partner. 

The delivery partner then transports the order to the customer's doorstep, driving at an average speed to ensure safe and timely delivery. 

It’s worth mentioning that population, traffic dynamics, topography, road patterns, weather conditions, last-mile operational improvement, real estate prices, and other geographic data and local intelligence aid Zepto in optimising its connectivity.

Who invested in Zepto?

While Unpopular Ventures, Ricardo Schaefer, Global Founders Capital, and Contrary are Zepto's early investors, the startup is also backed by notable names, including Mangum II, Goodwater Capital, Nexus Venture Partners, Glade Brook Capital, StepStone Group, Y Combinator's Continuity Fund, Lachy Groom, and US-based Permanente Ventures.

StepStone Group, Goodwater Capital, Nexus Venture Partners, and Y Combinator's Continuity Fund are its top investors who collectively infused more than $200 million.

A look at Zepto’s captable

Following the completion of the Series E funding round, Nexus Ventures leads the pack with a nearly 20% stake. Close on their heels are the founders, with Aadit Palicha holding 12.23% and Kaivalya Vohra holding 10.19%. 

While Y Combinator is the second largest external shareholder, holding 11.93% in the startup, Lachy Groom, Glade Brook, StepStone, and Rocket Internet hold 9.49%, 8.61%, 5.78% and 4.19% stake in Zepto.

According to Entrackr, other stakeholders in Zepto include Razor Ventures, which holds 2.26%, and Kaiser, with a 3.09% stake, while the remaining shares are held by other investors.

Notably, Zepto is one of the few Indian startups where the founding team controls more than 20% stake even after the Series E funding stage.

How well Zepto is performing financially? 

In its initial operational year of FY22, Zepto achieved a total revenue of Rs 142.36 crore. However, the startup also witnessed losses amounting to Rs 390.3 crore during the same fiscal year. With operations commencing in April 2021, Zepto's overall expenses added up to Rs 532.7 crore in FY22.

However, The startup witnessed a significant 14-fold growth in its revenue, reaching Rs 2,024 crore in FY23. Nevertheless, this growth also came with a surge in losses, which increased more than three-fold to Rs 1,272 crore in FY23.

Aadit Palicha, in a statement, said, “We still have a huge amount of work to do and problems to solve, but if we nail it, we will build an insanely big business.”

Zepto's total expenses witnessed a substantial rise, amounting to Rs 3,350 crore in FY23, up from Rs 532.7 crore in FY22. Palicha clarified that the initial 12-15 months of new dark store operations require significant investment, but they start to compensate for the operating losses by the 19th month. Despite the increased losses, Zepto improved its profit after tax (PAT) margin from -277% in FY22 to -63% in FY23.

How is Zepto overtaking its competitors? 

Zepto primarily competes with Swiggy's Instamart, BigBasket, and Zomato's Blinkit in the quick commerce segment. Dunzo is another startup in this space but has suffered severe financial challenges. 

In comparison to its competitors, Zepto's revenue growth surpassed that of Blinkit but remained smaller than Tata-owned BigBasket. It claims to be on track to achieve EBITDA breakeven in the next 10 months. 

While Blinkit's revenue increased to Rs 724 crore in FY23, BigBasket's revenue reached Rs 7,434 crore. However, Zepto's losses were in line with the industry trend, with both Blinkit and BigBasket also reporting increased losses in FY23.

Zepto’s roadmap for IPO

Following achieving unicorn status, Aadit Palicha, in interaction with BQ Prime, said Zepto plans to go public in the next 18-24 months and aims to achieve $1 billion in annualised sales in the upcoming quarters.

Additionally, The startup plans to multiply its dark stores and expand its delivery network. Earlier, Aadit said the company’s clear ambition is to go public in early 2025. 

"We should definitely be profitable by then, and we're confident we'll have a successful public listing. The IPO will provide a partial exit for some of our investors, as well as growth capital for us."

This comes after the company is close to a point where it's not spending more money than it makes, and it is running at a monthly revenue rate of anywhere between $50-60 million,

On average, According to Palicha, each order that Zepto gets is worth between Rs 400 and Rs 450, and more than 10,000 new customers are choosing to shop with them daily. 

The startup is also working on growing Zepto Cafe, its new venture while focusing primarily on groceries. 

The founders believe that the grocery sector is the most significant market, surpassing other sectors such as beauty, pharmaceuticals, fashion, and electronics combined. Therefore, The startup is primarily focused on groceries.

What does the future look like for the quick commerce industry?

The quick commerce (Q-commerce) industry in India, which Zepto is a part of, is expected to expand significantly, with predictions indicating a growth of 10-15 times by 2025, reaching a market size close to $5.5 billion. 

Quick commerce is gaining popularity due to its promise of rapid delivery, typically under 10-30 minutes, which is particularly appealing for e-grocery shopping. 

However, profitability remains a question for Q-commerce companies due to high operational costs, including last-mile delivery challenges. Despite this, the potential for profit is there, as seen with some companies achieving positive EBITDA in other regions. 

The Q-commerce sector in India also has a large addressable market, and its penetration within the online consumables market is expected to increase over time.

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