Synopsis“We sensed that the market was tanking. I was very clear that 60 days later it was not going to be available,” says Aadit Palicha, the 20-year-old CEO of Zepto on settling for a valuation that is USD100 million short of becoming a unicorn. He insists that he is on his way to build a ‘large public company’.
Zepto’s CEO Aadit Palicha is not a 19-year-old founder anymore.
Just as the delivery he promises, his startup Zepto’s fundraising too has been head-turning fast. Within a year of the launch, the quick-commerce startup raised USD360 million at a USD900 million valuation.
Palicha, the fresh out-of-school entrepreneur who made headlines for sharp comments on competitors such as Blinkit and Dunzo, has mellowed down a bit now. He seems to have grown up quickly much like the sector he is operating in.
Palicha says he isn’t bothered about the competition anymore and believes that the key to growth is the execution skills which nobody can take away from him — neither competitors nor their heavy-pocketed backers.
His teenage officially ended just two days ago and had it not been for the funding winter that suddenly hit the startup world, Palicha would have perhaps celebrated his 20th with a unicorn tag on his startup.
That was not to be but he sticks to his belief in 10-minutes delivery. Palicha candidly shares his views on why entrepreneurs should not get into the trap of “growth-at-any-cost” syndrome while stressing upon the importance of good governance in the tech ecosystem amidst allegations of corporate scams by entrepreneurs across companies like BharatPe, Trell and Zilingo.
Here are some edited excerpts from ET Prime’s interaction with Aadit Palicha:
The market seems to have consolidated with every leading quick-commerce firm having a godfather now. Blinkit has Zomato, Dunzo has Reliance and Swiggy has been betting big on Instamart. Where does that leave Zepto? Besides YC Continuity you don’t have any big new investors backing you.
I look at it from the lens of an operator. All the parameters of who’s your investor, what is your legacy brand, etc. are peripheral factors. The core factor is execution, always. If we continue to execute the way that we’re executing today, we will win.
We’re growing especially in a market which is down. From January to May, we were growing anywhere between 25% to 65% month-on-month on revenue. That’s purely on the back of solid execution, despite all the perceived headwinds. All the minute execution is significantly more consequential in the long-term success than how much these perceived advantages might seem big.
The quintessential example that we follow is DoorDash. When DoorDash started, Uber was obviously a big company and had UberEats. At that time, Travis Kalanick was raising billions of dollars every six months. And he had other heavy competitors like Postmates, better funded for a long period of time.
For the first six-seven years, it seemed like that would overpower the company (Doordash). The reality is that they were building such a high-quality operating model. And they were executing better than everybody else. They were able to come from single digit market share to 63% market share in a market with this huge amount of competition, lots of strategic players and huge amounts of capital that were in their favour.
Even today, DoorDash has spent a fraction of the capital that Uber has spent on UberEats. They have a significantly higher topline and they are actually profitable if you adjust for stock-based compensation.
Are you saying investors do not matter?
No, it matters who is on my captable. What I’m saying is that even if we had the best investors in the world, which I feel we do with folks like Y Combinator etc., but if we don’t execute well, it will not matter.
Why are we not seeing any big external investors coming into the company? It is YC Continuity which has led all your big rounds.
Out of the USD200 million we raised, close to USD100 million was new capital. The remaining USD100 million was filled by existing investors because they exercised their pro-rata very aggressively. And this was in May 2022. The Nasdaq was losing 500 points a day.
You are right to an extent that, let’s say a strategic backer would matter, but only if we were not in a position to raise capital. But one thing that we’ve been very good about is building differentiated capital bases. We have tapped into capital pools that most Indian founders haven’t tapped into.
When this round was happening, you mentioned that this was expected to be a relatively bigger round. What made you restrict yourself to a valuation of USD900 million, a notch below the unicorn status?
In relative terms, perceptions can be built. But in reality, if you look at the situation, we launched on July 14, 2021, and we raised that round in May 2022, that’s effectively 10 months. In 10 months, we raised USD360 million. And we went from a valuation that was insignificant to, like, a USD900 million valuation.
But the question is that the valuation wasn’t what you expected.
When we were raising this round, we sensed that the market was tanking. I was very clear that 60 days later from May it was not going to be available. We wanted to raise that capital, so that we had multiple years of runway ahead of us. We could have run for a valuation that is 10%-12% higher or we could optimise for cash in the bank. The idea was just getting cash in the bank. From an end-state ownership perspective, what really will matter is the value that we materialise when we go public.
Initially, we were going for a valuation that was just 12% higher, USD1 billion. We ended up at USD900 million. Currently, we are very capital efficient.
Our information is that you have been burning close to USD12 million per month.
That’s not the case. Compared to other folks in the industry we are operating with significantly more capital efficiency. That doesn’t translate into burn but what’s our Ebitda right now and how fast is it improving. Can’t tell you some of the internal numbers at hand because that will create a benchmark for our competitors. We have been able to show strong growth while improving unit economics simultaneously.
You started off with a 10-minute delivery claim. But now it’s a given that the deliveries are taking much longer. What’s the average time when we are talking about Zepto? What do you think of your ‘10-minute promise’ as of now?
In Mumbai, Hyderabad and Bangalore delivery times have deteriorated on the back of the monsoons and I expect it to recover in the next four-to-six weeks.
Analysts at Jefferies recently visited a Blinkit dark store in NCR for a perspective on quick-commerce dynamics. They said that they were “surprised” at aspects like portfolio spread, seasonality and micro-focus. They continued to believe that quick-commerce is at an early stage, and there is considerable uncertainty on various aspects, including eventual profitability.
When I started last year, firstly people were like — you are totally nuts. This is not going to work. They said you are just silly and wasting our time. I had been laughed out of investor meetings. That was the first phase, before we launched.
After we launched, we were still early and not doing millions of orders and people said nobody wants this stuff — I am willing to wait for a couple of hours or the next day. That was the second phase.
But then we and everybody else in our industry grew instantly. It became the fastest growing industry in consumer internet by far. We grew tremendously and got to a point where now millions of people use our service and our retention rates are through the roof. Now people are like — is it possible? Yes. Do people want it? Yes. But then they are like this is never going to make money. But I’m telling you, we are going to make money.
So how are you focusing on unit economics without compromising on the growth? Why don’t you share your target for profitability?
Profitability is an illusion. What we’re looking at right now is how we want a long-term growth trajectory to look like. Today, every time a new dark store is launched it doesn’t start profitable. Like any other business in grocery, there’s a certain turnaround time it takes to get to profitability. So to me, being profitable as a business and talking about that timeline is not dependent on whether we’ll be able to turn stores profitable or not. It is dependent on how many stores we are going to launch tomorrow.
How many stores do you currently have across the country? What is the expansion plan, given that you’re talking about this funding winter? What kind of pressure are you getting from the investors against expansion?
We’re getting deeper into the areas that are currently penetrated. Our customers are transacting more and more frequently with higher basket sizes. The revenue is growing within existing dark stores. Not that we are not expanding but expanding responsibly. We have got a significant amount of cash in the bank. And we have a very clear trajectory to like rapid improvements in contribution margin every month.
On profitability, we are in a position where we actually have a lot of control on the business. Our goal is to be a company that’s profitable at a free cash flow level before we go public.
That’s a very hypothetical situation. You are barely a year old. When do you plan to go public?
Yeah, we are a year old but we are going to build a large public company. And we are not going to file for an IPO as a loss-making company, that I can tell you for sure. We will probably hit a billion dollars in annualised sales sometime in the third quarter of the calendar year 2023.
Since your numbers are not public, how can one draw an inference? Please help us understand where you are sitting right now.
I can’t give you absolute numbers. But I can tell you the current growth trajectory and the cost of that growth incrementally. We don’t just look at it as the quantum of dark stores, we look at the cost per incremental order and cost per incremental gross revenue. So I don’t have the exact number of dark stores that we will end up at. But it will probably be in the zone of half a million to a million orders per day and a billion dollars in annualised sales by next year by this time.
Unless the world ends tomorrow and you get the hardest of hard landings, and there’s really sort of dire straits I mean if it starts looking like it’s going to be 2008 then obviously we’ll pull back, right. But as things stand, we are on track to do that.
You’ve turned 20 now and are running almost a billion-dollar company. Does that get a little overwhelming?
Honestly, it doesn’t come up on a daily basis. What I really like about our culture is that it’s very substance driven. We only peg credibility based on how much substance somebody has across the company. We have a very mature team. Most of the folks we have decades of experience. Some are double my age. But the good news is that it feels great because I am just working with people that only respect substance and don’t care about superficial things like how old is this person, etc. If this person is willing to deliver, then I’m willing to work with them.
We learnt about senior executives exiting the company owing to an aggressive work culture including Anurag Jain and Koustubh Rajepandhare, among others. Was it because you were in a hyper-growth stage? What really happened? Has there been any learnings from those exits?
We did not have any exits — at least not of anyone who is directly reporting to me.
In the last six-seven months, much has been written about startups promoting toxic work culture under the garb of achieving growth. Ashneer Grover recently also said — If you expect that someone will create a USD6 billion business in less than four years and want everything to be perfect including culture, sorry just not going to happen. What do you think of it?
I have a different perspective. I’m living it right now but I’ve also seen founders that have gotten built with a different perspective.
What about corporate governance? Do you think entrepreneurs should promote routine forensic audits instead of just stat audits given the recent example of corporate governance lapses at companies like BharatPe, Trell and Zilingo?
There are many companies that have grown, in the billions of dollars of scale in a very short period of time, they have done it without any governance lapses. I try to benchmark those companies. Folks on my board can tell you that we have one of the best financial controllership structures compared to any consumer internet companies.
We did three consecutive large rounds, which required rigorous financial due diligence. And we got done with all of them with no concerns.
For a company that’s going from zero to hundreds of millions of dollars in scale, in a very short period of time, you’d expect stuff to be broken, all sorts of financial due diligence passes but we don’t have a single snag.
We’ve been lucky enough to have really high-quality investors. For example, Paul Hudson from Glade Brook is on our board. He is a great guide on how to build best-in-class corporate governance because he’s done this for decades.
I’m actually in a position where I have a lot of comfort with corporate governance, financial transparency and controllership.
We learn that you also met SoftBank to test the waters for a potential investment.
I’ve never met anybody from SoftBank. These guys have put in almost a billion dollars in my biggest competitor. See, right now, I’m not speaking to investors to fundraise. I’ve got a lot of cash in the bank. Also in a market where I get hammered by investors, especially when I don’t need the cash and I know that my burn is reducing, my runway is north of two years – I’m stupid if I waste my time fundraising.
I have got good relationships with investors, obviously some internal but most of them are external, that I continue to cultivate and meet on a regular basis. If they are in Mumbai we have dinners.
I have grown up watching documentaries on Masayoshi Son and I was a fan of SoftBank. I would love to meet them at some point but have never really interacted with SoftBank as an entrepreneur. I wish I did at some point.
(Originally published on Sep 12, 2022, 12:00 AM IST)
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