The era of the down round is upon us. And it has been since 2016 ticked over on the calendar and investors came by the quaint notion that actual profits and a path to scalability are more monetarily valuable than a clever idea and a lively take on FinTech.
Which leads to the unfolding kerfuffle over food delivery app Zomato.
A year ago, the India-based startup was a new entrant into the unicorn club, with a valuation of $1 billion assigned after a round with $50 million raised.
These days, according to analysts over at HSBC, Zomato is not a unicorn — not even close — with a valuation of only $500 million.
Zomato, according to HSBC, is a demicorn, at best.
That insight comes care of HSBC Analyst Rajiv Sharma, who wrote in a report recently acquired by Mint that, given Zomato’s actual profitability picture, the unicorn designation just doesn’t add up.
“Zomato is present in 23 markets so early on, and none [are] profitable, which implies that, to address both the investments in last-mile delivery and losses in international operations, fundraising will be a continuous phenomenon, suggesting current valuations don’t make much sense.”
The report was not essentially focused on Zomato but about online classifieds company Info Edge, which owns a 50 percent stake in Zomato. And, notably, the opinion has been unpopular with the teams over at both Info Edge and Zomato.
“We respectfully disagree with several of the points raised by the HSBC report,” Sanjeev Bikhchandani, founder and executive vice chairman of Info Edge, said in a telephone interview with Mint after the report surfaced. ‘[Zomato’s] revenue has more than doubled in the last nine months and continues to head north at a good clip. Costs have been rationalized, and burn is down by more than 70 percent from the peak. The company has plenty of cash, and its unit economics are really good.”
Zomato officially disagreed somewhat more forcefully, noting HSBC “doesn’t obviously understand” the business well. In response, CEO Deepinder Goyal wrote a blog post that hit the Web on Monday (May 9).
“We hit 33,000 online orders yesterday; at our average order values, it makes us the largest player (and only profitable players on a unit economics level) by GMV … We already are profitable in the order business at a unit economics level, and the overall online ordering business will hit profitability when we get to an average of 40,000 orders a day. We should get there in the next three to six months.”
Goyal further boasted of rationalized costs and the drastic reduction in burn.
“We do not need to raise another round of funding to sustain the business or steer it to profitability.”
The critique, however, was fairly pointed out and noted that, because of high costs, particularly in that critical last mile, Zomato was simply corked in how well, or profitably, it can expand in the future.
“In our view, for Zomato.com to emerge as a market leader in the restaurant search space, it needs to focus on online food ordering and build last-mile delivery capabilities,” noted the HSBC report. “We think the company needs to develop a profitable online delivery business itself (and not outsource), at least in its top markets, to complement restaurant search.”
Goyal rather sharply disagreed.
“There isn’t any food delivery company in the world which owns its last-mile logistics fleet, operates at scale and is profitable. These assumptions and statements in the HSBC report make it look like they’re coming from someone who doesn’t — and hasn’t bothered to — understand the space well.”
Thus far, Zomato has racked up $223.8 million across eight funding rounds — most recently, for $60 million in September. The firm’s rapid growth was marked with acquisitions worldwide, including Urbanspoon, but of late has also been fraught with challenges as it has sought to lower its costs, while increasing its revenue base.
Last October, the firm cut 300 people — or about 10 percent of its workforce — and discontinued service to four Indian cities. Difficulties the firm’s CEO addressed, rather tangentially, in his digital remarks on the downgrade.
“We have a lot of work to do to justify the faith (not the valuation) our investors have put in us. We need to continue producing high-quality work, innovate on our product, build and scale our new businesses to a point where they become meaningfully large and highly profitable contributors to our overall business.”
He then ended on a note of it being time to get back to work.
And, given that at least one prominent analyst has dubbed the once-red-hot firm more demicorn than unicorn, he’s probably right to get that idea.
Investments for the week ended 5-6-16
A bit more torque this past week as total fund flows came in at just under $199 million for the period that ended May 6. The FinTech sector dominated, yet again, with the lion’s share of the investment interest and dollars committed, at 98 percent of the total.
Deals were a bit more evenly spaced this time around, with the double digits rather easily attained in the week. The biggest deal came from Lenskart, in which it raised roughly $60 million in a funding round tied to the eCommerce/traditional store and eyewear play’s efforts in India. There’s an omnichannel strategy in place, and growth will come through digital and store front operations, the company has said. Separately, but also with an eye on India, Mobikwik garnered $50 million in financing to help increase the reach of its digital mobile wallet in the country. This time around, the firm, which has an installed base of 75,000 retailers, got the Series C investment from Japanese firm GMO and others.
In a Series D round, Digital Reasoning grabbed $40 million in a vote of confidence for its cognitive computing solutions being deployed into the health care space. The round was led by Lehmi Ventures and Nasdaq, with participation from existing investor Goldman Sachs. The goal, according to news reports, will be to leverage smart computing to sift through video sources, where, previously, its purview has been text.
Thus far into the year, we can see that the U.S. continues to hold sway in terms of geographic investments, with a slight edge over Europe, and Asia, though seeing some spark, is trailing far behind.
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