Zepto: The unicorn in the grey (funding) winter sky

A few months later, in April 2022, the good times were coming to an end. The investing community was about to press the pause button, and Palicha panicked. He quickly summoned a town hall and raised a clarion call to reset the company DNA. “We need to be more disciplined, and think of a sustainable way of growing,” he underlined. The mood turned from exuberance to cautious optimism.

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Palicha decided to put a full stop to opening up dark stores—by April 2022, he had 220 across 10 top cities—and took a series of steps to maximise efficiency and cost. Supply chains were optimised, distribution centres were made more productive, sourcing channels were oiled efficiently, line-haul utilisation was improved, a flurry of experiments were done with last-mile vehicles, and the pace of growth was moderated. All was going well for Zepto, and it still had a runway of 18 months.

Then came the dramatic first week of March 2023. It was 10.30 pm on a Thursday night. Palicha was working out in the gym. Suddenly his phone rang, and he disconnected. After a few seconds, the phone buzzed again, and after a minute, it beeped. The co-founder answered but before he could utter anything, “Aadit, there is a bank run at Silicon Valley Bank,” said one of the investors of Zepto in Europe, disclosing the unfortunate news. “The bank is collapsing.” Zepto had $30 million parked in Silicon Valley Bank. Suddenly, $30 million looked like zero. Palicha thought that the funder is playing a prank.

The line got disconnected. After a few minutes, Palicha went on to Twitter (now X) to check the news. The social media platform was flooded with panic tweets from an army of helpless founders across the world who now had their money stranded in the US bank. From 10.45 pm, his phone started ringing incessantly, and he went on a flurry of distress calls for the next sixty minutes. Suddenly, Zepto’s runway was cut by half.

By 11.30 pm, Palicha was on a conference call with the CFO and existing set of investors. The crisis discussions went on till 3 am. All attempts to pull the money out of the bank failed. The next day, the bank collapsed, and all international transactions were blocked. Miraculously, the money finally got transferred to the account of one of the investors in the US, who then sent back the capital to Zepto’s parent company in Singapore. Palicha heaved a sigh of relief, but another crisis was round the corner.

Y Combinator, the famed US accelerator that was in final stages to lead Series-E funding round in Zepto, announced shortly after in March that it is winding down its late-stage investment fund. “It was devastating. Back to back tragic news…I was almost numbed,” recalls Palicha, who was planning to raise around $140 million on the back of impressive numbers that he had churned out over the last twelve months. The operating revenue jumped to a staggering ₹2,024 crore in FY23 from ₹142.36 crore in FY22. Though during the same period, losses ballooned to ₹1,272 crore from ₹390 crore, Zepto had cut burn, slowed down the pace of growth and made around 100 stores start generating cash.

Palicha went back to the drawing board, pushed the fundraise process by a few months and devised a new strategy. “We decided to stay away from a big dog and pony show,” he says, alluding to reaching out to as many investors as possible. The co-founder took the existing set of investors in confidence, got a commitment of around 60 percent of the funding from them, and then started hunting for a new backer who would place a contrarian bet.

He identified seven funds with whom he had been in some kind of discussions over a year or so, and once the final data was ironed out, and a thorough internal as well as external diligence was done to assuage the apprehensions of American investors who were spooked by a flurry of non-disclosure and shoddy corporate governance practices among a battery of Indian startups, the funding process became smooth.

In August, Zepto became the first unicorn of 2023. It closed a $200 million round at a valuation of $1.4 billion. The round was led by VC firm StepStone, with participation from Goodwater and existing backers such as Lachy Groom, Glade Brook and Nexus Venture Partners. Three months later, it raised another $35 million.

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The backers reckon that the 10-minute delivery startup has raised quick money on the back of delivering on its promise of growing  in a sustainable manner. “They’ve moved fast, which is critical in competitive, large markets like delivery,” says Nicolas Dardenne, a global investor and principal at Y Combinator’s growth fund.

In just over two years since launch, underlines the investor who is on the board of Zepto, they’ve grown to over 300 stores and more than $700 million of annualised sales. “More importantly, they’ve grown with healthy underlying customer metrics and economic control,” he claims, in an email reply.

Zepto’s customer retention, he adds, is best-in-class, and the new store cohorts are reaching profitability faster than older cohorts. In the prior decade of similar startups, it was rare to see a company drive hyper-growth and improve profitability simultaneously. “Zepto is proving it can do both,” Dardenne says.

Palicha, meanwhile, says he has a lot on his plate. The biggest challenge is to ensure that the startup doesn’t get complacent, and slip back into the ‘growth-at-all-cost’ period. “The burn has come down, and we are close to Ebitda positive,” he claims. “I want to take the company public in 18 months, and it will hit the public market with a positive PAT (profit after tax),” he smiles.

The ambitions are lofty and the intent is aggressive. Zepto, and Palicha, will now have to walk the talk and deliver on the promise of running a profitable venture.