W Power 2024

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

Aadit Palicha and Kaivalya Vohra's Zepto put brakes on growth-at-all-cost as the funding winter rolled in, in 2023. The cofounder duo re-evaluated and slowly pressed down on the clutch to deliver sustainable growth backed by strong customer and economic metrics. It has made it a unicorn in an otherwise freezing funding winter that was 2023

Rajiv Singh
Published: Jan 5, 2024 12:10:12 PM IST
Updated: Jan 16, 2024 06:59:35 PM IST

Kaivalya Vohra, co-founder and CTO (top), and Aadit Palicha, co-founder & CEO, Zepto
Image: Mexy XavierKaivalya Vohra, co-founder and CTO (top), and Aadit Palicha, co-founder & CEO, Zepto Image: Mexy Xavier

Dude, the party is over,” a grim voice from the other side of the call broke the bad news. It was 10 in the morning, and Aadit Palicha was in the midst of crafting another speedy move to his overall frenetic land-grab strategy for Zepto. From one dark store in July 2021, the young entrepreneur raced to 150 stores, and an annualised sales of $200 million by April the next year. Notching up such numbers in a market that had more naysayers than believers, Zepto’s furious pace of growth quickly became the talk of the town.

The 10-minute grocery delivery upstart had disrupted the quick commerce market. It stunned the incumbents like Dunzo, Blinkit, Amazon and Flipkart with its hyper-aggressive growth. ‘Zepto Speed’—a term coined by co-founder and CEO Palicha to describe the breakneck speed at which the challenger brand was cruising since its rollout in early 2021—was the last brand to enter the segment, and threatened to become the biggest in the space.

From zero revenues in the first five months, Zepto closed the first year of operations at ₹142.36 crore in FY2. Though it posted a staggering loss of ₹390 crore, a bloated bottom-line was the last thing on the minds of the audacious founders and investors who were cheering up an intense land grab by entrepreneurs. Two college dropouts—Palicha and his co-founder Kaivalya Vohra—were set to gatecrash into the party of the big boys.

Kaivalya Vohra, co-founder and CTO (top), and Aadit Palicha, co-founder & CEO, Zepto
Image: Mexy XavierBack in the US, in April 2022, one of the investors in Zepto had phoned Palicha, and was talking about another kind of party. “I am serious. The party is over,” he said, trying to underline the seriousness of the situation. The startup world, he continued, was set to enter into a funding winter, the heyday of easy flowing money was over, and raising hefty rounds of funding would be a thing of the past. “You need a complete flip in your mindset. It can’t be growth at all cost now,” he delivered a piece of advice to Palicha, who was jolted out from his fairytale funding journey. “In our first seven months of existence, we raised around $300 million, which is completely nuts,” confesses the co-founder who goes on to describe the staggering pace of fundraise.

The maiden funding round of $9.8 million happened in July 2021. Around 60 days later, Zepto closed $42.4 million in Series-B. In the next sixty days, in December 2021, Palicha scooped $110 million of Series-C. Then something unthinkable happened. Just two days after the money of Series-C hit the bank, the co-founder called up one of his existing investors and shared an outrageous plan. “I want to raise capital again,” he said, explaining his logic. “This funding euphoria is crazy. It’s not going to last for long. So let’s juice out every single dollar as long as the good times last,” he reasoned.

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.

Also read: India tech startup funding in 2023: Takeaways from a five-year low

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.

Kaivalya Vohra, co-founder and CTO (top), and Aadit Palicha, co-founder & CEO, Zepto
Image: Mexy XavierThe 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.

Kaivalya Vohra, co-founder and CTO (top), and Aadit Palicha, co-founder & CEO, Zepto
Image: Mexy Xavier

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.

Also read: Stagnation, losses: Why the economics of startups need a fundamental reset

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.

Kaivalya Vohra, co-founder and CTO (top), and Aadit Palicha, co-founder & CEO, Zepto
Image: Mexy Xavier

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.

(This story appears in the 12 January, 2024 issue of Forbes India. To visit our Archives, click here.)