Zepto bags year’s highest fundraise with $665-mn pre-IPO round; valuation doubles

Quick-commerce platform Zepto has raced its way to the biggest fundraise so far this year, as it reshapes India’s e-commerce sector forcing giants including Walmart Inc.-backed Flipkart and Reliance Group’s JioMart to venture into instant deliveries.

The digital platform, which promises to deliver anything from groceries to cosmetics within about 10 minutes, on Friday announced it had raised $665 million in a pre-IPO round at a valuation of $3.6 billion. 

Zepto, which is gearing up for a public-market listing next year, had gained its coveted unicorn status just nine months earlier, when it raised $200 million at a valuation of $1.4 billion.

Zepto plans to use the capital from its latest fundraise to double the number of its dark stores, or warehouses, to 700 by March 2025. 

It will also use the money to scale up Zepto Cafe, its quick-delivery snack and meal service, throwing the gauntlet at Zomato and Swiggy, originally food-delivery platforms that are investing heavily in their quick-commerce businesses.

Zomato’s instant-delivery platform Blinkit, the market leader, aims to double its network of dark stores to 1,000 by the end of this fiscal year.

Zepto’s ability to raise funds in quick succession is indicative of investors regaining confidence in India’s quick-commerce space, which they were once sceptical about owing to its cash-guzzling proposition.

India’s quick-commerce market grew 77% in 2023 to reach $2.8 billion in gross merchandise value, accounting for 5% of India’s overall e-commerce market, according to consulting firm Redseer. GMV, a key metric in e-commerce, tracks the total value of all the goods sold on a platform, not including discounts and other expenses.

Analysts, however, worry that the increasing competition in the quick-commerce space, including Flipkart’s entry expected in a few weeks, would prompt heavy discounting. They, however, acknowledged that quick-commerce platforms have been able to reduce losses in their dark stores.

Also read | Flipkart's q-commerce entry weeks away, will take on Zepto, Blinkit, Instamart

Profitability will remain a challenge for Zepto in the near-term, said Karan Taurani, senior vice-president at financial services firm Elara Capital. 

“Positive edbita margin will take some time because of the expansion of new outlets. Moreover, there is increased competitive intensity from JioMart and Flipkart. So if at all discounting increases you will see the negative impact of that as far as profitability is concerned,” Taurani said. “So one should not expect ebitda margins to be positive over the near term.”

From idea to IPO

Among the new investors in Zepto’s latest fundraise were New York-based growth equity firm Avenir Group, Lightspeed Venture Partners, and Florida-based Avra Capital, which made its debut investment. Existing investors Nexus Venture Partners, Glade Brook, and StepStone Group also participated.

Avra is a growth-stage investment firm headed by Anu Hariharan, former managing director of Y Combinator’s growth fund. The Paul Graham-founded startup accelerator was among the earliest backers of Zepto, placing its faith in two 19-year-old Standford University dropouts.

Aadit Palicha and Kaivalya Vohra founded Zepto in April 2021, by when covid curfews had made people in India’s large cities accustomed to buying daily staples online. 

The four-year-old startup is now gearing up for an initial public offering of its shares next year, aiming for a multi-billion-dollar listing, Palicha told Mint on Friday.

Over the past few months, Zepto, Blinkit, and Swiggy’s Instamart have fuelled demand for instant deliveries, growing their network of dark stores and expanding their range of products.

Also read | Zomato: It’s time for investors to open their eyes to Blinkit

Blinkit, which Zomato acquired in June 2022, commands a 40% share of India’s quick-commerce market, according to a HSBC Global Research report in April. Zepto has steadily increased its share to 28% at the cost of Swiggy Instamart over the past two years, it said.

Quicker to profitability

Nearly 75% of Zepto’s 350 stores are ebitda-positive (or operationally profitable), CEO Palicha said, adding that the company has shrunk the time it needs for its dark stores to become profitable from nearly two years to six months.

At a company-level, too, Zepto is nearly ebitda-positivite, he added.

Zepto is reinvesting proceeds from its profitable stores back into the business, he added.

Earlier this week, Mint reported that Zepto was looking to set up larger dark stores to stock a wider assortment of grocery and products such as cosmetics and gifting items. “If we are able to achieve this while continuing to delight customers, I believe we will be ready to go public relatively soon,” Palicha said.

While Zepto wants to expand non-grocery sales, such as cosmetics and apparel, Palicha said the company will avoid products such as smartphones and instead focus on items likely to be purchased frequently.

In recent months, Zepto has introduced several new initiatives to diversify its revenue streams and improve its margin.

Zepto Pass, its loyalty programme with monthly prices starting at ₹19, saw more than a million customers sign up within a week of launch in February, according to the company. The programme has more than 4.5 million subscribers, Palicha told Mint.

“The most exciting part about this next phase of Zepto’s journey is the major new projects that will [provide a] 10X customer experience, from launching new categories to expanding initiatives like Zepto Pass,” Vohra, chief technology officer, said in a statement on Friday. “To build out this roadmap, we plan to hire top talent across engineering, product, growth, finance, operations, and category management.”

Advertising revenue has also increased in recent months and could become a strong growth driver as companies promote their products on the quick-commerce platform.

Zepto’s advertising revenue has already hit ₹400 crore and is expected to reach ₹1,000 crore in 12 months, Palicha said. “The advertising business is scaling rapidly and is growing at the rate of 150% year-on-year, driving up margins steadily.”