Bespectacled, full of beans, and all of 19 years old: it’s easy to mistake Aadit Palicha and Kaivalya Vohra for a pair of college students.
Indeed, until recently, they were in fact college students. But Palicha and Vohra wanted to change the world and they didn’t wait to finish college to pursue that dream. They dropped out of a Computer Science course from Stanford to launch a start-up in the middle of the pandemic. And now, they are raising eyebrows with their quick commerce venture Zepto, an app that delivers groceries in 10 minutes.
The duo’s six-month-old venture recently raised $60 million from Y Combinator, Nexus, Global Founders Capital, as well as angel investors Lachy Groom, Neeraj Arora, and Manik Gupta. Zepto is now reported to be in talks to raise over $100 million at a valuation of half a billion dollars. According to Redseer, quick commerce (delivery under 45 minutes) is slated to grow 10-15-fold in the next five years to become a $5 billion opportunity by 2025.
Roots in India and Dubai
Palicha and Vohra, who grew up in Dubai, used to visit Mumbai at least twice a year to visit their grandparents. Hailing from families that had a background in business, they decided to start a venture early on.
In school, they started up their first venture, GoPool, a ride pooling app. However, it shut down following scalability issues. After finishing high school, in 2020, the two were selected for a computer science degree course at Stanford.
The Covid19 pandemic was scorching through the world by then. Soon, international travel was restricted, with countries closing their borders to international visitors.
How Zepto started
Palicha and Vohra were given the option of starting the first quarter of their graduation online. But they decided to delay joining and instead try their luck experimenting with some business ideas.
Just not in Dubai.
Inspired by the stories of unicorns (startups valued at a billion dollars and above) coming from India, they decided to come to Mumbai to try their luck with entrepreneurship for the second time.
They parked themselves in the city and started evaluating a few projects before deciding on Stanford.
Soon, a nationwide lockdown was announced in India, and it kept getting extended for multiple weeks.
Much like the rest of the people in the country Palicha and Vohra were stuck. With limited resources, the two were finding it difficult to arrange for basic essentials while living in a tiny bachelor pad.
Online grocery delivery companies such as Big Basket and Grofers were having a tough time meeting demand as supplies were hit. Riders, many of whom were migrants, had left for their hometowns. On the tech side, things were overburdened.
Companies were laying off employees in thousands.
It was then that the duo realised there was a big opportunity before them.
They started off by partnering with local kirana shops to deliver goods to consumers in a short span. However, Palicha and Vohra soon realised that quick delivery was not possible without having dedicated dark stores — large depots that are used to store goods to fulfil online orders. So they shut KiranaKart and set up Zepto.
“The inspiration to get into the grocery space was because obviously the space was extremely exciting and it was a space that personally affected Kaivalya and me — two bachelors living in Mumbai,” said Palicha.
The 10-minute model
Interestingly the company, which has gained instant fame, wasn’t sure it wanted to get into 10-minute delivery.
“We didn’t know what the right metric was: 10, 30 or 45 minutes,” Palicha told Moneycontrol.
They started off with deliveries across various slots. Soon, they realised that there was a massive jump in the customer experience metric for 10-minute delivery as compared to the 45-minute delivery.
“For us, the driving factor was the week-on-week customer retention and Net Promoter Score (NPS),” said Palicha.
However, critics claim NPS cannot be taken as a metric for business success. In a market like India, NPS can easily be influenced by providing discounts or free services to consumers.
But it wasn’t long before their idea found merit among investors, with venture capital funds such as Glade Brook, Nexus and Global Founder Capital lining up.
According to Palicha, while the founders were in talks with multiple investors, they were linked up with Glade Brook through common connections.
“We really like Glade Brook, their investment thesis, their focus on unit economics, and core business fundamentals. Paul Hudson and his experience investing in other phenomenal companies like Uber, Airbnb, and Zomato was something that was very exciting. It was a no-brainer for us,” said Palicha.
The company, which started talks on funding in August, claims it has managed to set up a strong leadership team with senior executives from Flipkart and Uber, and announced in November that it had received funding.
“We had validation on our ability to execute this model in a way that even global parallels weren’t able to in terms of unit economics, customer service and service-level agreement management. I do not think it was a stretch raising $60 million, It was more of a walk-in round where there was a lot of interest,” said Palicha.
The duo decided to quit Stanford to pursue entrepreneurship.
Was there resistance from family? Despite their business backgrounds, both founders’ families were apprehensive at first. However, once they saw the metrics it didn’t take them long to be convinced.
“On the surface there might have been some scepticism. But when we went deeper into what we were building, I think eventually the family became very excited. They got convinced seeing the way customers were reacting on the ground, the way business was growing, the kind of investor interest we were seeing,” said Palicha.
Palicha’s mother runs a recruitment firm while his father is in the banking industry. Vohra’s family, on the other hand, has run multiple businesses in Dubai, predominantly in the shipping industry.
Vohra has a lot of admiration for Zerodha founders Nitin Kamath and Nikhil Kamath for the way they devoted a decade of their lives to build the company from the bootstraps, eventually getting it a valuation of over $2 billion.
Palicha, on the other hand, is a fan of risk-takers. He derives inspiration from Silicon Valley entrepreneur and philanthropist Sean Parker and Uber founder Travis Kalanick for their fearless attitude in getting into an industry and changing it forever.
Playing catch-up with the big guns
While the company did not share the number of orders being generated, according to sources, across its warehouses, it has been delivering around 8,000-10,000 orders daily.
To put this in context, rival Instamart, which is Swiggy’s grocery delivery platform, delivers 150,000-1,60,000 orders on a daily basis.
Grofers founder Albinder Dhindsa recently told Moneycontrol the company was delivering 1,25,000 orders daily.
To be fair, this difference can be attributed to the difference in the number of dark stores as well as the large organic customer base both Instamart and Grofers are sitting on.
Zepto, which was in beta mode till six-seven months ago across Delhi, Mumbai, and Bengaluru, is expanding fast and plans to reach out to key areas across Hyderabad, Chennai, Pune and Kolkata with the launch of at least 100 dark stores by the end of this year. Gradually, it plans to set up 500 such stores. The company did not reveal how many dark stores it has currently.
The startup claims its aim is to first focus on key areas within a city — micro-markets as Palicha calls them — before expanding services across all the pin codes of a city.
According to Palicha, grocery has the potential to almost triple the number of orders as compared to food delivery. On an industry level, the food delivery sector generates around 3 million orders per day in India.
“The market potential is much, much bigger. It is hard to tell you one frontline number (dark stores). There are a lot of nuances in terms of throughput, capacity, network, design... how much profit we are able to get, what the density looks like, size of the store, etc,” Palicha said adding that plan was to set up 500 dark stores going forward.
The quick-delivery conundrum
While investors and companies are riding the new quick-commerce wave, the jury is still out on whether people really need groceries and staples in 10 minutes. Even the ability to make money while delivering goods at a breakneck speed is a big question mark.
“Any business will make money provided two conditions are met, namely, they are solving a real problem; and the customer is willing to pay more money for the service than it costs to deliver the service,” said TN Hari, HR Head of BigBasket, which also operates in the same space.
BigBasket has also announced plans to launch express delivery. However, unlike companies such as Zepto, Grofers or Instamart, it is not making any promises of 10-15-minute deliveries to customers.
“A 10-15-minute home delivery service will eventually make money only if customers are willing to pay a sufficient premium that can make the business sustainable. Regular grocery shoppers, who are happy receiving grocery orders between 60-90 minutes, are unlikely to pay this premium. Therefore, 10-15-minute quick commerce will end up catering to a niche segment that is willing to pay a high delivery fee,” he said.
A company’s addressable market will expand only if it does not charge a high delivery fee. But that would also mean it does not make money. And therein lies a dilemma.
However, Zepto claims that with the right combination of artificial intelligence and machine learning, the cost of delivery can be brought down phenomenally. While it did not share current numbers, the company claims its cost is much lower than the industry average of Rs 40-50 to deliver one product.
Zepto says it will ensure it reaches profitability on a store basis. “So, if we launch Bandra (a suburb in Mumbai), that micro-market should hit profitability in a certain period... Koramangala (in Bengaluru) again in a certain period of time. As we expand, the idea is to set a horizon of profitability for every micro-market and turn it profitable over time,” said Palicha.
Tough questions ahead from investors
While it sounds like raising $60 million just required the two friends’ common connections and a few word-of-mouth references, investors will certainly be asking more difficult questions as they head for their next round of funding.
“Online grocery is an interesting space. Especially given that people are increasingly liking the convenience of ordering from home. So, is the customer preposition there? Absolutely. But is unit economics there? I’m not sure,” said the head of a large investment firm evaluating multiple consumer tech companies in India, on condition of anonymity.
“Given the packaging and delivery costs, and in some cases returns, I am not sure if many of these companies make money at a contribution margin level. The unit economics still seem to be evolving,” he said, adding that a late-stage fund like his would always be sceptical betting on a company that is on a zero to one trajectory.
But with capital sloshing around amid the unprecedented funding boom, raising money will be the least of Zepto’s concerns.