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From Unicorn to Unicorpse: Zomato Flounders

Posted on Friday, May 27th 2016

Over the past year, several companies have seen their valuations plummet. After years of stellar increases in valuation, some of it unjustified, the VCs have finally begun to reevaluate business models and assign justifiable valuations to companies. The process has resulted in the creation of several unicorpses*. One such story is that of India’s restaurant search and discovery portal Zomato.

Zomato’s Financials

In April 2015, Gurgaon, India-based Zomato, had become the proud member of the Unicorn club. Since its founding in 2008, Zomato has been focused on simplifying the process of online ordering of food by making restaurant menu cards available online. Today Zomato has more than 30 million users across 10,000 cities and 23 countries who access its site to decide where to eat from its portfolio of more than 300,000 restaurants. Over the past years, Zomato has ventured beyond simple menu listing to providing services such as online ordering and table reservations.

The site earns revenues through native advertising and through premium listing of promotional offers. According to recently published financials, for the year ended March 2016, Zomato’s revenues grew 91% to Rs. 184.97 crores (~$27.3 million). But increasing revenues are not translating into improved margins. Over the same period, loss before tax increased 262% to Rs 492.3 crore (~$72.6 million).

The company has tried to placate investors by disclosing that it has achieved break-even in six out of the 23 countries it operates in. The six countries include India, the UAE, Lebanon, Qatar, the Philippines, and Indonesia. Zomato claims that its overall online ordering business will become profitable when it hits an average of 40,000 orders a day, compared to the current numbers of 33,000 daily orders.

So far, Zomato is venture funded with $223.8 million from investors including Temasek Holdings, Info Edge, Sequoia Capital, and Vy Capital. Its last round of funding was held in September 2015 when it raised $60 million in a round led by Temasek Holdings and Vy Capital at an undisclosed valuation. Back in April 2015, Zomato had raised $50 million at a valuation of over $1 billion. But earlier this year, the company suffered a set back when HSBC’s brokerage arm HSBC Securities and Capital Markets slashed Zomato’s valuation to $500 million.

HSBC has questioned Zomato’s revenue model citing that a mere 6%-8% restaurants on the platform pay for advertising. The non-advertising based online ordering business is too young to make a big contribution to Zomato’s revenues. HSBC believes that for Zomato to become a market leader, it would need to focus on the online ordering business and scale its last mile delivery network.

Zomato, obviously, disagrees with the evaluation claiming that HSBC does not really know about Zomato’s business model and thus has not presented a fair valuation.

Zomato’s Growth Plan

Zomato’s management is taking some big steps to make the investors more comfortable with its business model. In October 2015, Zomato announced plans to lay off nearly 10% of its workforce. Most of these lay-offs were announced in the United States.

It is also re-evaluating its business portfolio and shifting to higher margin services. After launching online ordering services, the company announced plans to shut down these services in four cities in India. Online ordering was closed in Lucknow, Kochi, Indore, and Coimbatore, as the markets were not big enough for Zomato to sustain operations.

Zomato also recently changed its strategy to address its market in two key segments – full-stack and enterprise. Zomato’s full-stack markets include India, the Middle East, Southeast Asia (Philippines and Indonesia), Australia, and New Zealand as these are big markets that are still growing fast and currently showcase all of Zomato’s products. Its Enterprise regions are markets that are small or slow growing economies and are offering stiffer competition. These markets include bigger regions like the US.

Within the full-stack market, Zomato plans to continue to monetize traffic through ad-sales. For the enterprise markets, it will focus on transaction businesses, especially on the table-reservations engine, called Book. Zomato believes that focusing on these B2B products will require less regional manpower presence, thus helping it manage costs while continuing to deliver on business goals.

Zomato has its work cut out. It may not agree with HSBC’s valuation reports, but it is no secret that the global venture funds are being more prudent in assigning valuations. Its over capitalized business has clearly been questioned and it will have to deliver now, if it wants to prove its Unicorn status.

* The term Unicorpse was first coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.

This segment is a part in the series : From Unicorn to Unicorpse

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