Hyperlocal start-ups feed into funding frenzy
Bengaluru: Too lazy to do the laundry or pick up groceries from the neighbourhood store? Want new cuisines delivered at the doorstep every day?
These are some of the customer wishes so-called hyperlocal start-ups are trying to fulfil in Indian cities—with discounts thrown in—and investors are eagerly helping these start-ups do so with generous dollops of capital.
More than 45 hyperlocal start-ups have raised $270 million from venture capital (VC) firms and other investors over the past nine months, according to MintAsia research.
VCs led by Sequoia Capital India Advisors Pvt. Ltd are aggressively investing in these potentially large, but unproven, business models, betting that some of these start-ups could become as large as Flipkart and Snapdeal, India’s two most valuable Internet businesses.
Largely, there are four kinds of hyperlocal businesses: food ordering, grocery ordering, home services marketplaces and logistics providers.
Grocery and food delivery start-ups, such as Grofers (Locodel Solutions Pvt. Ltd), PepperTap(Nuvo Logistics Pvt. Ltd), TinyOwl (TinyOwl Technology Pvt. Ltd) and Swiggy (Bundl Technologies Pvt. Ltd) connect customers with supermarkets and restaurants through apps and deliver products on-demand—in a few hours or even quicker—either through their own network or through restaurants in some cases.
Home services start-ups such as LocalOye, UrbanClap and Taskbob provide electricians and plumbers on-demand. Logistics start-ups such as Roadrunnr provide a delivery fleet for restaurants, e-commerce firms and other companies.
All these start-ups are catering to a shift in consumer habits towards convenience and on-demand services.
“Our thesis (on hyperlocals) is a combination of two points. One, that every business will go hyperlocal because it’s better for consumers (to get products and services) in terms of being able to get them faster, cheaper, fresher, locally, so on; two, a majority of our spends are offline today and are in cash. It’s time they became online,” said Mohit Bhatnagar, managing director, Sequoia India. “Five-six years back we used to say, companies are going mobile because the mobile trend was coming and every company will shift there. In a similar way, all companies are going to go hyperlocal.”
Food, groceries and services markets are massive and currently untouched by technology; so they are ripe “to be transformed and disrupted”, said Ritesh Banglani, partner at Helion Ventures Partners.
“But you need nuanced business models to succeed in these markets. What works in one may not work in another. For instance, we think the inventory model will work in groceries because margins in this business are too thin for marketplaces to succeed. Whereas marketplaces are much better suited in food delivery because it is fundamentally higher-margin business,” Banglani said.
Helion is an investor in online retailer Big Basket, which sells its own groceries.
The VC firm is currently evaluating online food start-ups and may also invest in more home services start-ups after pumping in $3 million along with Kalaari Capital into services provider DoorMint earlier this month.
Some other VCs are bullish on the marketplace model in both food and groceries ordering.
“In groceries, hyperlocal marketplaces provide on-demand services and convenience of home delivery that consumers want, and they do this without holding inventory,” said Mukul Arora, principal at SAIF Partners. “It’s much easier to scale up across cities in a faster and less capital intensive way, compared with companies that hold inventory. (In food), companies like Swiggy help restaurants get new customers and help the customers discover new restaurants and get reliable delivery, which helps expand the market.”
To be sure, there is some Fear of Missing Out (or FoMO) at play in hyperlocal investing.
The most active VC in hyperlocal is Sequoia Capital, which has at least seven such start-ups, including Grofers, PepperTap, TinyOwl and Roadrunnr in its portfolio. Sequoia was less bullish on e-commerce businesses in the past, compared with other investors such as Tiger Global and Accel Partners.
However, the surging valuations of Flipkart and Snapdeal— which are worth roughly $15 billion and $5 billion, respectively—over the past one year, have fuelled a rush to invest in e-commerce firms, leading former sceptics, such as Sequoia, to join other VCs in the search for the next big thing.
The fund-raising success of US-based groceries delivery start-up Instacart is also helping drive investments in hyperlocal businesses, whose early growth is promising.
The biggest Indian hyperlocal start-up currently is Grofers, which was started by Albinder Dhindsa and Saurabh Kumar in September 2013.
Grofers was known as OneNumber.co in its first avatar. The idea was to deliver all kinds of products from samosas to cigarettes quickly to customers. It raised close to $45 million from Sequoia, Tiger Global and others, and has an estimated valuation of more than $100 million.
Grofers currently delivers in 10 cities and does over 16,000 deliveries in a day, Dhindsa said. It lists all neighbourhood stores on its platform right from grocery shops to medical shops, employing a delivery crew of 3,000 people that is growing rapidly, he said.
Rival PepperTap isn’t too far behind. The company is currently operational in nine cities and is clocking some 13,000 daily orders. It expects to add 30 cities and do about 100,000 daily orders by the end of the year, chief executive officer Navneet Singh said.
Food delivery start-ups are growing at a similar pace as their grocery counterparts.
Food ordering app TinyOwl expects daily orders to grow by more than 10 times to 100,000 by next March, said chief executive officer Harshvardhan Mandad.
The company, which has raised $20 million so far, is in talks to raise a new round of funds from bigger rival FoodPanda, among others, according to media reports.
TinyOwl simply connects restaurants with customers, and depends on restaurants or third-party logistics companies to deliver a majority of orders.
Rival Swiggy, which has raised more than $20 million from Accel Partners and SAIF Partners, offers a wider range of restaurants and fulfils all orders placed on its platform.
Another food ordering app Dazo offers a more select range of meals, customized to each user.
“Rather than having all kinds of restaurants and confusing customers, it is important to offer meal options that are relevant to each customer,” said Shashaank Shekhar Singhal, CEO of Dazo. “For instance, a vegetarian customer would have no interest in seeing non-veg options. This actually works both for customers and restaurants, which then end up getting a large number of orders regularly through us. Personalization is essential and as our business grows, we are constantly getting better at figuring out what each customer wants.”
Dazo’s investors include Amazon India country manager Amit Agarwal, Google India chief Rajan Anandan and TaxiForSure founder Aprameya Radhakrishna.
While food and grocery sectors are large and the start-ups in these sectors have received a majority of investments among hyperlocal businesses, home services is an even more unorganized business, giving e-commerce start-ups a huge opportunity to consolidate supply from tens of thousands of workers and offer their services to a large customer base.
Goodservice Labs Pvt. Ltd, which raised $1.6 million from Sequoia earlier this year, is a case in point.
It provides all kinds of services from food delivery to laundry collection, charging customers a fee based on the kind of order they are placing.
In less than three months of starting out, the company is doing 1,300-1,400 orders a day and offers services from 25,000 merchants offline, co-founder Vipul Aggarwal said.
The urban India market for home services is pegged at $15-20 billion, according to the company’s estimates. Several services start-ups have been funded though the investment sizes are lower than those in food and grocery businesses.
Apart from Goodservice, Localoye raised $5 million in a round led by Tiger Global; Doormint raised $3 million from Helion and Kalaari Capital; Taskbob raised $1.2 million from Orios Venture Partners, among other deals.
These start-ups have adopted different models: while some are marketplaces and simply connect customers with service providers, other start-ups directly employ, train and offer electricians, plumbers and other service providers.
“On-demand home services is a fast-growing market but very unorganized and tough to crack. Because there’s a lack of professional and reliable workforce, you need to create that supply and take full responsibility of customer experience,” Helion’s Banglani said.
Sequoia’s Bhatnagar said the market for services is potentially even more lucrative than the products market.
“If you look at spending, 30% of our incomes go on product but 70% is spent on services. Today, nobody is buying services online. There’s this big wave where every service you buy will come online,” he said.
While the market size is large, some analysts have raised concerns that hyperlocal start-ups will find it tough to ever make profits. These start-ups are also seen as much riskier investments than Flipkart and Snapdeal, which have modelled themselves on successful international companies, such as Amazon.com Inc. and Alibaba Group Holding Ltd.
There aren’t any large, established international grocery and food-delivery companies yet. Even Instacart, the US groceries delivery start-up, is yet to prove it can build a profitable business.
The business models of hyperlocal start-ups are far from proven. Food-delivery start-ups keep a cut of 10-20% of every order while grocery apps keep 8-15%. Currently, however, these start-ups are burning tens of crores of rupees on discounting to acquire new customers and forgoing commissions in some cases to increase supply.
Grocery companies also face strong competition from older start-ups such as BigBasket (Supermarket Grocery Supplies Pvt. Ltd), which sells its own goods; food-delivery start-ups have to contend with restaurant discovery platform Zomato Media Pvt. Ltd, which is expanding its food-delivery services after avoiding this business for several years; home services start-ups have to contend with the large customer base built by bigger firms such as Just Dial Ltd. Logistics provider Roadrunnr (Carthero Technologies Pvt. Ltd) faces competition from specialty e-commerce logistics firm Delhivery (SSN Logistic Pvt. Ltd).
With so many start-ups competing for customers, it’s clear many of them will either shut shop or get acquired.
“This opportunity will play out over the longer term when there’s a clear winner. Currently, there are many companies that have been funded and are discounting heavily to acquire customers; so, margins are under pressure. But when capital may not be so easily available, there will be consolidation and the winners will be able to earn healthy margins,” SAIF’s Arora said.
It’s tough to paint a very accurate picture about when hyperlocal companies may achieve profitability, Sequoia’s Bhatnagar said.
“But here’s our going-in thesis: when economics are not as clear you better make sure there’s a lot of money available to these companies to figure it out. At this point, we feel there’s enough interest in India from the larger growth funds, strategic investors and others to give these companies the runway to figure out some of the economics. We, as existing investors, would not allow some of our companies to (expand so aggressively) unless there was capital available. There will be companies that may not be able to raise as much capital. And, absolutely, for these companies, our advice would be to focus on making unit economics work,” he said.