Saving private Dunzo: Where’s the white knight?

Dunzo pivoted to quick commerce in mid-2021. The move made sense back then—almost a fourth of its orders were grocery deliveries.
Dunzo pivoted to quick commerce in mid-2021. The move made sense back then—almost a fourth of its orders were grocery deliveries.


The next 60 days will be crucial for the quick commerce startup. Out of money, it urgently needs an investor

Bengaluru/Mumbai: Many years ago, an executive rushing between meetings in his Bengaluru office hit himself against a revolving door and broke his Timex watch. A friend then connected him to a company that ran a concierge service for busy professionals over WhatsApp, the popular messaging app.

Kabeer Biswas, one of the founders of that service, created a chat group and within a short time, the executive had options for watch repair shops in his neighbourhood. A delivery boy came over, collected the watch, got it fixed and delivered it back—in a few hours.

“I was in meetings and my schedule was tight. I did not have the time to fix it. But the work was done for around 200," the executive, who declined to be named, said.

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Graphic: Mint

That concierge service was the earliest version of Dunzo Digital Pvt. Ltd, now a popular quick commerce company, that almost became a unicorn, or a company with a valuation of over a billion dollars, last year. In January 2022, Dunzo was valued at about $775 million.

In its avatar as a concierge service provider, Dunzo would pick up groceries and deliver them at your apartment; drop off forgotten items at your office; make copies of house keys; pick up your car from the garage and even deliver bouquets to a friend.

But there were too many workflows and all of them were on WhatsApp. With some seed funding, the company moved from WhatsApp to an app. The human concierge service was replaced by technology. In this iteration, Dunzo restricted itself to being a logistics provider—it would pick and drop items as required by users.

This service took off and it scaled rapidly. At the height of the startup capital boom, in mid-2021, Dunzo added quick commerce to its product offerings and raised money from the likes of Reliance Retail Ventures Ltd and Google LLC. Overall, Dunzo raised close to $470 million till date. Quick commerce is delivery of groceries in quick time, often within an hour of placing an order.

Back then, the pivot to quick commerce made sense— almost a fourth of its orders were grocery deliveries. But quick commerce is also a double-edged sword. Scale comes at a steep cost. In 2021-22, Dunzo’s revenue doubled to 54.3 crore. The loss? 465 crore. The company gained scale on the back of its quick delivery business ‘Dunzo Daily’ but was losing money on every order.

Then, simply, it ran out of money.

Nine years after Biswas co-founded Dunzo along with Ankur Aggarwal, Dalvir Suri and Mukund Jha, the company is facing its biggest crisis. Here’s the list of woes: cash flow crunch, unpaid dues to creditors and vendors, layoffs, deferred salaries, shrunk operations, steep fall in valuation.

Simply, the business needs a lot of money.

The next 60 days will therefore be crucial. Dunzo has promised to pay off pending employee salaries and is also counting on raising capital. The question is whether it can raise enough money in time to save the business from going under. Who could be that white knight?

Before we attempt answering that question, let’s look at how and why things went south.

Undelivered promise

This is basically quick commerce’s food delivery moment," Biswas said in an interview to Mint in February this year.

He was talking about how quick commerce was going through an adoption curve, just like the food delivery sector did in 2017-18. Companies such as Zomato and Swiggy, back then, were focussed on creating higher return on investment (ROI) and increasing mass adoption.

The way to go about increasing adoption in the quick commerce business is to open more and more dark stores, or small warehouses within a city from where super quick deliveries can be executed. For a few months in 2022, Dunzo was opening one dark store every day!

The business started from Bengaluru but eventually expanded to all major Indian cities—Mumbai, Chennai, Pune, Hyderabad, Kolkata and Delhi-NCR. The company said it would surpass 75 million orders in 2022. It did deliver on that target, but the dark store strategy cast a shadow over its existence.

According to analysts and investors, apart from the aggression on dark stores backfiring, the company’s advertising and marketing blitz during the Indian Premier League, a popular T20 cricket tournament, proved rather expensive.

Meanwhile, the company’s cash burn and losses per order kept mounting. In 2021-22, its loss was over eight times the revenue generated.

“Many of Dunzo’s deliveries were made at discounted and unsustainable prices. It never achieved unit economics, or a product market fit at a reasonable price. They targeted customers who would never pay for these services, offered steep discounts and eventually ran out of money," said a person familiar with the business.

No way out, it had to scale back—cut fixed costs and re-imagine its margins.

At its peak, last year, the company had around 1,700 employees. Now, its staff strength has shrunk to 700 after multiple rounds of layoffs. It held back salaries since June this year (the company has assured paying by September first week). From 120-odd dark stores across cities, the company has shrunk the network to about 15% of that number. Since its peak, Dunzo’s overall revenue is down by 25-30%, an executive from the company, who didn’t want to be identified, said.

Needed: $75 million

How much capital does Dunzo need to survive and then thrive again?

Around $150 million of fresh funding would be nice. That would give the company a runway for over a year, according to two people familiar with its plans. Nonetheless, raising a large round won’t be easy in this climate. Fog from the funding winter has engulfed startups of all sizes. But, could the company’s existing investors come to the rescue?

Top investors in Dunzo comprise Reliance Retail Ventures (25.8% stake), Google India (18.5%) and Lightbox Ventures (11.8%). Aspada Investments (4.8%) and Blume Ventures (4.7%) have relatively smaller stakes, data from Tracxn, a research firm, shows.

Dunzo raised around $40-45 million debt in March-April this year through convertible notes, to which both Reliance and Google subscribed. A convertible note is structured as a debt instrument with an option to convert to equity at a later date.

This money was used for “some chunky payouts" and to ensure business continuity, the executive from the company quoted earlier informed. In July, Dunzo had to choose between making these chunky payments (the executive quoted above did not disclose to whom) or salaries. It chose to make the payments, promising employees salaries with interest in September. “It was a matter of keeping our lights on," the executive said.

If the company manages to raise even half of what it needs for a year—or $75 million—it should be able to emerge from the crisis, this person said.

Reliance is yet to make a commitment; Lightbox is likely to put in some capital. There is an expectation that Google, which has participated in the previous rounds, will also join in.

Dunzo’s founders, meanwhile, have reached out to external investors. But many potential investors appear to be nervous. They are gauging the moves of Reliance Retail Ventures.

In the past two years, Reliance Retail Ventures has acquired multiple e-commerce brands, from online furniture platform Urban Ladder to a slew of lingerie companies such as Zivame, Clovia and Amante. After acquiring 96.49% stake in subscription-based e-commerce platform Milkbasket, the latter is being integrated into the conglomerate’s online shopping arm, JioMart.

“Reliance has been acquiring distressed online retail platforms at very low valuations. Though its acquisition of Dunzo may not be on the cards now, it would be the thing to watch out for," said one of the people cited above.

Dunzo’s valuation has dropped to below $500 million now from $775 million in January 2022.

Currently, JioMart contributes significantly to Dunzo Merchant Services, the company’s business-to-business or B2B vertical where it handles shipment for companies. The B2B unit contributes around 40% to Dunzo’s overall revenue.

“Given the kind of infrastructure Dunzo has built, it could be the logistics arm for Reliance, for their overall ecommerce business," Satish Meena, an independent consultant, said.

Plan B

Let’s assume Dunzo manages the lifeline of $75-150 million. How will the company change?

One, from a hyper-growth model, it would settle for slower growth. From its focus on cash-intensive quick delivery business, it would perhaps stress more on the B2B arm.

It is already making a crucial switch—from a dark store model to partnering with kirana stores and super markets to fulfil its quick commerce orders. This can cut down the cash burn further, the company believes.

The quick commerce business is very competitive and is largely a five-horse race at the moment. Apart from Dunzo, there is Swiggy-backed Instamart, BigBasket’s BBNow, Zomato-backed Blinkit and Zepto. Encouragingly for Dunzo, all its rivals are eyeing a path to profitability. They are trying to optimize dark store efficiencies in an effort to improve margins.

“For investors to keep funding this (quick commerce), there is a rising expectation of a clear path to profitability, driven by operating leverage and internal efficiencies," said Angshuman Bhattacharya, partner and national leader—consumer products and retail, EY India.

The Dunzo executive quoted earlier said that the company has already reduced its monthly cash burn by over 90% now compared to six months ago. Fixed costs are down and the company wants to trim its cost base for the B2B business by 15-20%.

“We need about $75 million to become profitable in the next 6-9 months. That is our singular focus," said the Dunzo executive. He added that in June, the company became ‘contribution margin positive’—revenue generated after subtracting the variable costs.

The Dunzo executive further added that its quick commerce business can grow organically from now on, at 25-30% per year. The B2B unit, meanwhile, is expected to grow at 45-50% a year. And the company is keen to scale up this business because it is steady money.

One lever the company has is utilization. It plans to optimize the utilization of delivery riders by cross-using them across the B2B and quick commerce businesses. This could help bring down the cost per delivery. Dunzo’s utilization rate had dropped to 82% at one point. It is now in the range of 90%, the company executive informed.

“The key in this business is utilization—how do you use the biker for the full day? For any player to succeed, they will have to find multi-use cases to maximize utilization throughout the day," said Sumir Verma, managing director of Merisis Advisors, a boutique investment bank.

What happens if Dunzo is unable to raise venture funds?

The company could opt for structured debt to manage cash flows, one of the executives cited earlier said. The interest rate for such debt is high—it could vary between 12% and 18%. The easy money era has ended and the cost of capital is high, leading to higher interest rates. Interest payments can be structured monthly or quarterly against future cash flows or a future fundraising event. This may also involve converting debt to equity at a later date.

Less capital also implies further cuts in people and operations. “It could also be lights out," another person familiar with the business said.

Depending on whether it rises or falls, Dunzo could either become the first casualty in the Indian quick commerce industry or a small but profitable hyperlocal delivery startup. We will know in the coming weeks.

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