Hockey Stick, Swoosh or Spoon – The perennial startup challenge

Being an Optimistic Leader

So the results of Swiggy, a #foodtech startup started in 2014 is out. The summarized financials for Swiggy:

Mar -15: Rev = 0.11 Cr Loss = 2.1 Cr

Mar -16: Rev = 23.6 Cr Loss = 137.1 Cr

That’s a sharp dip in the profit line.

The monthly cash burn for Swiggy was Rs. 13 Cr for 2015-16. We also gather that they have $75m VC Investments. About Rs. 400 Cr. So, cash is there to build the business. So, for Swiggy to continue fighting the competition, cash burn would only have increased in 2016-17.

Tiny Owl got acquired within 2 years after Rs. 25 Cr of losses on revenue of less than Rs. 50 lakh. Runner is now incharge and driving the business, acquiring customers and spending more money. Foodpanda is down. New startups are challenging the space. In nutshell, competition is there. Also, more customers are ready to be acquired.

We have reasons to believe that revenue would also have increased. But how much is the question.

The Case of Zomato

Let us look at the Emperor of food tech startups – Zonato, started in 2008. Here are the summary financials:

  • Mar -12: Rev = 2 Cr Loss = 7.2 Cr
  • Mar -13: Rev = 11.4 Cr Loss = 10 Cr
  • Mar -14: Rev = 30.6 Cr Loss = 41.3 Cr
  • Mar -15: Rev = 97.7 Cr Loss = 136 Cr
  • Mar -16: Rev = 184.9 Cr Loss = 492 Cr

We can’t see any hockey stick effect at Zomato. In fact, we haven’t seen hockey stick effect with any Indian startup built with VC money. But revenue side view of Zomato, shows rapid increase. Ditto for expenditure. This is bound to happen is a sector that is new, an industry that is being built.

Let us look at costs of doing a Food tech business. This involves hiring cool designers to build the tech platform and apps. Enlist the business, market the app to customers who order food, call centre costs, and then deliver the food to customers. Not all data is in the public domain. But we can connect the dots.

As per reports, Swiggy clocked 1 million orders in April 2016, reporting 25% increasing over previous month. Assuming annualised monthly growth of 25% (that’s smoothening peaks and lows), year of year, Swiggy had about 70,000 customers in April 2015. That’s whopping 15X growth. One can estimate, Swiggy served 37.25 lakh customers in 2015-16. So, for revenue from operations of Rs. 20.14Cr this translates to Rs. 54.09 per order.

4200 delivery boys of Swiggy achieved 1 million deliveries in April 2016. That is just about 8 deliveries per FTE. Assuming average FTE cost of Rs. 10000 per month plus Rs. 2000 fuel cost + Rs. 1000 incentive, this translates to delivery cost of Rs. 54.66 per unit. Call centre costs, Customer acquisition cost, marketing costs and IT costs excluded. The call centre facilitation cost adds a burden of about Rs. 30 to 50 per call. So, if one-third of the orders require call centre, that’s Rs. 10 to 15 for Swiggy. Automated ordering can improve the margin.

Customer Acquisition Costs (CAC)

In a competitive market, the cost of bringing a customer to your platform or app is anywhere between Rs. 300 to Rs. 500. On average, only about 25% of the app downloads remain active. From the active customer base, Swiggy claims, 4 out of 5 repeat orders. Implicit in this narrative, on average a customer after 5 orders before, she has to be reacquired. Though, the re-acquisition cost should be less, but no one can evade the average CAC per order of Rs. 60 to Rs.100.

You start getting the sense of business. 90% repeat has the power to reduce the CAC by 50%, which is highly probable.

Much depends, therefore on revenue per order. There are two possibilities here. Either Swiggy improves its margin from restaurants from an already high level of 30% or the average ticket size of customer order increases significantly.

Those are interesting scenarios for Swiggy and its VC investors.

The question for them is:

Would Swiggy further dip further in 2016-17 or do we get to see a clawback?

If so, is it going to be a Hockey Stick, a Swoosh or a Spoon?


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