Stanford dropouts’ startup worth millions, could be India tech unicorn

(CNBC)- Two 19-year-olds dropped out of Stanford to build India’s next tech unicorn

“When we started this 12 months ago, every conversation we had was, ‘You’re totally out of your mind, this is never going to work,’” said teenage CEO Aadit Palicha.

Yet, Palicha’s company has managed to prove those doubters wrong — it’s now nearing unicorn status and is one of India’s fastest-growing quick commerce apps. A unicorn is a startup valued at more than $1 billion.

Zepto is a startup that promises to deliver groceries in less than 10 minutes. Despite being just one of many businesses to join the instant commerce wave, it has already caught the eyes of investors.

Its latest cash injection of $200 million in May 2022 valued the business at $900 million, just nine months after its launch.

Driving its meteoric growth are Palicha and Kaivalya Vohra, two 19-year-olds who dropped out of Stanford University to pursue their entrepreneurial dreams.

“At that point, we had already scaled to a couple million dollars of annualized revenue. We said here’s an opportunity to raise a large amount of capital, it’s got clear product market fit,” Palicha told CNBC Make It.

“How many people in their lifetimes get an opportunity to build a potential generational company? We figured that was just a more exciting opportunity than studying in an elite university.”

From 45 to 10 minutes

The idea for Zepto came in July 2021 — when the childhood friends were stuck in their homes in Mumbai, right in the middle of the Covid-19 pandemic and a nationwide lockdown.

At the time, demand for delivery services surged as many stayed home.

“Online groceries [would] take six, seven days to deliver, offline options were practically shut down or unavailable. It was incredibly difficult for us to get groceries,” said Palicha, who is Zepto’s CEO.

“We had sort of similar conversations with our neighbors that complained about pretty much the same problem. That’s when we said … why don’t we try building a solution for the folks in our neighborhood?”

But Palicha and Vohra were no strangers to the instant grocery delivery business. In 2020 — at just 17 years old — they started KiranaKart, which they said delivered groceries in Mumbai in under 45 minutes.

“Some people were getting their deliveries [within] a 10-15 minute timeframe,” Vohra said.

“In terms of their retention, how much they liked the platform and how frequently they were referring to their friends, [it] was significantly higher for those people who got the deliveries in that timeframe.”

“Which is why we said, ‘Look, maybe there’s some value in exploring that.’”

They weren’t wrong. According to research from consulting firm Redseer, India’s online grocery market could be worth up to $25 billion by 2025 and that is an opportunity that was “too compelling to pass up,” said Palicha.

“If you look at all the other major categories of e-commerce — electronics, apparel, you take all of them and combine them, they’re a fraction of the grocery market,” he added.

Building trust and reliability

In order to fulfill grocery orders in under 10 minutes, the duo established a network of dark stores, or microdistribution hubs across cities.

Dark stores are closed to the public, housing goods meant solely for online ordering.

“We design our network across the city, to make sure that our points of pickup are very close to population clusters in a specific neighborhood,” Palicha said.

“What ends up happening is that the average distances of our deliveries are so short, we’re able to get deliveries done consistently in 10 minutes.”

The startup added that the average distance for its deliveries ranges from 1.7 to 2 kilometers. Other forms of hyperlocal delivery, it said, could be “2 to 2.5 times longer than that.”

Today, Zepto says, it operates hundreds of dark stores across 10 cities in India, with tens of thousands of delivery drivers at work. Palicha added that it is currently delivering “90 to 95%” of its orders between five and 20 minutes.

But speed is not Zepto’s only secret to retaining customers and building loyalty. The startup, whose name comes from zeptosecond — the smallest unit of time — claimed it is adding 100,000 new users daily.

“To really retain customers for the long term, what do you really need to build is trust and reliability. Reliability comes in many ways,” said Vohra, who is also the chief technology officer.

“Yes, we deliver on time, but also reliability in terms of — if I ordered 10 things, I get those 10 exact things. And if I order fruits and vegetables, [they’re] the highest quality possible.”

Keeping cash burn low

To date, the company had attracted $360 million dollars from investors, including Y Combinator, U.S. health-care consortium Kaiser Permanente and Nexus Venture Partners. Its latest funding round puts the company on course for a likely $1 billion valuation.

Palicha said one the key drivers of Zepto’s investment success is its “operating discipline.”

“When we went to investors this time around, we showed very, very clear paths to profitability. We went from $0 in revenue roughly a year ago to today, we’re doing hundreds of millions of dollars in annualized revenue,” he added.

“We’re still talking in terms of multiples and not percentages when it comes to our growth rate, and that’s something that we’re excited by.”

Zepto claims it has managed to reduce its cash burn rate by 5 times on a per-order basis, while achieving a quarter-on-quarter revenue growth of 800%.

Even so, the days of easy money for cash-burning tech companies are gone, as interest rates rise and investors demand more results. Nonetheless, the young founders remain unfazed.

“We’re in a position where you look at the size of our balance sheet, we effectively got capital to last us multiple years, in the context of this downturn,” said Palicha.

“Since day one, we’ve been … forcing ourselves to be efficient to make every dollar last. We’re able to do more orders with the same amount of cash, we’re able to acquire more customers with the same amount of cash.”

Keeping costs lower than its competitors in the high-growth tech category has given them an edge, said the duo.

“That just puts us in a position where we are able to continue growing sustainably, where other folks have been forced to … induce layoffs, essentially pull back growth plans and contract to survive in a market like this,” Palicha added.

Touching ‘the billion mark’?

Because of that difficult environment, Palicha and Vohra aren’t resting on their laurels despite the fresh funding that Zepto has in the bag.

“The key focus now is to just build the incremental scale we need to break even in key markets. Once we have a balance sheet that is now operating in breakeven, we can start expanding into new cities with a lot more confidence and clarity,” said Palicha.

It was previously reported that Zepto is making $200 million to $400 million dollars in annualized revenue and the founders are now hoping to “touch the billion mark.”

Palicha added: ”[Zepto] came out as a personal project between Kaivalya and [me] to see if we could solve a problem at a small scale in our neighborhood.”

“It eventually evolved into the company that we are today, which we’re incredibly grateful for.”