DiDi Chuxing IPO: The race to dominate the global ride-hailing pool besides stiff competition

by Sandeep Kumar | June 1, 2021

DiDi Chuxing is a Chinese ride-hailing company headquartered in Beijing that was founded in 2012 by Cheng Wei. DiDi is China’s largest ride-hailing provider, with nearly 600 Mn riders and tens of millions of drivers. Didi Chuxing has the advantage of being a domestic player who is familiar with China and its clients. In China, the company’s app allows users to request trips from automobiles and taxis, as well as chauffeur services, minibusses, and ride-sharing services. If the IPO is successful, the company’s valuation could range between $70 Bn and $100 Bn. DiDi Chuxing, which is backed by SoftBank, plans to raise $1.5 Bn in debt financing through a revolving loan facility prior to its IPO. At a time when the Chinese government is cracking down on technology companies, Uber’s Chinese counterpart DiDi Chuxing may have filed for an IPO under the radar. Goldman Sachs and Morgan Stanley have been chosen to lead the company’s initial public offering (IPO).


  • Headquarters: Beijing, China
  • Founded: 2012
  • Notable Investors: SoftBank, Alibaba Capital Partners, and Ant Group.
  • Capital Raised: $24.9 Bn
  • Latest Valuation: $62 Bn
  • Exchange: NYSE
  • Ticker Symbol: DIDI
  • Founder: Cheng Wei

Cementing the position with its industry-leading services

DiDi-Chuxing allocates calls from customers within 3 kilometers, though this boundary is being widened now. However, DiDi-Chuxing recently added a destination basic allocation system in which DiDi drivers can announce a destination and escaping location. The DiDi-Chuxing allocating systems have two modes: selection mode, which began in July 2018, allows the DiDi driver to choose the destination, including long-distance; and allocation mode, which allocates calls to DiDi drivers nearby.

DiDi-Chuxing usually assigns DiDi-X to veterans and DiDi-pool to new drivers. Customers of DiDi use payment methods such as Wechat-Pay, AliPay, DiDi-Pay, and others. When paying for any DiDi-Chuxing usage, DiDi customers can change their payment methods. When a customer sends a DiDi-Chuxing car-sharing fee, the fee is transferred from the customer to DiDi. If the customer did not pay, he must pay the fee before using DiDi-Chuxing again. In the case of long-distance driving in Beijing, the DiDi system raises the fee by up to 30% to compensate the DiDi driver for financial loss.

In the case of DiDi-Premier, there are discrepancies between the announced payment amount in advance and the actual payment amount after driving. These two amounts, however, differed by only a few cents. Even though the customer’s money is directly allocated to the driver’s bank account, the money may be paid a little late after driving. Actual payment takes place two days after the customer’s payment, or one-time weekly payment is made.

Currently, DiDi-Premier is charged a distance fee, a low-speed fee, and a long-distance fee. DiDi-Luxury also receives a long-distance basic fee and a fast call allocation fee. Because of weak government regulations and medium-level public transportation conditions, DiDi-Chuxing has a 3 km base call allocation system, with a trend toward increasing the allocation distance from more than 3 km up to 10 km in the case of DiDi-Luxury.

Ride-Hailing App’s concentrated Revenue Model

The majority of the company’s revenue comes from its private ride-hailing app. DiDi-X drivers received 80% of the revenue paid to DiDi-Chuxing by the customer. DiDi drivers can drive the DiDi car for 12 hours per day, which is calculated based on the DiDi operating time.

DiDi-Premier drivers earn 74% of the revenue. DiDi-Premier fees are 20% higher than DiDi-X fees, and DiDi-Premier drivers earn 20% more than DiDi-X drivers. DiDi-Luxury is five times more expensive than DiDi-X and three times more expensive than DiDi-Premier. DiDi-Chuxing pays DiDi-owned luxury car drivers 10,000 yuan per month in one-time and weekly payments. The fee for DiDi-Pool is 10% less than the fee for DiDi-X. If customers pay with Alipay, Alipay provides a small incentive to the drivers as part of an Alipay promotion in DiDi-Chuxing. If a DiDi driver cancels the allocation more than four times, the driver must pay DiDi-Chuxing a fee.

What is important is that the revenue of DiDi drivers is more than twice the minimum salary of university-graduated manpower under the weakness of China’s taxi industry and the automotive industry with the support of the Chinese government with limited regulatory power. The Chinese government regards DiDi-Chuxing as a kind of revenue-increasing engine for the people.

DiDi’s Business Timeline


A dominant strategic player in the Chinese Market with uncertain longevity

DiDi Chuxing has risen to the top of the online car-hailing market after merging with and acquiring Uber China. After driving Uber out of China in 2016, DiDi Chuxing quickly dominated the country’s massive ride-sharing market – but its position is far from secure, as more powerful rivals emerge to challenge its dominance. According to PwC, China’s shared travel market will reach $564 Bn by 2030, with a 32% annual growth rate. Many businesses have been drawn in by the massive shared travel dividend. China’s online car-hailing market exhibits a high level of market competition. Many players are still active, in addition to the dominant DiDi Chuxing. There is still room for a taxi-hailing market worth $100 Bn. The national average ride-hailing success rate is around 75%, and 25% of online ride-hailing demand remains unmet. This provides a lot of incentive for new entrants like Gaode Taxi, Meituan Taxi, Ruqi Travel, and other public online ride-hailing platforms.

DiDi Chuxing has approximately 554.7 Million orders, while the order volume of more than ten travel platforms such as T3 Travel, Cao Cao Travel, Wanshun Car-hailing, Xiangdao Travel, and Meituan Travel is less than 90 Mn, according to the calculation of the internal parameters of online car-hailing. As can be seen, DiDi Chuxing’s order volume far outnumbers that of other ride-hailing platforms. DiDi Chuxing, on the other hand, cannot sit back and relax. The company’s continued loss of market share has also planted a slew of hidden dangers for it. DiDi Chuxing’s market share accounted for 95% of the scale of online ride-hailing around 2016. Later, due to security incidents, DiDi Chuxing’s ride-hailing business was forced to go offline in the second half of 2018, and its market share also fell to 90%; according to calculations, DiDi Chuxing’s market share is only about 85% today.

How does DiDi fair over different regions and their market leaders?

 Source: PitchBook 

 Chinese Ride-Sharing Giant on the way to profitability 

DiDi Chuxing is dubbed “China’s Uber,” yet it really outperforms Uber and other competitors in the Chinese market. DiDi Chuxing, or DiDi, is a Chinese ride-hailing startup that has amassed over 550 Mn users and 31 Mn drivers since its launch nine years ago. DiDi claims to have a 99% market share in China’s taxi-hailing business and an 87% market share in private auto hailing, according to its own data. In comparison to Uber China’s 45 cities, it has a presence in over 400 cities across the country.

The company’s primary ride-hailing business is lucrative, and it has rebounded since the coronavirus outbreak in China, its home market. The corporation has 14 international markets, including Australia, Japan, Latin America, and Mexico, in addition to China. The business is more than just automobiles and cabs. DiDi also includes bus services and a chauffeur booking option, which might be beneficial if you’ve had too much to drink and need a designated driver to take both the car and the driver home.

DiDi’s financial performance is difficult to quantify because it is a privately held firm. In 2018, Chinese news outlets claimed losses of $1.6 Bn. While its primary ride-hailing company charged an average of 19% in commissions, overall expenses, which included tax payments and driver bonuses, were 21%, implying a 2% loss each journey. This pattern may be traced all the way back to the beginning.

Concerns Regarding the company

  • Massive expansion and competitive pressure: DiDi’s rapid expansion in China was fuelled by its fierce competition with Uber and lax government rules regarding ride-hailing services. DiDi created an army of drivers, which it bolstered with massive driver subsidies, allowing it to outrun Uber’s operations.
  • Regulation which limits driver’s work regions: China, unlike the United States, has rules that limit where residents can work. DiDi drivers from rural areas, in particular, are not allowed to work in larger cities unless they live there. Residency licenses come in a variety of levels, and cities vary in how aggressively they enforce them. However, many are tightening their belts. Many large cities are experiencing a driver shortage as a result of this, as many drivers do not want to risk paying fines for working where they do not live. It has also compelled DiDi to delete a large number of its drivers from its own app.
  • DiDi’s predicament is hardly exceptional: Regardless of size, all ride-sharing companies must choose between responsible expansion and safety. The murders that were reported exposed significant flaws in the DiDi app and its protocols. One major flaw was the company’s decision to outsource its passenger assistance system, which was chastised for failing to act on a previous complaint against one of the alleged murderers. Keeping an in-house customer support team would definitely strengthen the entire safety system, but it is a step that would have a negative influence on the company’s bottom line, which is already far from profitable.

Valuation analysis of the company

 Source: PitchBook 

Market sentiments surrounding the IPO

DiDi Chuxing is planning an initial public offering, with a capitalization of $60 Bn. Although no official date has been set, the company anticipates going public in the first half of 2021. When it comes to ride-hailing, you may only be familiar with Uber Technologies Inc. and Lyft Inc. DiDi, on the other hand, is one of the most well-known ride-hailing companies in the world. Even yet, the recent failures of ride-hailing IPOs are worth noting. Following their IPOs, both Uber and Lyft saw their stock prices plummet, trading as low as 70% below their IPO prices. DiDi, on the other hand, may have something the other businesses don’t.

DiDi has a 17.5% ownership in Uber, and DiDi has invested $1 Bn in Uber, so DiDi is essentially the Chinese Uber. But there’s a lot more to it. DiDi joined Kuaidi in 2015 to build a smartphone-based transportation services behemoth. Taxis, privately owned cars, carpooling, and buses would be summoned by users. This is in stark contrast to the Uber and Lyft models, which rely solely on scooters.

According to the sources, DiDi Chuxing chose New York because of a more predictable listing pace, the existence of comparable peers such as Uber Technologies Inc. and Lyft Inc., and a larger capital pool. The decision comes as the US Securities and Exchange Commission pushes forward with a plan to delist international companies from US stock exchanges if they fail to meet US auditing criteria.

But even if DiDi was restricted to China alone, there would still be a case for the company. It serves a nation of 2 Billion people and has plenty of institutional backing. Tech investment giant and Uber-backer SoftBank Group Corp backs DiDi. Alibaba Group Holding Ltd. and Tencent Holdings ADR also back the company. Before its IPO, DiDi still expects to have another funding round to boost the valuation. Some of its shares are still trading below its 2017 peak valuation of $56 Bn.

Extensive product expansion and the road ahead

DiDi Chuxing, a Chinese app-based ride-hailing business, has unveiled a new three-year strategy for steady and sustainable growth. DiDi’s three-year plan, dubbed “0188,” moves away from its “all-in-safety” approach and toward longer-term safety capacity building and user value creation. The number 0 represents safety as a top concern, while the other three numbers represent DiDi’s strategy aims.

As of the beginning of 2020, DiDi has completed over 1 Bn international journeys. DiDi prioritizes its platform for integrated four-wheeler (ride-hailing, taxi, designated driving, and hitch) and two-wheeler (bike and e-bike) and public transportation solutions, as well as it’s subsidiary Xiaoju Automobile Solutions, autonomous driving, fintech services, and smart transportation businesses.

A customer-centric car leasing business has been unveiled by DiDi and its long-time partner BAIC, as well as a consortium of automotive industry enterprises and Chinese state-owned institutions. “In the next three years, the companies hope to have a fleet of 100,000 cars available for lease,” according to the agreement.

Should you invest?

The majority of initial public offerings (IPOs) are volatile at first. You have a large influx of early investors who buy into the hoopla and then fade away. As a result, many IPOs experience a drop in the period following the IPO. We’ve already listed Uber and Lyft, but we can think of a few more. JFrog Ltd. (NASDAQ: FROG) has dropped 33% since its first public offering in October. Snowflake Inc. (NYSE: SNOW), the largest software IPO in history, dropped 40% after rising 61% in the months afterward. This is how most initial public offerings (IPOs) go, which is why we constantly advise against investing in them immediately. You might want to get in as quickly as possible in some circumstances. But, in most cases, it’s better to wait for the euphoria to settle down and see whether the stock can return to a stable state i.e. the actual value. You should also be wary of the company’s particular industry.

It’s difficult to be positive about a ride-hailing service, using Uber and Lyft as examples. But, as we already stated, DiDi’s case may be different. As both Uber and Lyft have been embroiled in a price war across the United States, which has caused their stock prices to plummet.

DiDi has the advantage of having China almost entirely to themselves, as well as having infiltrated overseas markets. A user base seven times that of what many consider the industry’s biggest brand (Uber) might have a significant impact on DiDi’s stock performance following its IPO. As a result, the stock is more likely to be a buy than Uber or Lyft. However, because Uber is a shareholder, DiDi’s success might put money in Uber’s pocket, giving Uber an even bigger advantage in its struggle with Lyft. If you want to purchase Didi stock, it is advisable to get it at the right price

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This article has been co-authored by Sayan Mitra and Yogesh Lakhotia, who is in the Research and Insights team of Torre Capital.

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“All that glitters is not gold” — Growing valuation bubble of Indian start-ups

by Sandeep Kumar

 The valuation game

The Venture Capital valuation is a simple game, but never an easy one. While there is little to learn, to play it perfectly takes years, if not decades of experience under the belt.

So how do the VCs arrive at that valuation figure? Market Opportunity? Product Market Fit? Strong Founder Team? Disruptive Product Offering? Extensive Network Economics?


Capital invested divided by the stake diluted. That’s it!

The VC chooses the amount of capital he is ready to deploy and the stake he wants to have in the company. Of course, the wish is to part with the least capital for the most stake. Now coming up with these two numbers, the capital chunk to invest and the amount of stake to buy, this is where experience comes in.

The winning bet in your portfolio

Most VCs have personal favorite ranges which they are comfortable with. Some VCs may like to hold only a few concentrated bets while others may want to deploy small amounts into numerous startups. The premise is the same. Each VC wishes to hold at least one winner in its portfolio, the winning bet that ‘returns the fund’.

This gets us to staging. The valuations do nothing to the VC portfolio, except increase the unrealized returns section, which, as the name suggests, are ‘unrealized’ and don’t mean anything unless the company makes an exit from that valuation.

But what if the company is not yet ready for an IPO or a buyout?

The VCs of course know this. Hence when they get together to finance a startup at some stage, let’s say series A, they are offering just enough money to take the startup to the next funding stage. This continues until the IPO or buyout.

Nowhere do the VCs use the DCF or any other model to find a fair value of the shares of the startup. Startup valuation is not a valuation game, it’s a pricing game. It is not about finding a startup trading at a lower than its fair value price and hoping the market corrects itself, the game is about finding another buyer who will be ready to pay higher. All this has nothing to do with cash flows generated from the assets held by the startup, adjusted for the underlying risks of all sorts (DCF basically). All these valuations are nothing more than exhaust fumes as suggested by Fred Wilson, an NYC based VC:

“Early-stage valuations aren’t valuations. They are the exhaust fumes of negotiation about two things — the amount raised and the amount of dilution.”

The information asymmetry

Now let’s take a look at what we have: You are a VC that is trying to get a stake in some startup. What do you do to get an idea of how much you should pay? You don’t have DCF or any other model to help. So, you look at what similar companies have been valued at. With new business models operating in diverse geographies, you realize that it is hard to say how you can define a similar company. Let’s say you came up with food delivery as one category. Despite the difference in the business models, one can hardly cobble together a list of 4–5 startups in the Indian space.

So, the VC game is plagued with opaque, inconsistent deal information. While the figures the VC arrives at are most probably wrong and have nothing to do with reality, they have nothing to worry about as long as they are able to find someone who’s ready to buy at a higher price from them.

The Indian startups in numbers

The past few years have been a gala time for the Indian startups who have managed to secure funding unabated despite the pandemic and its blues.

Startups in India managed to raise $7.8 Bn until April itself. This is a significant number almost 70% of the total $12.1 Bn raised in 2020 and more than 50% of $14.2 billion raised in 2019.

The average funding size has increased to $25.21 Mn, up from $14.94 Mn in 2020. There have been 402 funding rounds until April itself, against 1,114 deals in 2020 and 1,036 in 2019.

Overvaluation and the global landscape

The push towards absurd overvaluations has been a result of the negative interest rate environment. Post the GFC, there was heavy lending and even more borrowing. So much so that people had to pay up money just so that they could lend money. Of course, this led people to look for alternative avenues to park their money and generate juicy returns. The baseless optimism and hollow belief in spotting the next Bezos, Zuck, or Musk have led to an audacious amount of money flowing in, creating completely senseless valuations, having no roots in reality.

Tesla, more than $13 Bn in debt at the end of last year, recently had a market capitalization of $160 Bn, greater than General Motors and Ford combined. At the IPO price, Square was valued at close to $3 Bn, which is 50% below the $6 Bn valuations for which it had raised money from private investors a year before. Uber which in accounting terms stands at around 5x times its revenues, is also grossly overvalued as it is nowhere close to being the leader in the driverless car’s space. WeWork tried to go for a $47 Bn listing but ended up getting corrected to $8 Bn.

The WeWork fiasco was dubbed as a wake-up call in a Morgan Stanley report stating that the days of ‘’ were over.

Unicorns were considered rare. Today, however, the United States has a herd of more than 100 of them, with 100 more outside the US. Each worth a billion dollars or more.

Will history repeat itself?

Let’s talk about the Indian scenario and the startups which we believe are overvalued and most likely to come back to their intrinsic value as and when the markets correct themselves.

1. Byju’s: World’s most valuable Ed-Tech Company

Byju’s operates an online learning platform. It also creates a mobile app for pupils that offers a variety of learning activities. Exam preparation classes are also available. Original material, watch-and-learn movies, rich animations, and interactive simulations are all available to users on the site. The firm is having an EV/Revenue multiple of 17x.

It is the only major player in the Ed-Tech space in India, which has led the company to raise multiple rounds of funding and leading to an enormous increase in valuation. Knowledge in today’s world is free, however, Byju’s creates unique content with animation and the product often seems to be overpriced. In recent times there were a number of instances on various social media platforms where people questioned the pressure on the sales team and how Byju’s is so concerned about their sales when they try to push their offering in the market.

In the long run, the expected return from Byju’s is questionable. Below is the chart of the revenue and valuation of Byju’s over the last five years.

2. Cred — The borrower’s messiah

Losses in billions of dollars are nothing new for hyper-funded companies, especially when they’re chasing size and consumers at any cost. CRED’s metrics tell a tale in and of itself. CRED has made a profit of $71,000 in its second year of operation. CRED hasn’t been able to monetize its user base in FY20, despite acquiring a large customer base with a high propensity to spend and consume.

While the two-year-old company’s sales remained low, its total expenditure increased by more than 5.9 times to $52 Mn in FY20, compared to $9 Mn in FY19. The greatest cost center for the financial firm was advertisement and marketing, which accounted for 47.6% of total expenditure. From $3 Mn in FY19, such costs increased by 9.3 times to$25 Mn. During the fiscal year that ended in March 2020, CRED spent Rs 726.7 to earn a single rupee of operating revenue. CRED’s yearly loss in FY20 was INR 360.3 Crore, up 5.9 times from the $8 Mn it lost in FY19. The current cash burn is difficult to sustain, with an appalling EBITDA margin of -1979.5% in FY20, and the company will have to focus on its collections.

Despite registering astronomical losses it has attained a unicorn status by raising its valuation to $2.2 Bn in 2021. It is worth noting that the company is founded and led by Kunal Shah who is a known name in the start-up world for founding and leading numerous companies which may be an explanation behind the astronomical valuation of Cred. The graph below shows the valuation and losses of Cred over the years.

3. CarDekho — India’s leading car search venture

CarDekho helps users buy cars along with expert reviews, detailed specs, and prices, comparisons as well as videos and pictures of all car brands and models available in India. It has recently acquired an auto marketplace, Carmudi (Philippines) in late 2019 to expand business in Southeast Asia. GirnarSoft, the parent company of Jaipur-based automobile-related services behemoth CarDekho, has seen its losses increase by 155% to $45 Mn in FY2020. This comes after the company’s losses had already increased by 39% in the previous year.

Despite that CarDekho has managed to raise its valuation. Last year, Cars24, a CarDekho competitor, increased its consolidated revenue to $418 Mn and achieved unicorn valuation, and has a much lower EV/Revenue multiple. Let us now see the EV/Revenue Multiple of the peers in this game through the table below.

As per the last reported revenue and valuation figures.

We can infer from the table that CarDekho has a huge EV/Revenue multiple which signifies that the valuation of the firm is increasing at a much faster rate with respect to the revenue that the company generates, leading to overvaluation of the company. The graph below shows the valuation and revenue of CarDekho.

4. Unacademy

Unacademy is a Bangalore-based educational technology startup in India. Unacademy lessons are available in the form of Live Classes, which are both free and available on a subscription basis. Unacademy earned $12 Mn in revenue but spent $53 Mn, resulting in a loss of INR 300 crore. Employee benefits accounted for 23.7% of the edtech start-up’s costs, while other expenses accounted for 75%.

While 2020 brought plenty of development, the corporation would need to significantly increase its expenditures to reverse the losses it had in the fiscal year 2020, which ends on March 31, 2020. Unacademy’s revenue in FY21 is estimated to be over $55 Mn. It’s worth $3 Bn or approximately 35 times the expected income. The graph shows the valuation and loss of BharatPe.

5. BharatPe

When we talk about e-commerce giants, PayTm, Amazon, and Flipkart all wanted payments to take place within their own closed networks. BharatPe’s goal was to achieve what all the large brands were afraid to do: simplify things for retailers by adopting a standardized interoperable QR code. It allowed shops, street food vendors, and tea vendors to accept payments using any UPI app (PhonePe, Google Pay, PayTM, and so on) without having to download the apps. It was a simple and cost-effective approach with an added layer of security. The payment system’s complexity was reduced by a factor of ten by combining multiple UPI apps into a single sticker.

BharatPe was able to achieve early success by keeping things simple. BharatPe’s product strategy is based on making things simple for merchants, and the company uses P2M transactions as a springboard for future services. Because BharatPe does not charge merchants a setup or transaction fee, its fundamental feature money collection using QR codes is essentially a loss-maker for the company. It must spend a large amount of money to manage the servers that process millions of transactions every day. However, this provides BharatPe access to merchants who are passionate about their products and eagerly accept their offers. Despite having no visible revenue stream and without even earning a penny, the valuation of the company is increasing, and currently, it stands at $900 Mn, very close to the unicorn status. The graph shows the valuation and revenue of BharatPe.

The apprehensive loop of growing valuations

The indications are all too familiar. With large markets, illustrious founders, rapid growth, and top early-stage VCs on your side, you have a good chance of raising the next big round, even if you don’t yet have unicorn status (the desired billion-dollar value). And when major acquisitions are made for unproven companies, and valuations double or triple in a matter of months, it begs the question: are we in a bubble? This is always a challenge because most people only realize they were in an economic bubble after it has burst in the past.

Rich valuation multiples have also spread from the typical suspects — consumer internet companies — to enterprise software providers. This is a first. SoftBank, for example, invested in Mindtickle last year, valuing it at $500 Mn based on estimated revenue of $20 Mn — $25 Mn. Even SaaS companies in the United States, including Slack, Zoom, Snowflake, and Cloudflare, have gone public in recent years with great success. Sentiment in India often comes straight from the United States, particularly in related industries and from funds that invest in both nations, including several of India’s leading venture capital firms. Startup valuations are also affected by how publicly traded firms trade if retail investors are ready to pay high prices for loss-making companies, whether banks financing a share issue can find enough at a given price, and so on. There isn’t a single bubble across the board. Because of the vast quantity of money available in the market, investors are willing to pay a premium for good business. But that should be done judiciously.

Investors beware

For the first time in years, it’s possible to claim that private markets are more logical than public markets. If stock markets are the yardstick, select pricey companies may not be overvalued. A closer examination of what constitutes a bubble, as well as what Indian entrepreneurs are doing, reveals a more complete picture. Growth investing has been positive in industries that have recovered quickly from the epidemic, and there has been a lot of interest in a few market leaders. At such levels, one would expect some amount of rationalization. Investors must evaluate the prospects and the future road map of a company before investing. As more investments flow into a company without a proper business model or less revenue, it results in overvaluation creating a bubble. Investors can lose a colossal sum by not choosing the right company.

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This article has been co-authored by Sayan Mitra and  , who is in the Research and Insights team of Torre Capital.

Startup investing 101: The HNI’s guide to investments beyond the conventional asset class

by Sandeep Kumar

Why invest in startups?

Investing in a startup is a high-risk, high reward game

Deciding the right opportunity and best practices for investing in a startup

Ways to invest in startups

Delaying the IPO comes with certain advantages for Startups

How startup investing really works

When can you expect a return or are you locked in forever?

Source: Pitchbook and CBInsights

Exits are what investors care about, but many founders dream of becoming a unicorn and avoid using the word “exit” until it’s too late. Despite this, M&As accounted for 97% of departures in 2020. And the majority of them occurred prior to Series B.

Exit or no exit: A fatal call

Zomato IPO: Analysing the future of the Indian Foodtech giant

by Sandeep Kumar

The future of Indian Foodtech is here

The food delivery and restaurant service tech giant, Zomato plans to go for an IPO this June or July. The IPO catches headlines, not just because of the amount being raised or the time when the IPO comes (both of which we discuss later), but also because Zomato could as well be the very first Indian Unicorn to go public. This shall be a momentous moment for not just the tech startup, but also for the entire startup community in India. The IPO could open doors to a new form of exit for the Indian founders and VC firms and cement India’s position as a startup friendly nation.

Zomato plans to raise over a billion dollars(!). This will be the biggest IPO since March 2020 after SBI Cards IPO at close to $1.3 Bn.

Business Model

Zomato was founded in 2008 as a simple restaurant reviews website. In 2015, Zomato entered a very crowded Indian food delivery space. Since then the landscape has changed completely. Out of the numerous startups (FoodPanda, TinyOwl, Scootsy, OlaCafe, UberEats) that were offering to deliver your food, chances are today you order food from one of these three: Zomato, Swiggy or Amazon (Amazon currently offers food delivery services in and around Bangalore). What happened to the rest? Well, most shut down, while the rest were acquired and then shut down. Barely a handful which were acquired by Zomato or Swiggy operate within, not independently.

Zomato acts as a restaurant discovery platform aggregating menus, dishes, user reviews and more. Zomato has nearly 3.5 lakh restaurants listings on its platform with more restaurants expected to join in as the pandemic and the induced lockdowns play a havoc on their dine in revenue streams. These restaurants pay Zomato a fee for greater exposure on the platform. The hope is, once a customer tried the food, chances are they will pay a visit to the restaurant. Now the pains and the faults in this premise make for a story for some other day. 

Zomato’s next line of revenue is the exclusive paid membership program very creatively titled “Zomato Pro”(earlier known as Zomato Gold), offering special discounts and/or free deliveries to is subscribed members. This membership model works how a gym does, take the membership fee and then hope the service is not utilised. Zomato has one advantage though, it can decide what discount to offer and/or what price to charge (dynamic pricing), based on traffic conditions, meal hours, order quantity etc. Zomato currently has 1.4 Million pro members and over 25k restaurants listed on Zomato Pro program.

Not all restaurants choose to be a part of the Zomato Pro program as these restaurants are also expected to offer discounts and offers on dine in options as well and maybe not all restaurants find themselves in such a position (again a story for some other day).

Zomato’s next stream of revenue comes from Hyperpure which supplies raw material to restaurants. This is a genius move in my opinion, at least theoretically. Zomato’s food delivery business allows it to forecast the raw material demands of a restaurant. Efficient buying practices and careful hedging (Zomato is in no position to carry out hedges against sharp commodity price movements, simply because it does not do enough volumes to justify this sort of a thing) can allow Zomato to up sell these raw materials, earning a constant cut.

If the hedging works, the restaurants are also set to benefit as they will receive a fixed price for their raw materials, allowing prior ordering. Zomato currently has 6000 restaurants on its Hyperpure platform in just two years.

And finally comes the last source of revenue (no need to be amazed, all this revenue does not trickle down to the bottom line), the delivery partners delivering your food. Here Zomato earns commission from the restaurants as well as the delivery charges from the customer (yes, all those extra delivery charges you paid and still these guys aren’t profitable…).

  Source: Zomato’s DRHP

Now Zomato does not give a breakup of how much revenue it makes from each segment, but nevertheless, most of the revenue comes from food delivery business, the ones you are the most aware of.

The not so straightforward Market Landscape

Food and restaurant Services is a competitive market in India comprising food delivery players like Zomato and Swiggy, cloud kitchens like Rebel Foods and branded Food Services players such as Dominos, McDonalds and Pizza Hut which. Food delivery players also compete with multiple other participants in the Food Services industry including restaurants which own and operate their own delivery fleets and both online and offline modes where restaurants place their advertisements to attract customers.

The food and restaurant industry in India is composed of three segments: delivery, take-away and dine in. Out of the three, the food delivery business is expected to grow most rapidly. While this was true even before the pandemic, the post pandemic has further cemented this.


Source: Zomato’s DRHP

During first half of 2020, the food delivery business contracted as India braced itself for the COVID lockdowns. However, once the lockdowns and the initial hysteria was over, a boost of business came to the food delivery business, not to the dine in or the drive way streams. This clearly is good for Zomato.

But things are not as straightforward for Zomato. This is because of how the food delivery business inherently is structured. Food delivery is more of ‘now pamper me’ kind of business and not ‘I don’t care what it is as long as it gets my thing done’ kind of business. Services such as Netflix or Zomato come in the former while services like Uber or Paytm which offer more of a commodity sort of service, come in the later.

One doesn’t really care who gets you from one place to the other or what app you used to pay someone, but one strongly cares what shows or movies a certain platform offers or which restaurant offers its dishes on which platform.

Source: Zomato’s DRHP

Zomato’s Financials

Let’s pore over the unit economics first. The number of orders placed on Zomato is largely driven by its customer base, restaurant partners and delivery partners. The number of orders is also subject to seasonal fluctuations and tend to be generally higher when customers may be less likely to dine-out as a result of unfavourable weather or during certain festival seasons and holidays when customers are more likely to order food for delivery.

Source: Zomato’s DRHP

The Average Order Value for Zomato has gone up over the last 7 quarters and stands at INR 407. The AOVs are higher for orders from premium restaurants. The orders have grown from 30.6 Million for 2018 to 403.1 Million for 2020. That’s a colossal 1200% jump in merely 2 years of time.

Source: Zomato’s DRHP

The change of heart and mind with increasing Unit Economics

Moving on to the unit economics of Zomato and we are welcomed by greener pastures: while last year Zomato lost INR 30.5 on every order made, this year Zomato managed to make a profit of INR 22.9 on each order. This has been achieved mostly on the back of.

  • increasing restaurant commission charges (remember the story for some other time 😉)
  • increasing delivery charges from the customer (sadly)
  • and cutting costs on deliveries and discounts (I swear I felt the last one pinch).

All this tight cost cutting and pressurising the restaurants for more commissions has led to this rather phenomenal turnaround.

And like most things in life, if it looks too good to be true, it probably is; many think such commission structure is rather unsustainable and Zomato won’t be able to sustain this for long. Whether or not Zomato manages to sustain this or not, the IPO, pre-IPO funding and special stake sale from Naukri.com is bound to flush Zomato with tons and tons and tons of sweet cash.

Source: Zomato’s DRHP

All this positive unit economics (whether or not sustainable) is yet to impact its bottom line (which continues to dive deep in red), Zomato seems to be right at the verge of hitting profitability. While the market is in no way saturated, as more and more people start making digital payments, internet becomes cheaper and smart phones penetrate the society even more, online food ordering is bound to keep increasing.

The increasing Turnaround of Customer Cohort

As the number of customers to acquire rises, it would prove to be a challenge to monetise each customer so well that each order’s unit economics turns in the green. Acquiring customers takes cash, and that too loads of it. What matters is whether or not Zomato manages to make money from its customers, which gets us to our next metric: Customer Cohorts.

Source: Zomato’s DRHP

Acquiring customers comes with a cost and that cost needs to be redeemed from each customer. This directly implies that the customer must spend on the platform, more than what the platform spent on acquiring him. The above chart shows that once the customer is acquired, he continues to stick to the platform. The bunch (cohort) of customers acquired in 2017 now spend 3X of what they did in 2017. This is pretty impressive given a lot of customers must also have churned.

So, with the unit economics turning positive, the question that still lingers is, why does Zomato still operate in loss?

For that we switch over to the financial statements.

Source: Zomato’s DRHP

Well, there are two ways to explain the huge losses. Firstly, the huge amounts of cash spent to acquire customers and the time lag between CAC and LTV of each customer. Customers take some time to monetise once acquired. The costs have already been paid, even before the customer start generating any revenue. All those acquisition costs get added up as we see in Other Expenses line item.


These Other Expenses are not really “Other”, they are the marketing spends and all the discounts that Zomato offers on its platform. This line item accounts for most of the customer acquisition spends.

The other major source of expense is the Employee Expenses. Well, maybe because Zomato pays its peeps well, who knows…

All of this requires cash, which Zomato happens to have truckloads of. The latest pre-IPO round got Zomato over $680 Mn. If the IPO goes as planned, Zomato may end up with $1.00 – 1.14 Bn more. A war chest of $1.7 Bn!

The shares of the company are going to be listed on National Stock Exchange of India. We expect that the shares will be listed at prices upwards of INR 60 per share. Previously the shares of the company were converted at a price of INR 58 per share.

Zomato plans to use most of its IPO crop in organic as well as inorganic expansion, offering discounts (yayy!), sales promotions, cementing its delivery network and thus acquiring more and more of both customer and restaurants.

That’s what $2 Bn is capable of. I would not want my competitors to have a $2 Bn advantage over me.

Which gets me to Zomato’s rivals…

Peer Group Analysis

The pre-IPO funding round in February 2021 valued the company at $5.40 Bn. Within the expected price range the IPO would value the company at $6.50 – $7.00 Bn. Taking EV/Revenue multiple into account and weighted average calculation of the comparable companies, we arrive at an NTM multiple of 8.76x which gives us an intrinsic valuation of 2.07Bn.

The Indian Food Delivery space is Duopoly: Zomato and Swiggy. Under the shiny apps, things twist and turn very differently.

For starters, the business approach of Swiggy is vastly different from Zomato. While Zomato wishes to service the entire restaurant supply chain, right from raw materials, to getting it delivered to your home, Swiggy assumes a different role.

Swiggy sees itself purely as a delivery aggregator. A delivery aggregator, that will deliver groceries, books, meat, alcohol, medicine, pretty much anything that fits into that Swiggy rider’s bag. Food fits, so it delivers.

This is important. Viewing from this angle, Swiggy becomes a delivery player, mimicking Delhivery in its business approach than Zomato! 

Food just happens to be what shot Swiggy to fame. Swiggy runs not a restaurant service business, but “I’ll find someone to deliver your stuff” business – a low cost, low capex, low overhead last mile delivery business, something which most players struggle to deal with.

Be reminded though, most of Swiggy’s revenue still stems from food. The IPO for Zomato is a big deal for Zomato, but an even bigger deal for Swiggy, which will force it to act. Acted Swiggy already has, raising a new funding round, but that’s no match for the $1 billion Zomato IPO. The IPO sets the scene for not just Zomato but Swiggy as well. A bombed IPO may as well hurt Swiggy’s IPO prospects.

There’s also a new kid in town, Amazon Food. Amazon Food, is like that rich kid whose mere presence threatens Swiggy and Zomato’s dominance. Things seem quite for now. Amazon only operates in Bengaluru, offers very low delivery fees and no packaging fees; and if you happen to be a prime member, you don’t pay that even.

And I get it. Maybe Amazon is not so much of a threat that I call it to be, but my fears are based on two reasons: firstly, Amazon. Yes. That’s it. Second, just as the dust from the numerous players undercutting each other settled, a new player enters the scene. Now it isn’t as if Indian market can’t accommodate these new entrants. The market’s expanding. But what all previous tech businesses have taught is, whoever lands first gets the bucks. Amazon with its existing, robust delivery network can very easily undercut its peers offering cheaper delivery and deeper discounts, as it seemingly has already started.

Will the IPO deliver in the same way Zomato does?

Zomato’s IPO is one the most awaited IPOs. The listing has come at a time when the Indian economy is going through crisis. However, being true to its foodtech giant status, the company has used tech extensively in operations, sales, marketing and automation, which has excellent operational leverage in the longer term, and tech company values tend to get a fillip.

– – – – –

This article has been co-authored by Khubaib Abdullah and Ayush Dugar, who are in the Research and Insights team of Torre Capital.


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