I thought Zomato was a food delivery company. Then I saw this chart:
https://economictimes.indiatimes.com/prime/technology-and-startups/zomatos-recent-investments-indicate-a-change-of-heart-is-this-the-end-of-its-ecosystem-vision/primearticleshow/89305051.cms
Soooooo many investments and acquisitions! Looks like Zomato wants to become a startup investor.
Sadly, most of the investments have failed. Hardly 2 or 3 acquisitions have been successful.
But Zomato isn’t afraid of failures.
They are still investing in startups. In fact, they are ramping it up. After IPO, they said they will invest a total of $1 billion in startups.
But why?
Why is Zomato investing so much money in other companies?
Are they bored of food delivery?
And if they have so much money lying around, why don’t they use it to improve their own business?
I’ll answer all these questions in today’s newsletter.
- First, a quick background: Why companies invest in startups?
- Then, I’ll tell you about Zomato’s long history of investing.
- And finally, I’ll try to find out the strategy behind Zomato’s investments.
Let’s go🚀🚀
🕹️ Why companies invest in startups?
Many reasons.
👉The first reason, and the simplest, is expansion. Companies want to expand to a new market, and investment/acquisition is the simplest way of doing so.
For example, Google wanted to get into the mobile market but didn’t want to start from 0. So they acquired Android.
👉Another reason is that companies are scared of the future. They are scared that new tech will come and disrupt them. So they invest in startups to prepare themselves for the future.
For example, Intel invests in startups that innovate in processor technology. Qualcomm invests in AI startups. Johnson&Johnson invests in biotech startups.
👉Companies also invest in startups to grow the ecosystem.
For example, Coinbase has invested in 250 crypto startups to grow the crypto ecosystem. Stripe has invested in 30-40 fintech startups to grow the fintech ecosystem.
👉Another reason is financial. Investing in startups gives good returns to companies.
For example, Salesforce has invested in 275 companies across 17 countries since 2009. And they have gotten solid returns: over $2.17 billion revenue from its investments. Just look at their portfolio: Dropbox, Stripe, Snowflake, Zoom, Twilio, Hubspot, Domo, DocuSign, AuthO, nCino, and MongoDB🔥🔥
👉But sometimes, companies invest randomly.
Take Google for example. In 2006, they invested in a car company. Today we know that company as tesla. They have also invested in Jio. And Dunzo. And Airtel. And DeepMind. And Ripple. And Lemonade.
None of these investments are related to its core business of search or ads or videos or anything. They are just..random.
Google calls this moonshot investing. It means funding extremely crazy ideas which have 0.0001% chance of succeeding, but if they succeed, they will revolutionize the world.
Now, you know why companies invest in startups: to expand, to prepare for future, to grow the ecosystem, to get financial returns, or for moonshots.
btw, this type of investing is called “Corporate Venture Capital” or CVC. In 2019, CVCs invested $57 billion around the world.
🕹️The Dark History of Zomato’s Investments:
As I’ve already told you, Zomato has done a lot of investments.
Sadly, only a few of them make sense, and fewer have been successful.
You’ve heard of the UberEats acquisition, right?
This happened in 2020, and Zomato paid 200 million for it.
This was a bad investment straightaway. Zomato didn’t get any benefit from buying UberEats. Both had the same restaurants. Both had the same users. 200 million wasted.
Zomato paid 18 million for TongueStun in 2018. The idea was to deliver food to office employees.
But in 2020, covid came and no one was going to office and Zomato shut this down. 18 million wasted.
Zomato tried to get into fitness with Fitso, didn’t work out, sold it to Curefit.
Zomato tried to get into international markets with acquisitions like Lunchtime, Menumania, Urbanspoon. All of them have been shut down.
Zomato tried to get into nutraceuticals but shut it down afterward.
I’ve also heard about Zomato trying to get into fintech. umm ok sure why not?
Zomato had a smart idea in 2018: drone delivery. And they acquired TechEagle.
Delivering food using drones sounds awesome. But maybe because govt rules weren’t clear or drone delivery wasn’t good enough, Zomato canceled the deal after 2 years.
Zomato had another smart idea after that: Zomato exclusives. And they invested in Kitchens@.
The idea was that Kitchens@ would be exclusively available on Zomato and that would pull users away from Swiggy and Zomato would beat Swiggy.
Sounds great, right? But Zomato couldn’t implement this idea and Kitchens@ got frustrated and bought back Zomato’s stake. (Atleast Zomato didn’t lose any money here)
Another smart idea was: if we can deliver food so fast, we can quickly deliver groceries too.
April 2020: Zomato’s first attempt at grocery delivery, flopped.
July 2021: second attempt at grocery delivery, flopped.
After 2 flop attempts, maybe they got tired. So they invested a lot of money into Grofers/Blinkit and said bye bye to grocery delivery.
But then, 3 days ago, Zomato again entered grocery delivery.
https://inc42.com/buzz/zomato-to-invest-400-mn-in-quick-commerce-after-tasting-success-with-blinkit/
This will be attempt number 3. Let’s see how this one goes.
3 more bad investments: Shiprocket, Magicpin, and AdOnMo.
Shiprocket ships orders for small businesses. Magicpin is a coupon/cashback company. AdOnMo does outdoor ads.
None of them are related to Zomato’s food delivery business. Why did Zomato invest in them?
The only good investments I could find were Runnr and WOTU and UrbanPiper.
Earlier, Zomato was just a website where you could find details of restaurants. Then, Swiggy entered the picture and showed that food delivery was a good business.
So Zomato acquired Runnr for 40 million and entered the food delivery space. Now its a food delivery giant. Good investment.
The second was WOTU. Zomato bought it in August 2018.
WOTU was supplying raw materials to restaurants. After the acquisition, WOTU became Hyperpure.
This was a smart investment. Zomato was now capturing a bigger part of the value chain: Zomato supplied raw materials to restaurants, they made food, Zomato delivered the food to people.
The third was UrbanPiper. Zomato invested in it last week.
UrbanPiper helps restaurants automate their ops. Just like WOTU, this will help Zomato capture an even bigger part of the supply chain.
You have a picture of Zomato’s investments, right? Lots of bad, random investments and very few good ones. Now let’s try to understand the strategy behind these investments.
🕹️ The Strategy behind Zomato’s random investments:
You remember the first section, right? Where I told you about why companies invest?
Quick recap: companies invest in startups to expand, to prepare for future, to grow the ecosystem, to get financial returns, or for moonshots.
The investments in Runnr, WOTU, UrbanPiper were smart. Zomato expanded into a new market after investing in them. So these were type 1 investments.
Even though the investments in UberEats, TongueStun, Lunchtime, Menumania, Urbanspoon, TechEagle, Kitchens@ failed, at least they were related to food delivery.
They were also type 1 investment: Zomato invested to expand.
What about the repeated investments in grocery delivery?
I know you must be thinking: why is Zomato so hell-bent on grocery delivery. They have failed so many times, why don’t they quit and invest somewhere else?
2 reasons why:
- grocery delivery is a huge huge huge market.
- Zomato’s delivery fleet and experience and data about hyperlocal delivery will make it a very strong competitor in this market.
That’s why I see grocery delivery as a good investment for Zomato.
This is a type 2 investment for Zomato: it is preparing for the future by investing in grocery delivery.
But what about Fitso, Shiprocket, Magicpin, AdOnMo? And the fintech thing?
Type 1? These investments are not remotely related to food delivery.
Type 2? These investments are not the future of food delivery.
Type 3? I don’t see the food delivery ecosystem growing because of these investments.
Type 5? These investments are not moonshots.
This means Zomato is investing for financial returns(type 4).
CEO Deepinder Goyal has himself said so:
This strategy is inspired by the likes of Alibaba and Tencent, where they invested behind the ecosystem at large, created multiple M&A (mergers and acquisitions) options for themselves, and in the worst case of M&A not panning out, realized windfall financial gains from their investments in market leaders across different categories
Goyal had told ET that as a worst case scenario, the Grofers bet will be like a financial investment that will give the company some returns.
Copying Tencent is a good idea. But Tencent invests FROM ITS OWN MONEY.
Tencent has a solid, profitable business which is printing money every second and Tencent uses this money to invest in other startups.
Zomato doesn’t. Zomato’s business isn’t solid. Or profitable. And it doesn’t print money :(
Before IPO, it got the money for investing from VCs. After IPO, it got 9000 crores from shareholders. Zomato said it will use this 9000 crore to invest in other startups.
But shareholders bought the shares of Zomato, the food delivery company. Not Zomato, the investing company.
If Zomato wants to invest in other startups, fine. But they should do that using its own money.
Zomato should do startup investing after its food delivery business is printing profits.
What do you think?
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This article originally appeared in Integral, a newsletter to get smarter about Indian startups.