Food Businesses

Zomato Founder Hits Back After Markdown, Says HSBC Does Not 'Understand The Space'

Zomato Founder Hits Back After Markdown, Says HSBC Does Not 'Understand The Space'
Image credit: Shutterstock

HSBC's brokerage arm HSBC Securities and Capital Markets slashed the valuation of food services portal Zomato by half to $500 million. Zomato founder and CEO Deepinder Goyal strongly reverted in an open e-mail to its employees allaying fears surrounding the markdown and reiterating that they were still doing well.

HSBC cited concerns surrounding Zomato’s advertisement-heavy business model, growing competition in the food ordering space and money-losing international operations for the lower valuation. This set off social media with many calling valuations a bubble and putting question mark on previous huge valuations.

Disputing the report that said – “Why do we differ from consensus?”, Zomato’s founder Deepinder Goyal said in an email to his employees, “That means this report is an outlier, and there are enough analysts, VCs, and founders out there who have called us “the only defensible Indian unicorn”, and have said “there’s multiples more inherent value in Zomato” about us.”

Talking about stats and numbers, he said, “Our internal data shows that we drove a large percentage (>50%) of business to some of the biggest restaurant names in the country. Our traffic in India, our home market, also grew 8 per cent in April 2016 over March 2016.” 

“We have over 8.5 million monthly uniques in India alone – very few Indian companies can claim that much traffic share in a single category. Also, we are currently present in 23 countries, and we are the market leaders in 18 of them,” Goyal added.

Within hours of the report, Zomato was trending on Twitter and there were comparisons drawn to the markdowns of e-commerce website Flipkart, another unicorn in this space.

Speaking on the criticism around ad spending, Goyal said food delivery is a small part of their advertising business. Most of its ad revenue comes from the dining out and nightlife categories. “Our search and discovery business is a big funnel for our transaction business though. We are able to divert traffic to transactions businesses (ordering, and table reservations) without any additional customer acquisition cost – a unique advantage that cannot be contested,” he said.

Goyal said that the company is already profitable in the order business at a unit economics level, and the overall online ordering business will hit profitability when they get to an average of 40,000 orders a day. “We should get there in the next 3-6 months. Also, there isn’t any food delivery company in the world which owns its last mile logistics fleet, operates at scale, and is profitable,” he added.

Mohit Bhatnagar, Managing Director, Sequoia Capital India Advisors - an investor in Zomato also came in support of Goyal saying,"We strongly believe in Zomato, the business and the team. The business has been growing nicely and business metrics have never looked better."

While some supported Deepinder, there were others like investor Mahesh Murthy who said that valuing Zomato at even half a million is ambitious. This led to a Twitter spat between Murthy and Goyal.

Mahesh Murthy tweeted: So @Zomato took in 1,500cr to do 97cr sales at 137cr loss. If I said a Fixed Deposit would've done better, I'd be called Startup Hater:)

Deepider Goyal hit back saying: @maheshmurthy I will send you some books to read up on how to build tech businesses with long term profitability. And Venture Capital 101.

The food–tech space has been under the scanner post a string of shutdowns and job cuts as a result of companies grappling to maintain market share in this space. Despite negativity surrounding this domain, startups like Freshmenu and Swiggy managed to raise funds this year. Zomato’s investors include Info Edge and Sequoia Capital.

Edition: November 2016

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