India’s first ‘unicorn’ of 2023 boosts tech sector’s hopes of funding revival

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Fast-delivery service Zepto has overcome a slow year for Indian tech start-up funding, becoming the country’s first “unicorn” of 2023 with an investment round that pushed its valuation past $1bn.

The two-year-old business operates in seven Indian cities, selling and delivering goods from salt to cigarettes in minutes. It announced a $200mn fundraising on Friday, valuing it at $1.4bn. US investment group StepStone led its latest round, while other backers included Bengaluru-based Nexus Venture Partners, which was an investor in delivery group Zomato.

With funding of early-stage companies in India falling to $5.6bn in the first half of this year — down 72 per cent year on year, according to data provider Tracxn — Zepto’s news came amid signs of an improvement in the investment climate, said venture capital analysts.

“Directionally . . . the worst of the funding winter is behind,” said Neha Singh, Tracxn co-founder. “The decline has paused, it has stabilised.”

Zepto’s new valuation would have seemed modest just 18 months ago, when pandemic-era cheap financing fuelled a boom in investment in Indian start-ups, with 65 unicorns minted in 2021 and 2022, according to Invest India. Valuations soared as international financiers ploughed in cash in search of the next Paytm, a digital financial services company backed by China’s Ant Group that listed in 2021 at a $20bn valuation.

Amid a global economic downturn and interest rate rises that have hit the tech sector hard, Paytm’s share price is now 40 per cent below its highs after listing. Several start-ups have delayed or scaled back long-expected initial public offerings. SoftBank-backed hotel booking company Oyo has watered down IPO plans due to souring investor sentiment, while Sequoia Capital-backed skincare start-up Mamaearth postponed its IPO this year. Sequoia Capital India is now called Peak XV.

India-focused funds are still flush with “more capital than they’ve ever had before”, said Abhay Pandey, general partner at Mumbai-based fund A91 Partners and a former managing director at Sequoia Capital. But they are insisting that companies they back focus on becoming profitable, he added.

“What we’ve seen is a flight to quality,” said Suvir Sujan, Nexus co-founder and managing director. “There’s a lot more scrutiny towards the quality of assets.”

Zepto co-founder Aadit Palicha said: “We actually have real stores that are generating real cash.” The service uses “dark stores” — small local warehouses — to deliver goods within 10 to 20 minutes of a customer placing an order.

“That’s why we are where we are in terms of closing this round in a pretty terrible investing market, versus a lot of other consumer tech companies that are struggling,” he said.

Palicha estimated Zepto was now recording $600mn to $700mn in annualised sales, compared with about $20mn in the 2021-22 financial year.

For companies not generating cash, their prospects of attracting new investment are bleak.

“We’re starting to see some real pain in the ecosystem,” Palicha said. “There are going to be companies that don’t make it. That shock is something that for this scale hasn’t been seen before in India because the Indian ecosystem is in its infancy.”

Some backers are hopeful that the slowdown is, at the very least, not getting worse.

“A few good numbers from existing companies, turnarounds, improved performance, one or two IPOs and the mood starts changing,” said A91’s Pandey. However, he cautioned, investors are unlikely to splash the cash yet.

“You have to see other people making money for the greed to set in,” he said. “We’re still in the fear zone of not wanting to make mistakes.”