Weekly commentary on startups, entrepreneurship and business

Edition 33

“Your body is not a temple,
it's an amusement park. Enjoy the ride"
Anthony Bourdain

Dear *|HTML:FNAME|*,

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The battle for food at your doorstep intensified this week with Swiggy becoming a unicorn and competitor Zomato following up with fundraising talks 2 days later. Swiggy is by far the market leader with some mind-boggling metrics - 11 million monthly orders, 35,000 restaurants and 23 cities. Zomato follows suit at 7.5 million monthly in both India + UAE, while UberEats and Foodpanda do roughly a million each. Swiggy's growth has been fuelled with customer acquisition and the resulting burn funded by $460 MM of capital. For Zomato, I had previously looked at the clever execution of Zomato's Gold, and I think the company has done well by monetizing its virtual monopoly on listings effectively.

Not all used to be well in doorstep delivery for food. In the nuclear summer of 2016, food startups began to fail in quick succession with the largest being TinyOwl. The company raised almost $30MM of capital, expanded to multiple cities without much of a plan and was received with little demand and poor supply chains. The company was a classic case of too much spent, too quickly and too haphazardly. It is due to cases like this that my recommendation to entrepreneurs is raising only what you need as most growing startups die due to indigestion rather than the hunger for capital. The market thus remained untouched for a year, but the recent headwinds are part of a broader trend in the market.

Companies like Swiggy own something powerful - a relationship with a customer i.e. the literal doorstep. Hypothetically, Swiggy could sell you fruits or vegetables from a nearby store if it wanted and you might probably not think it is a bad idea. Swiggy is a logistics company that has perfected delivering externally cooked food as a use case, and this infrastructure could be flexed for other fresh products. The fact that Swiggy finds such a gigantic market in food delivery makes it focus sharply, but the battle for your doorstep is the broader market trend. Kishore Biyani's Future Group announced that it is battling for your doorstep to push milk, fruits and vegetables. You will find the same article speculating on Swiggy getting into groceries - and the hypothetical scenario I mentioned earlier doesn't seem wild anymore.

Flipkart and Amazon started what was the first true battle for your doorstep, but they were for infrequent transactions. You would rarely find Amazon at your house daily, and they could afford to have infrequent transactions because of large ticket sizes. The new entrants want to be at your doorstep every day, both from a customer relationship perspective as well as pure economics. Products like milk for retail distribution have wafer-thin gross margins of ~10-11% and fruits and vegetables at a higher 20-25%. For a milk packet of 30 INR, the company makes a contribution margin of 3 INR (after delivery and cost of goods). Looking at pure unit economics, customer acquisition cost (CAC) usually hovers around 75-100 INR and the milk provider can recover the CAC from contribution margin after 25 units (25*Margin of 3 = CAC of 75). The customer lifetime value (sum of contribution margin*retention) can only be at the "healthy" 3 times CAC at 75 units. It is no wonder you want consumers to order daily so that you can recover the customer acquisition cost over a few months (a.k.a payback period).  

Being at your doorstep every day has powerful consequences for companies as it allows them to upsell and cross-sell. Rather than attracting customers through deep discounting, companies maintain a relationship with the customers through a subscription. The daily cadence makes you a "utility service" for the customer, like water and electricity, and you can bundle a lot of things. Amazon's Prime is trying to do exactly this, starting from large-ticket (e.g. books/phones) to small ticket (milk/fruits), while the others are going the opposite way (or sideways). This results in an interesting macro-trend, which is more strangers at your home and creates a derivative market for home tech (a discussion for another time).

The next big battle is not going to be at the store but at your door.

This week, I look at Sprints, Chatbots and Psychographics. 
  1. [Large Startups]: Dear Indian startups, its time to exit the bubble and grow up
  2. [Work Culture]: Personal sprints and applying design thinking to life
  3. [Growing Startups]: The new look inside Theranos' dysfunctional culture*
  4. [Buzzwords]: Chatbots were the next big thing, what happened?
  5. [Life x Startups]: The valuation obsession
  6. [The New Monopolies]: How tech conquered America's cities
  7. [Data!]: Psychographics and the dark arts of Cambridge Analytics
  8. [Modern Economics]: Is the global economy just a giant debt scam?
  9. [Classic Economics]: America's millennials face a grim financial future*
  10. [Business is Entertainment]: GRR Martin and the winds of winter
Based on an excellent recommendation by members of the community, I now asterisk* paid articles. I have started adding India focused content as well. Please do drop in reads that you found interesting this week here and I would love to accommodate them. You can pass on the love by sharing this with your friends and colleagues who can sign up here, and these are all the previous editions

I started this with the belief that there is a whitespace on conversations by venture capitalists in the entrepreneurial and startup ecosystem in India. This is my small way of starting a conversation. In case you have any feedback on the structure, design or content please feel free to reach out to me in reply to this email. 

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