What Happened To The $450 Million Dunzo Raised?

Over $450 million (around Rs 3,700 crore) in funding. Marquee investors such as Reliance Retail Ltd. and Google Inc. Yet, Rs 460 crore in losses for FY22, with minimal market share. And most recently, amid a cash crunch, it capped salaries of some employees at Rs 75,000 for June.

For Dunzo, the stress is apparent. But how did the hyperlocal, quick e-commerce startup get here?

It's a familiar tale for India's startups. Grand ambitions, shaky business model and high cash burn. The moment easy money is no longer on the table as investors demand profitability, everything unravels. Ventures including FrontRow, Byju's, and PharmEasy are facing crunch. Dunzo joins this beleaguered league.

Dunzo has yet to respond to BQ Prime's emailed queries.

How It Began

Founded in 2015, Dunzo started as a local e-commerce service, connecting local grocery merchants and customers using their drivers.

It wasn't the first entrant in the space along with Grofers—now known as Blinkit—having already started operations in 2013. Grofers, too, offered online grocery delivery. However, Dunzo was among the earliest entrants to tap on-demand delivery.

Cut to 2021, Swiggy's Instamart and Zepto, Blinkit and Dunzo adapted faster delivery times as startups chose to tap the untested waters of 10-minute deliveries.

Eight-year-old Dunzo has had other pivots as well—food delivery from restaurants, meat delivery, and courier drop-off services.

And cumulatively, Dunzo raised about $450 million from investors such as Reliance Retail, Google, Blume Ventures, Lightrock, and LightBox Ventures among others, according to data from Crunchbase.

Dunzo's Predicaments

A gross overestimation of the quick commerce market, high cash burn and an unsustainable business model are some reasons behind Dunzo's current stress, according to investors.

"What has happened with Dunzo and hyperlocal delivery companies, is that their total addressable market projections are way off," according to Pushkar Singh, a partner at Tremis Capital, a venture capital fund.

"It is actually a very small niche, but the market will slowly increase. They were able to amass users with discounts, but the moment you start charging a sizeable delivery fee, that market diminishes," he said.

Dunzo, he said, is also "not a very asset-light model like Zomato. They are not just aggregators. They are also opening their dark stores. That requires a lot of capital”.

Singh added that Zepto, on the other hand, has done well. "They nailed that category quicker than Dunzo. Though Zepto is also burning lot of capital, and it won't be profitable anytime soon, by the time they become a big player and their revenue increases, maybe the market size would have increased too."

Singh said a downround might happen for all such startups, but that shouldn't be a cause of concern. "That happens in all bull markets. The big concern is whether these guys continue to raise capital and burning it with very little topline to show."

Nikhil Kamath, in a LinkedIn post, had recently said that venture capital fund operators have "miscalculated and maybe oversold the India opportunity to their investors”.

"If I could use one line to explain what I think is the root cause of the problem: Believing in a TAM that isn't there yet and then burning out by chasing it," he had written.

According to Somdutta Singh, an angel investor, a limited partner at several funds and the founder of Assiduus, an e-commerce solutions firm, low average order value is also an issue for Dunzo to tackle.

"It is always dangling between Rs 250-500. Hence, the margins on them are extremely low. It is never going to be a money-making proposition," Somdutta. "There is going to be insane cash burn. For every rupee Dunzo earns, it is spending close to Rs 9."

No Growth Or Profitability

Despite multiple pivots, the startup reported paltry revenue from operations of Rs 54.3 crore in FY22. The company is yet to file earnings for FY23.

While revenue doubled from the preceding year, it registered losses of Rs 464 crore, which also doubled from Rs 229 crore, according to data accessed from Tofler.

It stated that performance had been "significantly impacted due to operational expenditures largely on account of incentives, advertisement and marketing costs”. Dunzo also posted negative operating cash flows of Rs 603 crore, up from Rs 209 crore in the previous year.

In the FY22 earnings, Dunzo's auditor had said that it is expected to have such financial parameters in FY23 as well.

It also posted accumulated losses of Rs 1,230 crore. "Considering the cash flow forecast prepared by the management, there exists a material uncertainty that may cast significant doubt on the company's ability to continue as a going concern," the auditor had written.

In FY22, the Bengaluru-based startup said it completed 3.5 crore orders and its gross merchandise value scaled twofold "as the focus was on expanding key business verticals i.e. Dunzo Daily and Dunzo For Business”, which is its B2B segment.

"The focus for FY23 is on expanding the on-demand consumables business (Dunzo Daily) in our existing cities, and scaling the B2B delivery network," it had said.

Its troubles prompted it to fireabout 380 employees in an effort to become leaner and improve profitability. In February, the company had also "realigned its network design" to make its daily subscription offering, Dunzo Daily, "lean and cost-effective". That wasn't enough though.

What Next For Reliance

In January last year, Dunzo had raised $200 million from Reliance for a 25.8% stake, giving it an enterprise valuation of slightly below $800 million. Reliance called it the "market leader of the quick commerce category", and pegged the sector as a $50-billion opportunity.

At the time, Reliance had said that the money will be used to grow Dunzo's quick commerce business to 15 cities. According to Dunzo's app and website, it hasn't expanded yet.

Apart from the funding, Dunzo was to "enable hyperlocal logistics" for Reliance Retail stores and facilitate last-mile deliveries for JioMart’s merchant network. Since the partnerships were formed in January 2022, the effect should show up in Dunzo's FY23 earnings.

Somdutta said it could have been a "spray and pray" approach Reliance. "When you are a very big firm, a couple of hundred million dollars is pocket change. Investors put their money in 30-40 companies, knowing only two or three are actually going to give returns.”

"I would actually think Reliance should acquire them, because the integration seems very seamless. They could have Dunzo operate as a wing."

She said that Blinkit getting acquired by Zomato Ltd. or Swiggy branching out to quick commerce sets an example for Dunzo to be acquired.

"Blinkit was bought and the operational efficiency between food delivery and grocery delivery was deeply optimized because of this," she said. "It couldn't survive on its own. This whole strategy works, because one firm can't do it all."