Food startups: So, there has been a lot of hue and cry at the recent devaluation of Zomato by HSBC’s brokerage arm which is a pioneer in restaurant search and discovery service, founded in 2008 by Deepinder Goyal and Pankaj Chaddah and which operates in 23 countries.
Let us try and analyse in detail as to what these start-ups are, how they are valued or devalued and what implications does it have on the economy, the economic perception and the public in general , if any .
What Is A Food Start-up?
So what exactly does Zomato do? So it’s a food start-up. Food Start-ups has one and only one objective – that of saving our time and effort into preparing food. They aggregate different restaurants, have tie ups with them and on a commission, deliver their food to different locations by conducting the entire process through an app. They typically provide multiple conveniences that of the decision, access, choice, transaction, time etc.Think of it as an online menu of multiple options of different restaurants, where you can select, pay, and eat online. Well not eat; I was just seeing if you were paying attention!
Valuation is one of the most important term associated with start ups, Basically valuation determines the share of the company that you have to give away in exchange for money. At the early stage the value of a company is close to zero but it really is about the growth potential rather than the present value, so it’d typically be a lot higher. Some of the factors determining valuation are:
Traction – Which basically means what is the growth in the number of users over a time period, the more the users, the higher the valuation
Reputation – What are the reputation and previous record of the founders/ financers? The better the founders known, the more valuation the company commands
Revenues – What is the growth in revenue and the trends since the inception of the company? Obviously, great growth means great valuations
The Trend of The Industry – Commonly known as the “hotness” of the industry in which the start-up is functioning, is it just a passing trend or a sustainable business model.
Obviously these same factors are the reason for devaluation, in reverse.
Why Zomato (And Others) Got Devalued?
Basically, the concern is the business model that relies very heavily on advertising and discounting. In addition, there is a stiff competition in the space since most restaurants these days have started delivery services of its own, often tech integrated. There is a feeling that these companies do not have a sustainable growth model and that there are inherent channels that the company has not been able to address. The shutting done of Zomato’s service in a few cities earlier this year is a case in point.
The Impact Of This Devaluation
Although the markdown of tech start-ups is nothing new, there is a view that Zomato’s devaluation might impede the discount-driven customer acquisition model. It might mean that the companies will have to come out with other innovative value additions, other than vanilla discount offers. This devaluation which has halved the value of the erstwhile unicorn (start-ups with a valuation of USD 1bn or more) will definitely have a cascading effect on the valuation and funding prospects of other existing and upcoming tech start-ups.