Last week, grocery delivery startup Grofers was said to be raising $125-150MM of capital from its early backer Softbank. 

The intriguing journey of Grofers is encapsulated in the top search suggestion when you first Google "Grofers" (try it in incognito). With a BigBasket ad ranking as the first result, higher than Grofers itself, one can imagine what an intriguing place Grofers is in today. As search engine marketing (SEM) savants would know, it is really expensive for BigBasket to place an ad for the term Grofers.

That it has come to this is really surprising. 

In 2015, Grofers was the most funded hyperlocal delivery startup in India, and likely one of the most well funded in the world. BigBasket, which optimizes better on search for "Grofers" than Grofers today, only got into the centi-million fundraise club a year later. Grofers clearly had the backing of some of the world's biggest, and most prolific investors, but is now in 2nd place. 

What happened? 

Following Grofer's journey will help us understand what did. The company initially started in 2013 as a B2B inventory management tool for Kirana shops, connecting large brands with smaller Kirana retailers who needed to accurately track their stock. It is definitely a problem to solve because most of these retailers do not have any technology to manage inventory. Grofers, evidently, saw good adoption of the technology for these kirana retailers, and was clocking $15K of GMV every day in 2015. Processing grocery orders for retailers is a decent business, but when you see so many customers paying for these myriad goods what would you do?

You tap the customers (and become more appealing to investors in the process).

Just after raising its first round in late 2014, Grofers, opened up its platform to consumers (appealing to investors, anyone?). The platform allowed consumers to purchase goods and immediately began to see adoption. The pivot from being retailer focused to being consumer-focused immediately resulted in strong investor interest, and the company raised $45MM just in a matter of 2 months. 

For a company doing 20K orders a month, with an average order value (AOV) of $15, that would peg the company GMV run rate of $3.6MM. Assuming a 30% equity investment for the $45MM, it would peg the company at a valuation of $150MM ($45MM/30%). Even in the heydays of GMV based valuation, Grofers was valued at a 35x multiple at GMV. Flipkart (although much larger in size) in the same year was valued at 3x GMV. By the end of 2015, Grofers had raised another $120MM from Softbank. 

Grofers was flying as the rockstar in its category. 

Given how expensive the investment was, it was clearly a bet on the category (groceries) and the team (ex-Zomato). In 3 years (i.e. today), this very market was to become incredibly hot and would see the Flipkart CEO eat his words (or, poetically, have some churan). It is a testament to investing acumen to identify a massive category ($600 Bn worth) long before others, and back a strong team to execute. 

Strong team, massive market, growing momentum - but what about the business model?

Grofers believed that the marketplace model of owning no inventory, with hyperlocal delivery, would be successful in the low margin grocery market. The company would take orders from a customer, pick up the goods from a nearby grocery store, and deliver. It essentially functioned as a delivery company, coupled with a platform matching demand and supply.

The model was inspired by US grocery delivery startup Instacart, that though started just a year before Grofers, had already raised $300MM by 2015. Grofers and Instacart also had a common investor, which likely helped in shaping Grofers' new business model.

Grofer's largest competitor, BigBasket, followed the inventory-led model. BigBasket's founding team had perfected the grocery inventory model at the company they sold to Aditya Birla Group, which would be known as More. More now interestingly comes under the wings of Amazon (which I analyzed as a masterstroke), in direct competition to BigBasket.

The marketplace model has the advantage of being frictionless, and easily scalable. Importing higher margins from Instacart would not be possible, because Indian grocers had lower margins to give from. Relying on gig-economy labour, as Instacart did, would not be feasible for Grofers because these lower margins would make it flexible labour prohibitively expensive. The company would thus need to hire their own delivery guys.  

Winning would need scale, as Grofers gross margins would be low (5-6%) due to being inventory light. On a ticket size of $10, the company would make at best 0.5$. Assuming a customer acquisition cost of $4, Grofers would need at least 8 transactions to break even on its customer.  

Strong team, massive market, growing momentum - but it now seems clear it would turn out to be a faulty business model. 

2016 would be the nuclear winter for on-demand startups, both in food and in groceries. TinyOwl ($20MM) and PepperTap ($50MM) were the two largest casualties (full list here). It was a strong indication that the hyperlocal model would not fly in India due to low ticket sizes and high costs of delivery.

Grofers would not be spared.

The company saw a slight increase in revenue to $1MM, while the losses expanded to $10MM. Grofers had also scaled to 27 cities, with the faulty business model, and scaled-down as quickly - while laying people off. 

How did the inventory-led model of BigBasket do, at the same time? It's revenue grew 3x to $90MM, leaving Grofers in the wake. As swift as its rise, within a year of its Softbank investment, Grofers was struggling. 

I always maintain that startup investing is about backing the jockey, and not the horse. Grofers, led by able management, saw the writing on the wall, accepted the issues in its own model, and pivoted to the inventory-led model (i.e. BigBasket). The company saw FY 17 grow to $35MM of revenue, and FY18 at $100MM. The inventory led model also provided the opportunity for better margins (35%).

Groceries are also an interesting category in India because people buy in bulk (rather than small numbers) and one could innovate for the customer by making prices like wholesale buying. Grofers caught onto this behavior and started wholesale priced "Smart Bachat Club" that already has 500K subscribers in mid-2018.

The groceries market in general also heated up in 2018, with Amazon's acquisition of More, BigBasket's 3 acquisitions, Swiggy's potential entry, and Flipkart selling Churan. From high ticket, low-frequency items, everybody is fighting for the low ticket, high-frequency groceries. Like I had elucidated earlier, battling for the customer's doorstep every day is much more lucrative than being there once in a while.

Grofers has big plans to scale even larger, to $300MM or revenue, and higher-margin private labels. The grocery market is huge, and $300MM of revenue would just account for 0.1% of the overall $500Bn market. BigBasket now has serious competition in its own territory, with the bigger players all descending on the "newly lucrative" grocery market. 

Grofers could be well-positioned to rise again, while acquiring its rightful place on Google search.