MUMBAI | NEW DELHI: SoftBank is exploring a possible investment in restaurant discovery and food delivery firm Zomato,according to three people aware of the discussions, which are at a very preliminary stage.
The Japanese technology conglomerate’s talks with Zomato come six months after it first held conversations exploring a possible funding of up to $200-250 million in Bengaluru-based Swiggy, which was reported by ET. Soft-Bank, which has backed Flipkart and also Paytm, aims to now play the kingmaker in the food delivery market, the sources said.
“SoftBank’s meeting with Zomato, held earlier this week, is exploratory in nature,” one of the people cited above said.
The investment firm has also held multiple conversations with Swiggy for a possible investment, two people directly familiar with the conversation told ET adding that “(Swiggy) is of the view that it is still little early to raise a large cheque from the Japanese firm”.
“SoftBank discussed business metrics across Zomato’s three main business lines. One of the points of conversations revolved around Zomato’s international expansion over next few years,” said the person pointing out that “there is no guarantee the conversations will materialise into an investment.” While SoftBank is still scanning India’s food delivery space looking to finalise a candidate for a likely investment of $200-400 million, “a final decision on its investment is likely to be taken by the year-end”, said the one person privy to conversations with SoftBank officials.
Swiggy and SoftBank did not reply to emailed queries on the development. ’“Speaking to prospective investors is part of every day at Zomato, and for that matter, every high-growth startup. Beyond that, we don’t comment on market speculation," said a spokesperson for Zomato in response to ET's queries.
Global investment firms are making a beeline for the fast-growing Indian food delivery sector. In 2017, the sector recorded a 125% increase in order volumes to 4.5 lakh orders per day from about 2 lakh orders per day in 2016, according to estimates from RedSeer Consulting.
Swiggy, as reported by ET, is in the final stages of closing an investment round of about $250 million likely to be led by Russian billionaire Yuri Milner’s DST Global and South Africa’s Naspers along with participation from US-based hedge fund Coatue Management and existing Chinese investor Meituan Dianping.
The round is expected to value Swiggy at about $1.1-1.2 b, according to two people aware of the talks.
DST Global, Naspers, Meituan Dianping did not reply to emailed queries. Coatue Management declined to comment.
Experts are of the view that the food delivery sector, which is essentially a logistics-driven business catering to one need – food, allows big-ticket investors to pour in large amounts of capital.
“For Softbank, to deploy large pools of capital of $100-400 million and move the needle, it needs core sectors such as (food delivery) that can absorb (such money) and give significant returns too,” said K Ganesh, founder of startup factory Growth Story, promoter of cloud kitchen firm Freshmenu and grocery portal Big Basket.
SoftBank is also the largest shareholder in cab hailing applications Ola and Uber, both of which acquired and launched food delivery services last year, respectively.
Earlier this year Gurgaon-based Zomato closed a $200-million funding round from Chinese online retailer Alibaba’s payment affiliate Ant Financial, which valued Zomato at about $1.1b. Alibaba and Ant Financial may also further invest in Zomato, though it is not clear if they will infuse capital immediately.
Alibaba has been stepping up efforts to expand its role in China’s online delivery market. It most recently acquired Chinese food delivery player Ele.me in a mostlycash deal valuing the firm at a whopping $9.5 b, as per global media reports.
The intensifying war of capital between Swiggy and Zomato comes seven months after talks of a possible merger between the two companies fell apart, last November.
While valuation differences and business alignment have made the merger conversations rather turbulent, people aware of the developments maintain a possible merger has not been completely ruled out yet.
SoftBank’s investment in any one of the two companies, will tip the balance of power in favour of the chosen one, said the person.
This influx of global capital into the food delivery space is similar to the investor exuberance for the ride-hailing aggregation sector during 2014 and 2015.
Investors also point to the early frenzy in the e-commerce market where a capital rush followed companies like Flipkart even as they burnt significant cash on every single order.
Industry watchers say “losing money at this stage in the sector may not necessarily be a bad thing just yet” because despite a long period of significant cash burn to create loyalty, Flipkart has shown that efficient demand fulfilment can create copious amounts of value.
“The food delivery sector moreover has the added advantage of high frequency (unlike e-commerce) thus creating customer loyalty,” said Growth Story’s Ganesh.