What Zomato’s $ 12 billion IPO reveals about tech companies today


In mid-July, Zomato, a food delivery company, listed its shares on Indian stock markets. Its initial public offering (IPO) was oversubscribed 35 times, which earned it a valuation of $ 12 billion. Why does a loss-making company – with no real estate or assets – enjoy such a high valuation and attract world-class investors like Fidelity, Morgan Stanley, the Canadian Pension Fund and the Singapore government?

Although he operates a traditional food business, Zomato embodies a modern technology company. Like DoorDash and SkipTheDishes, it delivers ready-to-eat foods to your home without owning farms, grocery stores, restaurants, warehouses, trucks, or delivery vehicles. Its business model is similar to those of other tech companies like Uber, Amazon, and Airbnb, but subtly differs from Facebook and LinkedIn.

In a previous HBR article, we claimed that WeWork is not a tech company, despite its claims to the contrary. The failure of WeWork during the IPO and the success of Zomato can teach us what a modern tech company is and what it is not. In our view, a successful modern tech company can transform entire industries, achieve expansion of scale and scope at breakneck speeds, and realize huge profits, all without requiring significant capital investments. It typically has most, if not all, of the following six characteristics.

Rapid transformation of the industry.

Zomato aims to transform the eating habits of 1.36 billion people in India, where 90% of the population does not eat out. Compare that to China, where 58% of people eat out regularly. Previously there were two obstacles to dining out in India. The first was purely logistical: only 2% of Indian households own a car (compared to nearly 98% of American households). The second was a cultural taboo: some people would never eat food cooked in someone else’s kitchen.

Zomato crosses these two obstacles. It gives a new segment of the population access to restaurant food by delivering it at the push of a button. It also breaks down cultural barriers by encouraging users to provide feedback – people will be less reluctant to try restaurant food when they see their own family members or people of their own caste and peer groups. do so and provide food and restaurant recommendations.

While a food delivery app may sound familiar to many of us, Zomato potentially transforming the eating habits of a large number of people is no less ambitious than what Uber or Airbnb set out to do. Uber allows millions of people to be driven by strangers and now employs more cars than any taxi company in the world. Airbnb makes it easier to stay with foreigners and has more rooms than any hotel chain in the world. Thanks to these companies, people do not need to own their own kitchens, cars and homes to enjoy their privileges. This shared virtual ownership creates value for people by improving the use of assets and reducing the risks associated with asset ownership.

Low investment costs but extremely valuable local assets.

Google search, Airbnb, Yelp, Uber, LinkedIn, and Facebook share a common characteristic: they have scalable virtual models that can be exponentially grown with few additions to their asset bases. This is different from a business like, say, Ford or Target that would need land, factories, distribution centers, or warehouses to grow. In other words, tech companies can increase their revenues and income statements with few additions to their balance sheets. Zomato, a multi-billion dollar company, doesn’t even have an office.

Nonetheless, Zomato differs from other tech giants in one important respect: Companies like Google and Facebook can serve a foreign country without having a physical presence there. In contrast, Zomato only enters new towns after establishing relationships with local restaurants, evaluating their offerings, and working with them to improve their menus and prices. It also identifies, assesses and appoints local delivery agents. Zomato thus invests significant sums in local relationships and local knowledge, intangible assets that cannot be easily reproduced by competitors.

Client privacy.

Modern technology companies collect, store, organize, and analyze years of user data. This data is virtual gold because it enables businesses to serve targeted advertising and personalize the customer experience. The main difference between a customer entering a Walmart supercentre and Amazon’s online store is that Amazon instantly revamps the entire store (layout, displays, product offerings, etc.) in a way that works for that customer. .

Likewise, Zomato or Uber Eats can track a customer’s tastes, discount needs and preferences in terms of cuisine, delivery time and price and combine this information with local culinary trends, seasonality, days. holidays and festivals to instantly offer a personalized menu. This level of customer intimacy increases the costs of change for customers, imposing significant barriers to entry for new players.

Network effects.

For most modern technology companies, the larger the network, the more valuable the company. There are three types of network effects: direct network effects, indirect network effects, and data network effects. Tech companies like Facebook and LinkedIn benefit from direct network effects. Each new customer joining Facebook or LinkedIn creates value for an existing customer because the two customers can now bond directly with each other, even if they are located in different places. The thousandth customer joining the network creates more value than the tenth, fiftieth or hundredth customer, because the thousandth customer can create 999 new links, while the tenth can only create nine links.

Tech companies like Netflix, Amazon, Uber, and Zomato don’t have any direct effects on the network. If a new customer joins Zomato, they do not create a new direct link with current customers. Likewise, a new restaurant joining Zomato does not create value for current restaurants using Zomato. However, in a two-sided platform like Zomato, there are indirect network effects. The greater the number of customers, the greater the value for restaurants and vice versa. Now customers have more choices, restaurants have a bigger market, and the delivery network can be used more efficiently.

Most importantly, Zomato benefits from the data network effects. Each new customer and restaurant provides valuable data that Zomato can use to improve the value proposition for all existing users by improving the quality and depth of feedback, understanding usage patterns, optimizing logistics, troubleshooting and by developing the repository of local tastes and preferences. Machine learning continues to improve this information. Zomato can now provide more personalized recommendations for each customer and better connect restaurants to their target customers based on collective learning across its customers. This improvement, along with the increase in the number of delivery agents and restaurants drawn to the larger market, improves product and service options while reducing costs. Zomato calls this a “flying effect,” and each new customer and supplier joining the network adds to the momentum behind the wheel.

Ecosystems that stimulate expansion with minimal costs.

A modern technology company can leverage its relationships with its customers to deliver new lines of products and services. Companies that leverage the strengths of ecosystem partners can achieve this at little additional cost. Consider Apple’s use of the iPhone and Amazon’s use of Echo devices to sell third-party apps, music, games, and videos using their own payment services. Apple and Amazon then take a share of every dollar that goes through their systems. Another example, Uber has extended its carpooling service to Uber Eats with minimal investment. Likewise, Zomato can expand its catering offering to include pre-sorted and ready-to-cook ingredients; in fact, he’s already leveraging his relationships with restaurants to source ingredients for them. Zomato also reserves tables for customers of its partner restaurants by offering personalized recommendations based on customer information.

Variable costs and margins.

Google, Microsoft, Twitter and Facebook search can increase their income with minimal variable costs. It costs relatively little to make another copy of Windows 10 or serve another Google or Facebook client. Facebook’s gross margins, for example, reach 80-85%.

The same concept, however, doesn’t also apply to Uber, Airbnb, Amazon, and Zomato. Much of their income is passed on to vendors, such as restaurants (Zomato), motorists (Uber), and owners (Airbnb). In addition, Amazon and Zomato have to pay their delivery agents.

But improvements in scale, knowledge of suppliers and increased bargaining power reduce these variable costs. Futuristic technologies like drones, robotics and autonomous vehicles can further reduce delivery costs. Increased scale improves unit economics (the benefits obtained from each new transaction unit) by improving revenues and reducing unit costs. Rapid growth thus becomes an integral part of a company’s strategy.


It should be noted that low asset value “tech” companies that exhibit these six characteristics have achieved significant valuations in the 21st century. In July 2021, the combined market capitalization of the companies FAANG (Facebook, Apple, Amazon, Netflix and Google) and Microsoft was almost $ 9 trillion, which exceeds the GDPs of all but two of the world’s nations. . Zomato’s high valuation should therefore come as no big surprise. After all, it’s a proven tech company that aims to transform the eating habits of a nation of a billion people strong.

Today’s tech giants should be compared to the industrial giants of the 20th century: Ford Motors, General Electric, Dow Chemicals, Standard Oil, Union Pacific, etc. These companies have also transformed industries and society. They required significant investments that took decades to build. Yet despite being lightweight in the traditional sense, a 21st century tech giant has a library of flexible assets that cannot be easily replaced or replicated. How easy is it to gain trust and replicate the relationships, networks, and personalized data of 1.5 billion Facebook followers?

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