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What factors did lead to the death of hyper-local grocery delivery startup PepperTap, which is backed by the likes of Snapdeal, Sequoia and SAIF Partners?

The VCs would never have foreseen the failure of this startup so soon. Such was the growth PepperTap was registering since its launch one-and-half-years ago. However, the huge customer acquisition cost and a ‘pessimistic funding environment globally’ did the startup in.

The story of this Gurgaon-based hyper-local delivery startup began in November 2014. Founded by Navneet Singh and Milind Sharma, the firm raised its first major investment in April 2015, with a US$10 million from SAIF Partners and Sequoia Capital, both prominent VC firms in India.

Then in September, it got a whopping US$36 million in Series B led by e-commerce giant Snapdeal. This was followed by a US$4 million debt tuning from InnoVen Capital. On the way, it became the third most-heavily funded grocery delivery company after BigBasket and Grofers.

The huge funding helped PepperTap scale fast — from just one city in 2014, the company grew to almost 17 in October 2015, covering all the major cities in India.

In December, the firm acquired Bangalore-based grocery delivery startup Jiffstore for an undisclosed sum, and was in talks to raise another US$11 million.

PepperTap was one of the top three grocery delivery services in India with an average of 20,000 orders delivered daily. It was improving sales by an average of 30-40 per cent and with its mobile-first approach, geographic expansion was fairly easy for the startup.

But the momentum at the top was intoxicating.

“There was just one problem. The integration of our app with our partner stores was not great. In the race to pepper the whole country with PepperTap, we had brought too many stores online far too quickly. Our customers were, at times, unable to see the entire selection of items from a store and sometimes even essential items were missing from the catalogue visible to them,” Singh says in an official blog post.

In photos: PepperTap’s spicy corporate office in Gurgaon

Indeed, this was not an impossible problem for it fix right away, but then came another problem. To keep enticing customers to buy from its platform, the firm was spending a lot of time and energy to devise clever sales and discount schemes.

“This was not hugely problematic in itself – we had money in the bank and investors were on board with this plan. After all, we were in it for the long-haul and this was the way to build a loyal customer base by showcasing the quality of our service, and getting them to adopt it as a way of life. We told ourselves that the convenience we would bring to PepperTap loyalists would become of such great value eventually, that these discounts were simply a cost of doing business while we perfected our processes,” read the post.

And then a third problem started to rear its head. “We were in it for the “long-haul”. This meant we needed to constantly build buffer capacity in our logistics and operations teams. If we were going to stick to our 2-hour delivery promise (which was rapidly becoming a key differentiator in the markets for us), we needed to build spare capacity in every one of the 17 cities in which we were present.”

Compounded with the necessity for discounts, this meant that the cash it was burning on every order was increasing rather quickly with no immediate end in sight.

To the company, this too was not insurmountable. PepperTap was born to be a logistics company – the one thing it could call its core competency was optimisation of delivery fleets, routes and general logistics.

It just needed to revisit some of the basics of the business, this time with a stronger technology lens, and set the wheels in motion.

“The most logical thing to do to solve all three of these problems simultaneously, was to halt operations in some cities. We decided on this list by looking at the size of our customer base in each city, and the pain we would cause to all stakeholders by shutting them down. Relatively new cities with a small customer base were selected for closure.”

As a result, the company closed down operations in six cities — including the major metro areas of Mumbai, Chennai and Kolkata — early this year. This claimed the jobs of 400 delivery staff.

The impact of this move on the business was profound. With some focussed work and really solid initiatives, PepperTap managed to increase the value of its average sale twice over and its retention rate (how often the same customer transacts on the app in a given period of time) soared 400 per cent.

“We were still financing orders and discounts with capital but now this was a more concentrated burn with a clear goal, timeline and geography in mind. However the timeline and the path to profitability was looking long (very long in fact) and arduous.”

“The harshness of a pessimistic funding environment globally also started creeping in; and as the increasingly inclement investment climate began to become obvious, we found ourselves at the toughest node in the decision tree yet. Losing cash on every order meant one day we will run out of cash – perhaps we could slow down the process but mathematically speaking, this was a certainty. We couldn’t shake off the feeling that we were walking (not racing like some other companies) towards the edge of a cliff hoping that things will get better before we reach the abyss.”

“We decided that sooner (read while preserving a large amount of the capital we had raised) was better than later (on the way down to the bottom of that abyss we talked about earlier). If anything, having a large chunk of equity capital from our last round still sitting in the bank made this decision infinitely harder. Had we tried everything? Were we convinced that this was not the space for us? Was hyper-local commerce finished as a sector? The answer to all these questions was a resounding ‘No’. But let us be clear about one thing, we haven’t taken the task we set out to do in the late summer of 2014 to its rightful culmination in the limited time that we have had. And that’s the simple truth,” the post reads.

Image Credit: Shutterstock

So, in addition to the soaring customer acquisition cost and a pessimistic funding environment, the unnecessary discounts and inability to build buffer capacity in its logistics and operations teams, the company suddenly found itself in an extreme situation.

According to Albinder Dhindsa, Co-founder and CEO of bigger competitor Grofers (which in November last year raised US$120 million funding led by SoftBank), discounting was a big part of the strategy for majority of last year in order to to attract consumer behaviour in the category.

“Since November, however, this has more or less ceased or become rational in the space. We are now mostly passing along discounts or offers given by retail chains, so the cost of discounting is no longer borne by e-commerce players. I think we see enough customers now that want to transact for assortment or convenience that discount as part of the strategy doesn’t need to be a driver of organic growth anymore- I believe you will see this play out especially in the grocery space over the next few years,” he told e27.

Constantly, the startup world reminds itself that entrepreneurship is hard. Sometimes, even if the company is aware it had made mistakes, and tried to alleviate their impact, the errors are too much to overcome.

At the end, PepperTap seemed fully-cognisant of its missteps, but the hole had been dug too far and the company could not dig itself out in time to save the startup.

The post This one-and-half-year-old startup scaled fast, got US$50M from large VCs, acquired a rival, and now shut down appeared first on e27.

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