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  • MAP Asia Pacific Ltd

What Zomato’s $12 Billion IPO Says About Tech Companies Today

In mid-July, Zomato, a food delivery company, listed its shares in Indian stock markets. Its initial public offering (IPO) was oversubscribed 35 times, giving it a valuation of $12 billion. Why does a loss-making company — with no real properties or assets — command such high valuation and attract global celebrity investors like Fidelity, Morgan Stanley, Canadian Pension Fund, and the Singapore Government?

Despite operating a traditional food business, Zomato epitomizes a modern tech company. Like DoorDash and SkipTheDishes, it delivers ready-to-eat food to homes without owning farms, food stores, restaurants, warehouses, trucks, or delivery vehicles. Its business model is similar to those of other tech companies like Uber, Amazon, and Airbnb, but differs subtly from the likes of Facebook and LinkedIn.

In a previous HBR article, we claimed that WeWork is not a tech company, despite its claims to the contrary. WeWork’s failure at IPO and Zomato’s success can teach us what a modern tech company is and what it isn’t. In our opinion, a successful modern tech company can transform whole industries, achieve expansion of scale and scope at breakneck speeds, and make enormous profits, all without requiring significant capital investments. It typically has most, if not all, of the following six features.

Rapid industry transformation.

Zomato aims to transform the eating habits of 1.36 billion people in India, where 90% of the population doesn’t eat at restaurants. Compare that to China, where 58% of people routinely eat at restaurants. Previously, there were two hurdles to dining out in India. The first was sheer logistics: Just 2% of Indian households own cars (compared to almost 98% of U.S. households). The second was cultural taboo: Some people would never eat food cooked in someone else’s kitchen.

Zomato clears both of these hurdles. It gives a new segment of the population access to restaurant food by delivering it with the touch of a button. It also brings 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 from their own caste and peer groups doing so and providing recommendations about dishes and restaurants.

While a food-delivery app may feel familiar to many of us, Zomato potentially transforming the eating habits of a huge number of people is no less ambitious than what Uber or Airbnb set out to do. Uber empowers millions to get rides from strangers and now employs more cars than any taxi company in the world. Airbnb facilitates staying at strangers’ houses and offers more rooms than any hotel chain in the world. Thanks to these companies, people don’t need to own their own kitchens, cars, and homes in order to enjoy their privileges. This virtual shared ownership creates value for people by improving asset utilization and lowering the risks that come with asset ownership.

Low capital costs yet extremely valuable local assets.

Google Search, Airbnb, Yelp, Uber, LinkedIn, and Facebook share one common feature: They have scalable virtual models that can be magnified exponentially with few additions to their asset bases. This is unlike a company like, say, Ford or Target that would require land, factories, distribution centers, or warehouses to expand. Put another way, tech companies can expand their revenues and income statements with little addition to their balance sheets. Zomato, a multibillion-dollar company, doesn’t even own an office.

Nevertheless, 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 enters new cities only after establishing relationships with local restaurants, assessing their offerings, and working with them to improve their menus and pricing. It also identifies, evaluates, and appoints local delivery agents. Zomato thus invests large amounts in local relationships and local knowledge — soft assets that cannot be easily replicated by competitors.



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