Will TinyOwl, Roadrunnr merger fly?

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Mumbai: It is a curious development. TinyOwl, the food-tech start-up, and Roadrunnr, the hyper-local delivery start-up, have merged to form a new start-up. It is called Runnr.

But why?

Good question. So, once upon a time there was a start-up called TinyOwl. In the two years that TinyOwl was around, it grew aggressively, venturing into several cities. At its peak, sometime in February 2015, it had the audacious ambition of connecting restaurants and people who like to order food on an app in over 50 cities in India. TinyOwl went some distance down that road and then began unraveling. The economics weren’t working—food delivery costs were too high, order sizes too low, customers weren’t willing to pay for delivery, restaurants weren’t willing to charge for delivery—so cough, sputter, cough, sputter…

Fast forward to late last year, employees were laid off, branches shuttered and TinyOwl came to a grinding halt. The start-up was then put on the block but nothing came of it. All talks were unfruitful.

Now, even as all this was happening, in another corner of India, Bengaluru, another start-up was taking shape—Roadrunnr. The idea: delivery of things. A fancy term was thrown in: hyper-local delivery. So, pick something from A, deliver it to B, within a 4km radius, in 30 minutes or a few hours. Slightly less fancy terms have been used to describe the business idea—express delivery, time-bound delivery, on demand, local delivery… anyhow, you get the drift.

Next up, Roadrunnr hit the ground and started picking up merchants. Another matter altogether that in a bag that was originally supposed to be full of all sorts of random merchants, like restaurants, grocery stores, pharmacies, clothes and electronics retailers, Roadrunnr ended up with several start-ups as clients. Those in the business of food technology or selling groceries on an app and of course, e-commerce. Was a lot of hyper-local delivery happening? Yes and no. So, restaurants and groceries, yes, but e-commerce, no.

Come September 2015 and Roadrunnr’s daily deliveries were going through the roof—50,000+ deliveries a day. It was a heady time. Lots of delivery boys floating around, talk of expansion and hiring and you know, the whole ‘let’s grow this thing now’.

But then it all started slowing down. Roadrunnr began unraveling, too.

Mohit Kumar, 27, the founder of Roadrunnr, says the moment of reckoning was a presentation that the start-up made to its board, sometime in February this year. It had one leading number—almost 80% of Roadrunnr’s deliveries was food.

Jeez, how did that happen?

“So in September, grocery was big,” says Kumar. “Lot of aggregators giving lots of discounts to generate demand. So while they were burning money, we were delivering. Laundry was big, food was big. Well, some 45 aggregators have shut down in the last six months. So, now think about our board and investors. In our list of Top 100 customers, 45 were dead.”

Needless to say, it wasn’t like this just last September. Back then, Roadrunnr’s bag was full—delivering lunch and dinner, squeezing in multiple grocery deliveries post-lunch and squeezing in another predictable e-commerce item, earlier in the day. In e-commerce, one can predict or schedule a delivery. Delivery is not time-bound like, say, in food. So Roadrunnr was scheduling the e-commerce delivery before noon and in the evenings. As the grocery aggregators shut shop, Roadrunnr’s deliveries disappeared. Start-ups which survived wanted to do their own delivery. Plus, there was a growing realization that there’s no real business case for on-demand grocery.

Soon enough, the e-commerce cookie crumbled. Roadrunnr had ramped up e-commerce deliveries. But, sometime in January, the start-up realized that something was amiss.

A. The numbers weren’t growing, stagnant at about 12,000 transactions a day.

B. To grow the numbers, the business needed a lot more investment but Roadrunnr wasn’t sure if that was the right thing to do.

As grocery aggregators shut shop, Roadrunnr’s deliveries disappeared. Photo: Ramesh Pathania/Mint
As grocery aggregators shut shop, Roadrunnr’s deliveries disappeared. Photo: Ramesh Pathania/Mint
“We realized that we will find it harder to solve e-commerce if we don’t go deep,” says Kumar. “So, we had working capital problems. We were working with five players. Paytm, Flipkart, Amazon, Snapdeal and Myntra. Each has its own payment cycle. You know, three months. They are themselves unstable. Plus they had better negotiation power, in the sense they can negotiate on volumes. So x rate for 1,000 orders and then x minus certain % for 2,000 orders. But you’ve already deployed deliveries for 1,000 orders but if they don’t give you 1,000 orders then you are screwed. So that was one problem.”

There was a far bigger problem. No need for on-demand delivery. It was a luxury service. Plus, e-commerce players wanted to build their own logistics network. Ekart for Flipkart and GoJavas for Snapdeal, for instance.

“Add to that third-party logistics players with road and warehousing capability,” says Kumar. “We heard horror stories of them not getting enough orders despite their infrastructure. So, some aggregators also said ‘work with us exclusively’ but that’s a honey trap because your future is tied to the success of the aggregator. So, net, net shit sector to build.”

All of which brings us to the February board meeting, where a decision had to be made. What then?

“The on-demand delivery piece hadn’t really played out,” said an official of a fund that has invested in Roadrunnr. He requested not to be identified because he is not authorized to speak to the media. “One road was to become a full-scale logistics player but there was no real need for it. The other option was to continue doing what you do best.”

The way Kumar tells the story, it was an obvious decision. Food delivery.

Really? Despite everything that’s gone horribly wrong there?

Yep.

The hypothesis

Kumar and Arpit Dave, the other co-founder at Roadrunnr, have a hypothesis that in the past year or so, the business has seen some transformational changes. The following:

• Food isn’t dying anytime soon. People are going to order and eat food.

• The shakeout in the business has actually made it a good time to enter. Too many players going after the same consumers, discounting and building their own delivery business had spoiled the economics.

• Restaurants and aggregators are charging for delivery. No more freebies.

• Restaurants have increased food prices to accommodate higher commissions which they have to part with to work with a food aggregator.

• The delivery piece has been solved. Delivery has moved from a fixed-fleet model (one where you actually have the delivery boys on payroll) to a flexible, commission-based model (get paid once you log in and depending on the number of deliveries you can do during a day).

in the two years that TinyOwl was around, it grew aggressively, venturing into several cities. Photo: Bloomberg
in the two years that TinyOwl was around, it grew aggressively, venturing into several cities. Photo: Bloomberg
“The one thing we looked at is, is there revenue headroom in this business,” says Kumar. “We found yes. You can charge a commission to the restaurant. Charge delivery fee to the customer. Charge surge to the customer. Plus it is a maximum retail price-free market, so the average order value has gone up in the last six months.”

That’s not all. Kumar says that the death of early foodtech start-ups has actually been good for the ecosystem. Where they were signing on restaurants, sometimes at 0% commission, at times 3% or maximum 6% commission, this number has turned on its head. “Swiggy and Zomato have been signing restaurants at 12-15% commission,” says Kumar. “Restaurants started paying because demand had come down for a brief period.”

Let’s do some math here. What’s the revenue potential on one order of Rs.350? Commission at 15% (Rs.52) and delivery fee (Rs.30). That’s Rs.82. Cost comprises delivery and support. Roadrunnr’s hypothesis makes the case that the cost of delivery per order is now Rs.45. Support is about Rs.19. (What’s support? Call to restaurant, call to driver to track, call to customer in case of change in order)

“So yeah, this started proving out to be a healthier model for us,” says Kumar.

Kumar scribbled down some numbers to explain why Roadrunnr pivoted (see table).
Click here for enlarge
Anyhow, fast forward to mid-February and Roadrunnr pitched the pivot to the board. Not everyone was convinced. Would Roadrunnr build a front-end too? A consumer platform where consumers can log in and order food. That would be expensive. How about the cost of acquiring customers?

“So we started looking at data for other start-ups, like Swiggy and Zomato,” says Kumar. “We found that they had almost 85% repeat order rate. So the cost of customer acquisition is for the remaining 15%, which is also a function of growth. The number we arrived at is about Rs.70 or thereabouts, some portion of it was going for the wallet guys. So we realized that the cost of customer acquisition is also going down because of repeat orders. Which is not the case in e-commerce. There the repeat orders are much, much shittier.”

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Next up, Roadrunnr began speaking to the large food chains. Like a McDonald’s. They were in for a surprise. “We were shocked to see that they were struggling for demand,” says Kumar. “The first question we were asked is ‘how much demand can you generate’. Higher the demand, higher the commission rate. These guys were demand-desperate, which is completely contrary to e-commerce.”

Fast forward and Roadrunnr started looking for a small front end start-up to acquire. Since the company didn’t have any cash and only equity to offer, it proved difficult. Talks began with a few start-ups but went nowhere. Roadrunnr was also in talks with Foodpanda, with several options on the table, but that too went nowhere. Kumar refused to comment on the specifics, saying that in general, Roadrunnr was out meeting everyone.

Of course, it finally settled with a beleaguered TinyOwl. Kumar says TinyOwl was the best fit.

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Mint reached out to Harshvardhan Mandad, 26, founder of TinyOwl, for perspective.

He said TinyOwl and Roadrunnr have been in talks since January. On and off. That’s because TinyOwl had its introspection to do and see if there were any buyers, for whatever it was worth. That took a while but nothing came of it. “We had some options but they didn’t materialize. Not according to our terms,” said Mandad. “Finally, Mohit and I agreed that the synergies are good so we joined hands. So now, we will have control over lead generation on the consumer side and delivery. I will be looking into the consumer product.”

As part of the deal, Runnr will now have 150 people. Some 100 odd people will come on board from TinyOwl for technology, design and customer support.

It will be fair to say that TinyOwl has had a fairly difficult last year . Mandad knows this. “Personally speaking, it has been a horrible failure for me. Till now there has been no success. But I am positive.”

He should be. Of course, the new model is still hypot