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Due to the challenging equity funding market, Dunzo is likely to raise $100 million through convertible notes.

Reliance Retail-backed Dunzo is in talks to raise up to $100 million (Rs 825 crore) through convertible notes, people aware of the matter said, joining a growing list of startups which have tapped alternate funding routes to preserve their valuations. Dunzo is primarily raising this capital to expand its quick commerce service, Dunzo Daily, people in the know said.

The round is in advanced stages of closure and could finally settle in the range of $70-100 million, the people said. The Bengaluru-based startup was initially looking to raise at least $150 million by selling a stake but its decision to opt for convertible notes underscores the ongoing funding winter for large startups which need capital to sustain their businesses. “It will settle closer to $100 million but definitely not anywhere closer to $150 million,” said one of the people familiar with the discussions.

Raising funds through convertible notes, a popular instrument now among growth- to late-stage startups, will allow Dunzo to not ascribe itself a valuation immediately when investors are being cautious.

The quick-commerce model, where platforms promise grocery delivery within 15-30 minutes, has seen a sharp reversal of sentiment from investors in India and globally amid the liquidity squeeze.

For Dunzo, which was last valued at around $775 million in January 2022, its largest investor Reliance Retail is likely to cut a relatively smaller cheque in this round than last time, people briefed on the matter said.

The Abu Dhabi Investment Authority (ADIA) is among new investors who are likely to join this round. The sovereign wealth fund is an investor in Reliance’s Jio Platforms. Sources said Dunzo had held talks also with Singapore’s Temasek as well, but those seem to have fallen through.

“Most late-stage startups are raising capital through instruments that don’t impact their valuation amid a tightening funding environment,” said the person quoted earlier. “They (Dunzo) are still trying to bring one or two more external investors to join the round.”

“The due diligence has also now closed for this round which was done by one of the Big Four (accounting) firms,” another person said.

Dunzo chief executive Kabeer Biswas and a spokesperson for ADIA declined to comment. Emails sent to Reliance Retail and Temasek didn’t elicit any response till press time Thursday.

Reliance Retail owns 25.8% in Dunzo. Google is another major investor, with a stake of just under 20%.

Venture funding for startups in 2022 fell around 30% to nearly $24 billion, according to data from industry tracker Venture Intelligence.

Nearly 64% of the respondents to ET’s State of Startups survey, as reported on December 30, had said they expected an improvement in funding scenario only by the second half of 2023, while more than 21% said it could even get worse in 2023 compared with the year before.

Quick cost optimisations

Dunzo has been trying to optimise costs internally at its quick-service business, similar to rivals like Swiggy’s Instamart, Zepto, Zomato-owned Blinkit and BigBasket’s BB Now. Among the quick commerce players, BB Now, a late entrant, is the only player expanding aggressively on the back of new funding from parent Tata Digital and other investors.

ET reported on Wednesday about the challenges 30-minute delivery platforms are facing to scale their ventures while trying to arrest rising spending and discounting.

Dunzo has made changes to its cost structure since it splurged more than Rs 100 crore per month for promotions during the Indian Premier League last year. Among other changes, it was pushing for “batching of orders” and incentivising users to go for 60-minute delivery slots.

The company also has a pickup-and-drop service for goods as well as a marketplace business to deliver groceries, medicine, meat and others. It had ventured into food delivery as well, but phased it out gradually last year.

Besides Dunzo, Y Combinator-backed Zepto is the other major standalone quick commerce player as Instamart is part of Swiggy while Blinkit and BB Now are being funded by parent firms Zomato and Tata Digital, respectively. Zepto last raised $200 million in May 2022.

Creativity in funding

Dunzo is among the latest of Indian startups to have opted for funding through convertible notes. Business-to-business ecommerce startup Udaan had raised close to $400 million in convertible notes and debt in 2022, while PharmEasy and others had also opted for capital via this route.

Many startups raise debt to fund daily operations. In convertible notes, it is linked to a future funding or liquidity event like an IPO where the incoming investors now will get a discount on pricing compared to others. Dunzo had taken $6 million in debt from Blacksoil in November.

At the time of the Reliance Retail investment, Dunzo’s Biswas had said the company was planning to go for an IPO by 2025.

“The debt from Blacksoil was largely a short-term capital arrangement while the ongoing round is being closed,” one of the people briefed on the matter said.

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