Believe the Hype: There's Big Money in Delivery
WHY YOU SHOULD CARE
Because these are the companies that will survive, grow and employ us one day.
By Michael Moe
The author is the co-founder and chief investment officer at GSV Asset Management.
As the legend goes, Fred Smith dreamed up the blueprint for FedEx in a Yale management class. He allegedly earned a “C” because the idea was too far-fetched. Years later, when his fledgling company was struggling, Smith took his last $5,000 and headed to Las Vegas for the weekend, winning $27,000 at the black jack table — which went toward FedEx’s planes flying on Monday. It worked out. But he still took a poke at his roots: Look closely at the packages displayed in the company’s first print advertisements and you’ll see that the return address is his alma mater in New Haven.
During the Internet Bubble 1.0, many of the intelligentsia were enamored with the idea of hasty doorstep delivery and online ordering. The concept made FedEx seem like the Pony Express. Now-forgotten companies like Webvan, UrbanFetch and Kozmo raised billions, but there was one small problem: The cost to deliver each product typically cost more than the revenue from the order generated … let alone the profit. Scale didn’t help. The more revenue, the more losses.
When the bubble burst, the next-gen local delivery guys were left on the battlefield with mortal wounds.
It is tempting to write this trend off as evidence of the Internet Bubble 2.0, but the fundamentals are very different from the dot-com days.
The Early Bird Gets the Turd
Timing in innovation is everything, and being too early is the same as being wrong. In 1999, less than 50 percent of homes had an Internet connection; the “smartphone” wasn’t even a glimmer in Steve Jobs’ eye. The rise of ubiquitous connectivity and new technology has allowed companies of the day such as Uber, Spotify and Lyft to become billion-dollar babies.
Today we have one new advantage: dramatic reductions in storage and computing costs, which enable startups and large businesses alike to employ sophisticated frameworks. Now it’s far easier to manage and optimize the challenging logistics associated with last-mile, same-day delivery. Algorithms minimize the amount of time it takes couriers to pick up orders and maximize the number of deliveries they can make.
If at First You Don’t Succeed …
Something funny happened in the middle of 2013. Businesses promising instant gratification from same-day delivery caught fire. Between Q2’13 and Q1’14, companies like Instacart, DoorDash, Munchery, Sprig, Postmates and SpoonRocket raised more than $500 million, funded by heavy-hitters like Sequoia, Greylock, Accel and Khosla Ventures.
Benchmark-backed GrubHub IPO’d in April and is, today, valued at nearly $3 billion. Berlin-based Delivery Hero, a competitor, raised $350 million at a valuation over $1 billion. Amazon, Google and eBay all have launched same-day delivery, and large retailers like Wal-Mart are scrambling to offer this service on their own or through partners.
It is tempting to write this trend off as evidence of the Internet Bubble 2.0, where broken business models are being resurrected by market froth. But while emerging same-day delivery services sound eerily familiar, the fundamentals are very different from the dot-com days.
Today’s Companies Are Smaller — and Better
In the ’90s, a company called Webvan built several $35 million, 350,000-square-foot distribution centers, and managed a fleet of delivery trucks operated by an army of drivers. Today, Instacart, which offers one-hour grocery delivery in 12 cities, has just 70 employees in a small office in San Francisco, all engineers and administrators. Instacart doesn’t own or operate warehouses, and relies on contract labor for deliveries.
Many of the major costs associated with business — inventory and labor — are out of the way.
Instacart is a marketplace. Consumers browse and purchase groceries aggregated from third-party grocers. They then connect with personal shoppers (those contract couriers) to deliver the goods. They’re facilitators more than operators. Instacart is therefore able to earn a portion of delivery fees, arbitrage grocery prices, and establish fee-based relationships with grocery vendors who need help with distribution. In other words, their increasingly popular peer-to-peer model means many of the major costs associated with business — inventory and labor — are out of the way.
What to Watch
Instacart has raised $55 million and is expanding to 17 cities by year-end; it’s proving popular with consumers and large retailers like Whole Foods that are looking to offer an outsourced delivery service. TaskRabbit has secured nearly $40 million in financing; it builds local networks of free-agent service providers completing tasks on demand, including delivery. What we’re most excited about? Enjoy, a company founded by Apple veteran Ron Johnson — and a recent GSV investment. The company brings the Genius Bar experience to your doorstep. Enjoy’s raised $30 million in Series A funding from firms including Kleiner Perkins Caufield & Byers, Oak Investment Partners and Andreessen Horowitz, in addition to GSV.
E-commerce innovation today is centered on speed and reducing friction in transactions. But that’s only part of the equation. I recently ordered the new Apple iPhone 6. And three failed UPS delivery attempts later, I was finally able to track down my phone at a remote warehouse in East Palo Alto. And then I had to figure out how to activate it. Annoyances abound, ones that smart companies can fix for consumers like me.
This OZY encore was originally published Nov. 23, 2014.