George Shaheen built one of the most glorious flops of the
dot-com bust. Fifteen years later he is a believer again. Mr. Shaheen is the
former chief executive of Webvan Group Inc., the online grocery company that in
less than three years burned through more than $800 million in cash, went
public, filed for bankruptcy and then ceased operations. Today, a new
crop of companies are battling once again to drop off eggs, cold cuts and
milk at customer doorsteps.
Many investors are betting on Instacart Inc., a San
Francisco company that calls to mind Webvan if only for its soaring sales and
surging valuation. Two-year-old Instacart is expected to announce on Tuesday it
raised $220 million in fresh funding from venture capitalists. The round values
Instacart at roughly $2 billion, up from $400 million last June, according
to people familiar with the matter. The company says it expected $100 million
in sales in 2014, about 10 times greater than a year earlier, but it is also
unprofitable.
Webvan grew at a faster clip, generating $178.5 million in
sales in 2000, its second year in operation. Shortly after its IPO in November
1999, it was valued at $8 billion. Still, much is different about these two
companies. And in that way, Instacart stands as a metaphor for how the online
business has evolved over the course of a generation, driven by the rise of the
smartphone. In particular, Instacart, like many online businesses today,
vigorously pushes out costs and risks to others.
Instacart has a far different approach, taking advantage of
existing grocery stores by dispatching couriers to Whole Foods or Safeway and
delivering goods within an hour. The drivers are independent contractors,
meaning Instacart doesn’t have to provide them with salaries or costly
benefits.
Instacart charges $3.99 to $5.99 per delivery and makes
money by marking up many items and pocketing the difference—a gallon of Safeway
brand organic milk costs $7.39 through Instacart, compared with $5.99 in store.
The company generally pays the couriers a minimum $10 per delivery as well as
additional fees based on order size and speed. Couriers say they also accept
tips, which can bring their earnings up.
Instacart also doesn’t operate its own trucks—the drivers,
contracted employees, use their own cars and buy their own gas. Nor does
Instacart have to pay upfront to stock shelves, as Webvan and brick-and-mortar
grocers do. Even so, Instacart isn’t yet profitable, say people familiar the
matter, and not all orders eke out even a small profit.
Mr. Shaheen says one of Webvan’s biggest problems was the
speed of Internet connections at the time, which were slower than the modern
broadband link. Today, customers can order from anywhere using Instacart’s app,
while couriers can call to make on-the-fly changes as well as scan items and
use GPS for faster routing to peoples’ homes. That makes the process more
appealing than during Webvan’s heyday, he says.
And because Instacart is partnering with grocers, which view
it as a means to bringing in new customers, it doesn’t have to worry about the
day-to-day operational risks such as spoiled tomatoes.
That dependency on grocers, however, is also a big risk for
the company. Instacart co-founder and Chief Executive Apoorva Mehta, 28 years
old, said the secret sauce of the company is in its dispatching software and
the exclusive agreements it reaches with grocers to integrate into their
register systems, helping them monitor inventory and speed up checkout.
Like Webvan did, Instacart has broader ambitions beyond
groceries. In the coming months, Mr. Mehta said he expects to add new
categories of goods to its one-hour delivery guarantee. That would put it more
in competition with general one-hour delivery services like startups Postmates
Inc. and WunWun Inc. Still, that business is hardly a sure thing. EBay Inc. has
scaled back the goals of its Now service, which dispatches couriers to
stores, acknowledging the financial difficulties of one-hour delivery.
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