Billion Dollar Unicorns: Instacart Looks Shaky

According to Packaged Facts research firm, online spending on groceries was estimated to have generated about $23 billion in sales in 2014, a tiny 3.4% fraction of the total grocery spending of nearly $670 billion. Online grocery sales are however expected to quadruple to nearly $100 billion by 2019. It is a sector that is attracting big and small players. Billion Dollar Unicorn club member Instacart is attracting attention due to its unique business model.

Instacart’s Offerings

The San Francisco-based Instacart was founded in 2012 by former Amazon software engineer Apoorva Mehta and Max Mullen. It is a grocery delivery service that allows customers to browse the online catalogs of their favorite grocery stores like Whole Foods and Safeway and schedule the deliveries directly to their homes. The catalogs are laid out in a simple-to-browse grid, with a Pinterest-like UI.

However, unlike competitors AmazonFresh, FreshDirect, and Peapod, Instacart does not hold any inventory, warehouses, or even trucks. It enters into deals with local grocery stores to tap into their computer systems for inventory monitoring and even the use of their registers.

It uses contract workers to do its shopping and delivery. It even gives its customers the option of becoming part-time workers. It employs only around 300 full-time employees and has more than 7,000 contract employees and 1,200 part-time employees. It now serves 18 cities, including Atlanta, Austin, Boulder, Boston, Chicago, Denver, Houston, Indianapolis, L.A., Miami, Minneapolis, New York City, Philadelphia, Portland, San Francisco, San Jose, Seattle, and Washington, DC.

This is what sets it apart from its competitors. It also focuses on just groceries unlike Google, eBay, and Amazon, which offer a wider range of products.

However, Instacart faces challenges with this model.

It is barred from listing Trader Joe’s inventory on its app and website. Berkeley Bowl has warned its customers that Instacart or similar services could hurt the grocer’s reputation if people believe there is an affiliation. Some analysts say it doesn’t seem like a business model with staying power and in the absence of formal agreements with grocers, the service will remain pricey for customers and costly for Instacart.

Another challenge is the increasing competition in the space. Apart from the bigger companies, Instacart also has to face fresh competition from the likes of Postmates Inc. and Wunwun Inc., which are expanding their one-hour delivery services from stores and restaurants.

Instacart’s Financials

Instacart charges a delivery fee of around $3.99 to $5.99. It also earns revenues by marking up items at some stores and in fees from the stores. Its revenue in 2014 was $100 million, 10 times the revenue in 2013.

It has raised $274.8 million in five rounds from investors including Andreessen Horowitz, Canaan Partners, Comcast Ventures, Dragoneer Investment Group, Khosla Ventures, Kleiner Perkins Caufield & Byers, Sequoia Capital, SV Angel, Thrive Capital, and Valiant Capital. It raised $44 million in June 2014 in a round led by Andreessen Horowitz at a valuation of $400 million. Its latest round was held in December 2014 for $220 million when it was valued at around $2 billion.

The company plans to use the new capital for hiring more customer service representatives, business development employees, and operations teams for expansion into more cities. It is also looking at acquisitions. In August 2015, it made its first acquisition of mobile application startup Wedding Party, which allowed wedding guests and friends to contribute their own photos and videos to a shared, digital album. The terms of the deal were not disclosed, but the deal will add about half a dozen engineers to its team.

In September, it also hired its first CFO Ravi Gupta, who will be heading its corporate development efforts, and, more specifically, its acquisitions.

More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns. The term Unicorn was coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.

Looking For More Hands-On Advice?

I receive many emails from entrepreneurs who want to discuss their specific businesses. I’m very happy to discuss your situation during my free online 1M/1M Roundtables, held almost every Thursday. During each roundtable, up to five entrepreneurs can pitch their businesses and receive my immediate and straightforward feedback.

To give entrepreneurs all over the world access to Silicon Valley’s knowledge, methodology, and network, I founded the One Million by One Million (1M/1M) global virtual incubator. 1M/1M aims to nurture a million entrepreneurs to reach a million dollars each in annual revenue and beyond, thereby creating a trillion dollars in global GDP and ten million jobs.

For those still testing the waters of entrepreneurship, I’ve written my Entrepreneur Journeys book series to inform and inspire. My newest book, Billion Dollar Unicorns, is now available from Amazon.

If you are interested in entrepreneurship topics and my writings, you can follow me here. I hope to publish articles on LinkedIn every week.

Photo credit: Kristin Sloan/Flickr.com.