Search
Delfina_SY-18
Food from Pizzeria Delfina, one of the many restaurants from which Postmates delivers in San Francisco.  Courtesy of Postmates

Why on-demand delivery startup Postmates really raised $80 million

Jun 25, 2015

On-demand delivery service Postmates has recently inked deals with major retailers like Chipotle, Starbucks, and Apple to deliver their products to customers. But it's only the beginning for the three-year-old startup.

On Thursday, Postmates revealed it has closed a new $80 million funding round at a $400 million valuation to fuel some ambitious expansion plans. Though it's mostly known as a food delivery service, Postmates lets customers order products from a wide variety of partner merchants through its app and acts as a personal shopping service for people too busy to visit a store themselves.

In an interview with Fortune, co-founder and CEO Bastian Lehmann said that partnerships like Starbucks and Apple are a taste of what's the come. One of the company's biggest priorities for its additional funding is to expand into more categories other than prepared food, hence the Apple Store deal.

In December, it also launched a tool for merchants to link their website to Postmates' dispatch system. The goal is to entice more merchants to use its service for delivery. At launch, it had already partnered with brands like Everlane and Threadflip, among others.

But why does Postmates really want to branch out of prepared food delivery?

It has to do with its own operations, it turns out. While delivering meals is a fantastic business — high frequency with plenty of partner merchants. — the demand has very clearly defined peaks and troughs throughout the day, Lehmann explained. People tend to order from restaurants at lunch and dinner mostly, creating periods of high-demand time. To combat that, Postmates raised delivery fees during peak times to encourage customers to eat during slower periods of the day.

"There is only so much you can do to get someone to buy a food item in the afternoon,” Lehmann said.

And that's where the other categories come in. As Lehmann explained, the cycles of demand for food at lunch and dinnertime is what Postmates calls the "demand curve" of prepared food. Other categories have demand curves that look different. For example, people tend to do their online shopping in the afternoon, Lehmann said, while the demand for coffee would likely be concentrated in the morning.

If Postmates can add a sufficiently diverse range of product categories, it can spread it operations more evenly throughout the day. Eventually, this could have an effect on delivery fees, something Postmates is already working on. It recently introduced an option for customers in a few cities to have food from a limited selection of restaurants delivered within an hour for a $5 fee. The company also plans to roll out a new service in August that will charge only $1 fee for certain foods and other items in dense delivery areas.

The layer of demand curves, if you will, could also help with another challenge most on-demand startups are grappling with: labor costs.

Postmates currently uses contract workers for deliveries, just like ride-hailing companies Uber and Lyft, and home cleaning startup Homejoy. Postmates doesn't have plans to convert its contractors into employees anytime soon, according to Lehmann. The question of whether these services should be using contract workers to lower labor costs has been around for as long as these companies have existed. But the debate has been reinvigorated by a non-binding ruling last week by the California Labor Commission that a former Uber driver should have been classified as an employee and is entitled to reimbursement for her driving expenses.

But while he's not planning on steering away from contract workers, Lehmann says he and his team are constantly looking at how the company could make changes to how its workforce is paid. "We’re not here on autopilot mode, we’re very aware of what’s going on," he said.

Smoothing out the demand curve would help Postmates more efficiently manage its couriers — and their costs — in the event it had to convert them to employees, Lehmann said.

So what is Postmates not planning to do with its new funding?

Acquisitions, for one, are not on the menu, though if an opportunity does come along it will consider it, Lehmann said. An IPO is also not in the foreseeable future as the company is focused on its current priorities, he added.

Tiger Global Management led the round, and partner Lee Fixel will join the company's board. Postmates' total funding is now $138 million.

All products and services featured are based solely on editorial selection. FORTUNE may receive compensation for some links to products and services on this website.

Quotes delayed at least 15 minutes. Market data provided by Interactive Data. ETF and Mutual Fund data provided by Morningstar, Inc. Dow Jones Terms & Conditions: http://www.djindexes.com/mdsidx/html/tandc/indexestandcs.html. S&P Index data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Terms & Conditions. Powered and implemented by Interactive Data Managed Solutions