Why UPS Invested In A Same-Day Delivery Startup

Inside A United Parcel Service Inc. Distribution Facility On Cyber Monday
United Parcel Service Inc. (UPS) drivers deliver packages on Cyber Monday in New York, U.S., on Monday, Nov. 30, 2015. Online sales on Cyber Monday may rise at least 18 percent from a year earlier, slower growth than during the holiday weekend, as consumers start their Internet shopping earlier, according to forecasts by International Business Machines Corp. Photographer: John Taggart/BloombergA
Photograph by John Taggart — Bloomberg via Getty Images

United Parcel Service has delivered a box full of cash to a startup that could one day be a competitor.

Same-day-delivery startup Deliv announced on Wednesday that it has raised $28 million in funding led by UPS’ venture-capital arm. Several other venture capital firms including Upfront Ventures and RPM Ventures also participated in the round.

Deliv was founded in 2012 to help local retailers, businesses, and e-commerce companies deliver products to customers on the same day orders come in. The company operates in 100 U.S. cities on behalf of 4,000 partners including major retailers Macy’s (M) and Best Buy (BBY).

Deliv is trying to gain traction in an increasingly important battleground for both e-commerce giants and brick-and-mortar stores. Over the years, e-commerce companies have grappled with getting products to customers’ homes more quickly to remain competitive.

Brick-and-mortar stores are ready for customers to walk in and shop anytime. Online retailers, however, must take orders and deliver them to customers through traditional logistics companies like UPS (UPS) or FedEx (FDX). That takes at least a day, depending on how much the customer is willing to pay.

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To level the playing field, Amazon (AMZN) has been among the most aggressive online retailers in offering same-day delivery. It currently offers its Prime customers free same-day delivery on orders of $35 or more in 16 metro areas. In the coming months, the company plans to expand its same-day delivery to others cities to make it easier for more customers to get their products the same day they’re ordered.

Same-day delivery is also of interest to traditional logistics companies. As Deliv’s current client list shows, large retailers are thinking of ways to get products to customers more quickly, and some logistics companies are looking to fill that void.

UPS is already offering same-day delivery for a few industries including healthcare and the replacement parts market for major manufacturing. Now, it’s clearly seeing even more promise.

For more, read: VCs Invested More in Space Startups Last Year Than in the Previous 15 Years Combined

“We see this as a growing segment of the industry, so one of the reasons we invested was to learn more about the market and customer requirements and see our investments as a way to gather information to make future decisions about our business,” UPS spokesman Steve Gaut told Fortune.

In other words, UPS is willing to give what could be a future competitor for same-day deliveries some cash to learn more about the emerging same-day delivery market. But UPS still has some questions about the near-term prospects.

“Today, for UPS, we don’t see the economics for same-day delivery for retail packages as currently fulfilled by Deliv,” Gaut said. “What we’re doing is seeking to better understand the marketplace so it will guide our decision-making.”

Indeed, it’s a tack UPS takes often with its venture capital arm, called the Strategic Enterprise Fund. In his interview with Fortune, Gaut said that UPS’ venture capital fund is used for researching startups that are already at work in their particular industries. He argued that it’s often a better use of resources to invest in a company rather than to test ideas internally.

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“We learn from them without having to make the internal investment,” he says.

Despite potentially letting a big competitor in on its business, Deliv doesn’t seem too concerned. In a statement, the company’s CEO Daphne Carmeli said that Deliv is “thrilled with this strong vote of confidence from the UPS Strategic Enterprise Fund.” Carmeli added that the investment round will help the company stay ahead of the “fast-growing, multibillion dollar same-day delivery market” by expanding to more U.S. cities.

Neither companies disclosed the amount of money UPS invested in Deliv.

Whether UPS will push into same-day delivery for retailers remains to be seen. In his interview with Fortune, Gaut says no decisions have yet been made.

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