Instacart’s Latest Cash Grab Shows Investors Are Hungry for Grocery Delivery
Grocery delivery service Instacart has raised $400 million in its latest financing round, the startup announced on Wednesday, as investors show more enthusiasm for a business model whose viability has long been in question.
San Francisco-based Instacart has struck deals with Whole Foods (WFM), Costco (COST), Target (TGT), Safeway, and about 130 other retailers to deliver groceries to consumers. Customers can order groceries from those stores through the Instacart app, and an Instacart driver delivers the food in as little as an hour.
The most recent financing round is Instacart’s largest and boosts its valuation from $2 billion to $3.4 billion, the company said. The round was led by Sequoia Capital, Instacart’s earliest venture capital investor. It also backed the defunct grocery delivery service Webvan, which went bust in the dot-com era.
Instacart’s resemblance to Webvan has put the startup under intense scrutiny since its launch in 2012. The struggles of other on-demand delivery services, such as meal delivery firm SpoonRocket, which shut down a year ago, and PepperTap, an Indian grocery service also backed by Sequoia that folded last April, have precipitated a slowdown in venture investing in the sector.
Instacart’s fresh funding signals a break from that trend. The company eased investor fears by reaching profitability in 25 of the 35 markets where it operates, said Apoorva Mehta, Instacart chief executive and founder. In new markets, Instacart expects to reach profitability in six months or less.
“Webvan was 20 years ago. Lots of things have changed,” Mehta said. “People today have broadband connections. People have smartphones.”
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Instacart has set itself apart from some of its peers by finding more ways to make money than on just delivery fees, a famously difficult model. It earns revenue from a fledgling business of coupon sales and promotions sponsored by brands such as Nestle, General Mills (GIS), Coca-Cola (KO), which are displayed in the app and target consumers based on shopping habits.
The company also has a subscription service, similar to Amazon Prime (AMZN), which accounts for about half of customer purchases, Mehta said. Mehta said the company will continue reducing delivery fees, critical to retaining customers, and eventually the largest portion of Instacart’s revenue will come from the coupon and promotion features.
Instacart has to date raised more than $600 million from investors including Andreessen Horowitz, Khosla Ventures and Whole Foods. The company says this year it will double its footprint to about 70 markets.