Instacart’s comedown speaks volumes about the plight of digital retail

Pandemic-driven shifts in lifestyle, 15-minute delivery windows, and the rise of influencers are all causing consumer demands to evolve at an unprecedented pace. “Changing consumer demand combined with an inability to calibrate their supply chains to meet that demand is at the heart of what’s going on in retail,” Matt Nichols, a partner at Commerce Ventures, tells me. “It’s challenging to adjust to those changing demands fast enough.”

As a case study, consider Instacart, the grocery-delivery company and the most prominent U.S. unicorn in the space. Founded in 2012, Instacart has raised $2.9 billion in the past decade, including a $265 million haul in March 2021 that valued the company at $39 billion. But that was when pandemic shut-ins were still relying on delivery services for food and goods. This year, shoppers have been itching to shake off their cabin fever and get back out into brick-and-mortar stores.

Meanwhile, inflation is squeezing the profit margins of retailers, another unpleasant effect of the pandemic. To curb inflation, central banks raise interest rates, which can in turn trigger a recession. And recessions are hard on consumer spending: Even the whiff of one can send consumer confidence diving.

This perfect storm is hitting e-commerce in general and Instacart in particular. One year after reaching that $39 billion valuation, Instacart cut that figure to $24 billion, saying “we are not immune to the market turbulence.” Last week, investor Capital Group dropped its valuation of Instacart even further: to $14.5 billion. That blow came two months after Instacart confidentially filed a draft S-1.

Instacart reportedly has more than $1 billion in cash, so it’s not in a rush to go public, but it’s also facing more competition from Uber and Doordash—which have seen their own stocks slide—and large grocery chains making their own deliveries. Instacart has also undergone several C-suite changes, naming a new CEO, CFO, and COO in the past two years, as well as a new president who stepped down after only three months.

But the bigger challenges facing Instacart are ones sweeping the digital-retail industry. Walmart underscored the toll taken on retail sales, warning that its operating profit could fall 13% this year as inflation and recession fears pressure shoppers to curtail purchases. Unicorns that recently went public—like Allbirds, Stitch Fix, and Warby Parker—have lost more than two thirds of their value this year. Klarna, a Swedish buy-now-pay-later company, also slashed its valuation this month to $6.7 billion from $45.6 billion a year ago.

Digital retail startups aren’t immune to the fallout. Funding in U.S. retail-tech startups fell to $13.2 billion in the second quarter, down 56% from the same quarter in 2021, CB Insights said in a report last week. The decline was even worse for e-commerce startups (down 71%) and food and meal delivery companies (down 65%).

If there’s a bright spot in retail financing, it’s in technology that manages store inventories and sales. Funding in this sector was down 19% from last year, but the amount has increased steadily for the past two quarters. That suggests investors are shifting their attention and dollars away from capital intensive companies like delivery apps and online retailers to makers of software that enables automated fulfillment or frictionless checkout.

Among retail-management software startups that CB Insights said secured funding last quarter, the biggest U.S. rounds went to Faire, a wholesale marketplace for independent stores that raised $416 million at a $12.6 billion valuation; Wonder, a food-delivery platform from Jet.com founder Marc Lore that raised $350 million at a $3.5 billion valuation; and SpotOn, a point-of-sale software maker that raised $300 million with a $3.6 billion valuation.

“There’s still interest in technologies that can solve core challenges that retailers and brands are facing,” Nichols says. “The realization among venture investors is that retail is a hard business to make money right now, but you can still do it.”

Still, those investors will probably need to remain patient for several more quarters because exit opportunities for digital retail are especially scarce. Not a single U.S. retail startup went public in the second quarter (with only two in the first), while the number of M&A deals fell to 51 from 77 in the year-ago period, according to CB Insights’ data.

Nichols expects that slowdown in both IPOs and M&As to continue for another 12 to 18 months in retail. Once those markets recover, it’s likely to be the startups developing retail-management software that find the earliest exits. For many others, they will still need to adjust downward the high valuation they were awarded in better times.

“The biggest challenge for startups today is not the business opportunity in front of them. It’s just the disruption in the capital markets, this massive change in investor expectations,” Nichols says. “I think it’s going to be a painful few years as that new reality sets in. For companies with lower growth rates that raised at high valuations, it’s going to take a while to get back.”

Kevin Kelleher
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Jackson Fordyce curated the deals section of today’s newsletter.

VENTURE DEALS

- Acronis, a Schaffhausen, Switzerland and Singapore-based cybersecurity provider, raised $250 million in funding from BlackRock and others.

- Enko, a Mystic, Conn.-based crop health company, raised $70 million in Series C funding led by Nufarm. 

- BridGene, a San Jose-based drug discovery company, raised $38.5 million in Series B funding. Lapam Capital, Junson Capital, and Dyee Capital invested in the round.  

- PriceLabs, a Chicago-based pricing and revenue management solutions provider for the short-term rental industry, raised $30 million in funding from Summit Partners. 

- Switchboard, a remote-based cloud coworking space, raised $25 million in Series A funding. Icon Ventures led the round and was joined by investors including Sequoia Capital, XYZ Venture Capital, and Spark Capital. 

- Genesis Global, a Miami-based application development platform for financial markets organizations, raised $20 million in funding. Bank of America, BNY Mellon, and Citi invested in the round.  

- Huue, a Berkeley, Calif.-based bio-based dyes company, raised $14.6 million in Series A funding. Material Impact led the round and was joined by investors including HSBC Asset Management’s Climate Tech VC, SOSV’s IndieBio, iGlobe, Nobel prize winner and CRISPR Technology inventor Jennifer Doudna, and professor Jamie Cate. 

- Paragon, a Los Angeles-based integration platform for SaaS apps, raised $13 million in Series A funding. Inspired Capital led the round and was joined by investors including FundersClub and Garuda Ventures. 

- Finwave Semiconductor, a Waltham, Mass.-based transistor design and development company $12.2 million in Series A funding. Fine Structure Ventures led the round and was joined by investors including Citta Capital, Soitec, Safar Partners, and Alumni Ventures.

- Holey Grail, a Hanalei, Hawaii-based donut company, raised $7.5 million in Series A funding co-led by Collaborative Fund’s Craig Shapiro and Lee Fixel.

- Condense, a Bristol, U.K.-based live events hosting company in the metaverse, raised $4.5 million in funding. LocalGlobe, 7percent Ventures, and Deeptech Labs led the round and were joined by other angels. 

- Kona, a remote-based employee experience platform for remote teams, raised $4 million in seed funding. Unusual Ventures led the round and was joined by investors including Evolutionary Ventures, 2.12 Angels, and other angels. 

- Trustless Media, a Brooklyn, N.Y.-based Web3 media company, raised $3.25 million in seed funding. Alameda Research, Ava Labs, Red DAO founding member Megan Kaspar, and others invested in the round.

- Gatenox, a London-based corporate client verified credentials provider, raised $2.5 million in seed funding. C3 VC Fund, and Aleph Zero co-founders Matthew Niemerg and Antoni Zolciak invested in the round.  

- Coinfeeds, a San Francisco-based metrics and insights company from crypto socials, raised $2 million in seed funding co-led by FTX Ventures, Coinbase Ventures, Protocol Labs, Huobi Ventures, and Y Combinator. 

- Remble, a Tulsa, Okla.-based relationship health and wellness platform, raised $1.4 million in pre-seed funding led by Atento Capital. 

PRIVATE EQUITY

- Advent International invested over €250 million ($253.60 million) in Seedtag, a Madrid-based contextual advertising company.

- Brightstar Capital Partners agreed to acquire WindsorONE, a Petaluma, Calif.-based manufacturer of trim boards, molding, shiplap, and other fabricated wood products for interior and exterior applications. Financial terms were not disclosed.

- Monarch House, backed by Venn Growth Partners and BDC Capital, acquired 1to1 Therapy Services, a Markham, Ontario-based therapy center. Financial terms were not disclosed. 

- PestCo Holdings, a Thompson Street Capital Partners portfolio company, acquired Alliance Commercial Pest Control, a Tinton Falls, N.J.-based commercial and residential pest control provider. Financial terms were not disclosed. 

- Uni-Select, backed by Birch Hill, agreed to acquire Maslack, a Sudbury, Ontario-based automotive parts supplier. Financial terms were not disclosed.

- WindRose Health Investors recapitalized RevHealth, a Morristown, N.J.-based healthcare communications provider. Financial terms were not disclosed. 

OTHER

- BAI Communications acquired ZenFi, a Morristown, N.J.-based digital infrastructure firm. Financial terms were not disclosed.

- ClaimLogiq acquired SyTrue, a Stateline, Nev.-based health care natural language processing technology company. Financial terms were not disclosed. 

- Exo acquired Medo, an Edmonton-based artificial intelligence technology developer. Financial terms were not disclosed. 

- HUMAN Security, a New York-based cybersecurity company focused on bot attacks and fraud, and PerimeterX, a San Mateo, Calif.-based application protection company, agreed to a merger. Financial terms were not disclosed.

- Integrity Marketing Group agreed to acquire Annexus, a Scottsdale, Ariz.-based insurance and financial product design and distribution company. Financial terms were not disclosed. 

- OpenGov acquired Cartegraph, a Dubuque, Iowa-based cloud software company for public agency operations and infrastructure asset management. Financial terms were not disclosed. 

SPAC

- OMS Group, a Shah Alam, Malaysia-based underwater cable installation company, is weighing an initial public offering for as much as $300 million in Kuala Lumpur as soon as next year, according to Bloomberg.  

FUNDS + FUNDS OF FUNDS

- Spectrum Equity, a Boston and San Francisco-based growth equity firm, raised $2 billion for a fund focused on software and data services companies across industries. 

- Genoa Ventures, a San Francisco-based venture capital firm, raised $84 million for its second fund focused on research tools, diagnostics, Agri/Food Bio, and industrial bio startups. 

- Concept Ventures, a London-based venture capital firm, raised £50 million ($60.79 million) for a fund focused on pre-seed stage investments. 

PEOPLE

- 3i, a London-based investment firm, hired Trevor Russo as vice president. Formerly, he was with Ironwood Capital. 

- SpringTide, a Cambridge, Salt Lake City, and San Francisco-based venture capital firm, promoted Brad Otto to principal.