We’re hearing from sources that Postmates, which is among a few companies that are seen as operating in the difficult on-demand space, is raising at least $100 million in a round led by Founders Fund. Sources stressed that the round has not closed, and that things may change over time.
Despite the challenges of working in an on-demand economy — which can sometimes lead to punishing gross margins and high operational costs — we’ve heard that Postmates is actually in okay shape. Some leaked financial documents earlier obtained by TechCrunch dated last year highlighted gross margins of around 20%. Postmates’ CEO Bastian Lehmann has said before that the company is on track to hit profitability in 2017 — which, at the time we reviewed the leaked documents, we also heard was on track.
The company is operating in an area of steep competition with the likes of DoorDash, which recently raised $127 million in a down round. That moment was somewhat of a microcosm of the financing environment at the time: DoorDash sought a valuation of $1 billion, but inevitably had to settle for something lower. However, in Postmates’ situation, we hear that this round is not a down round. The company last raised $80 million at a round that valued it at nearly $500 million.
For Postmates, this is obviously good news. While the company offers more general product delivery, it’s also clear that restaurant delivery is an aggressively growing space. It’s going to need capital to increasingly compete with those companies. If the company’s financials continue to be healthy, this offers quite a bit of overhead to grow and expand into new markets — including internationally — as well as come up and experiment with new business models that may be loss-leaders at first but prove to be successful in the long run.
Postmates has been busy. It’s working on getting its Postmates Plus unlimited delivery service — in which users pay a monthly fee to get free delivery on orders over $25 — ramped up. Postmates in June lowered the minimum order fee for users to get free delivery from $30 to $25 and expanded to several new markets. So on that front if the company is able to do that, it usually means one of two things: either it’s going well and something seems to be clicking, or the company needs to aggressively attract new users and tweak it in order to figure out the business model. Again, for this case, we hear from the sources it’s the former.
It also gives itself room to run aggressive marketing campaigns to attract new customers — like offering free delivery from Plus merchants on Labor Day — which can also help drive customer loyalty and keep them sticking around instead of jumping to other services. That kind of marketing can be costly, but in the end it can help attract a swath of new customers, and amid increasing competition Postmates has to show it can come up with unique customer acquisition strategies. All this helps keep customers to continue from the service, and if they start to pay more per order, shift to its subscription business model.
There’s another challenge for Postmates, too: keeping drivers and couriers to stick around with the service. You’ll often jump into an Uber, only to find that those drivers are also working for Lyft. In the case of Postmates, there are a lot of other courier options, and Postmates has to nail down the right operational costs in order to keep its drivers happy and its financials healthy. But for a business like Postmates, that can require scale — and having additional financing can help it attract new drivers and keep them around. Postmates still pays its couriers as 1099 workers instead of salaried W-2 workers, but if its business is palatable enough, that may attract workers who are looking for a more flexible schedule even with salaried roles available.
There are also other competitors like GrubHub and UberEats, not to mention some different approaches to food delivery like Sprig. But the company is plenty ambitious, with Lehmann saying last year that the company would expand into London. Indeed, however, many in Silicon Valley view on-demand companies across the board facing challenges, especially with the giant shadow of the $60-billion-plus company Uber above them all. Uber’s ambition is also not to be taken lightly, as this is a company that’s also working on self-driving vehicles.
The sum of this is that establishing growth for businesses like Postmates, which operate best at a large scale, is expensive and requires continued financing, either to continue experimenting with models or attract new customers. The on-demand space is clearly challenging — Uber, which has an obvious challenger in Lyft, alone lost $1.2 billion in the first half of the year, according to Bloomberg. We periodically get glimpses of how well the space is doing, and it appears that investor interest has yet to fade. Yet still, we have yet to see a company in the on-demand space go public.
Postmates declined to comment on the story.