How Apoorva Mehta hopes to build an Instacart empire with a promoted ad business

Instacart is one of the most well-known companies in what can be an extremely difficult on-demand delivery economy. It’s known for being one of the pioneers of a new age of online grocery delivery, especially in light of the previous failure of companies like Webvan, but it’s going to have a long uphill battle to profitability and sustainability.

Instacart CEO Apoorva Mehta, however, says he thinks the company can get to cash-flow positive in the next year, and that’s thanks to the company’s attempt at bringing in a diverse number of revenue streams instead of just relying on a cut of the transaction costs. He tried to hammer that point home on stage at TechCrunch Disrupt SF 2016 today.

“We have partnerships with hundreds of retailers who also do a revenue share with us, but we also have CPG companies such as Pepsi, Proctor & Gamble, who promote their products on Instacart,” Mehta said. “As a result of that we have a third source of revenue most people forget about. The key point here is that all on-demand companies do not look the same.”

There’s certainly logic to the argument. The existing promotion method for CPG companies is coupons, in which there’s little targeting and it’s not clear if it’s acquiring new customers. With analytics from Instacart, those companies could better target products against customers that might be more likely to buy those products, and in turn become loyal customers and keep driving additional revenue.

In 2014, the company raised additional financing at a valuation of $2 billion. But if you talk to Silicon Valley watchers, the company is not in a good place. On-demand companies in general can have punishingly low margins, and managing growth, securing new partnerships and finding a way to operate profitably or at least break-even is one of the most difficult parts of the space. Earlier this year, there were reports that Whole Foods was investing in the company.

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The company attempts to have a three-pronged revenue strategy: partnerships with grocery stores to drive additional traffic, advertising with consumer packaged goods companies, and then the fees from the customer. But in the next few years that CPG advertising may grow to be a huge portion of the company’s revenue. It begs the question as to whether the company, with those other two revenue streams, may be able to reduce the cost on the customer to zero.

Of course, that’d be a good thing for the customer — and create the opportunity for more deliveries. And as the company makes its deliveries more efficient, drivers can deliver more products, and then handle more orders per hour and theoretically make more money. That’s Mehta’s justification for a recent drop in wages.

“Four years ago when I started this company none of these things existed,” Mehta said on stage. “You couldn’t get groceries delivered in one hour, you couldn’t get them delivered from all grocery stores in a market. Today Instacart does this, as a result of that we grew to get to this point very, very fast. We went from having three markets to 15 — when you grow so fast obviously you’re going to have adjustments you’re going to have to make. When we think about the wage changes, the reason we had to do so, the wages made sense in three markets did’nt make sense for 15 markets.”

Instacart has a heavy presence in the Bay Area at least. The company secures Instacart-only express lanes for its couriers in order to shorten the delivery time for its products. Eventually, it wants to offer a “bypass checkout” option for its couriers, allowing its couriers to skip the register. This is all in an attempt to lower the time between orders, increasing the frequency of which it can sell products and take off a share of those purchases.

Instacart isn’t the only company in the on-demand space — nor is it one that’s facing challenges. But there are emerging competitors that are also raising large rounds of financing like Postmates, which is raising at least $100 million in a new round of financing that isn’t a down round, we reported earlier this month. Instacart launched out of Y Combinator in 2012.

Managing the partnership minefield may be increasingly complex, especially with Whole Foods looking to take a share of the company. It’s going to have to grapple with the optics of favoritism, which might frustrate other potential and existing partners as it would encourage shoppers to gravitate toward faster-operating grocery providers for the shortest delivery time. In the end, it may make sense for Instacart to exist within the empire of a large grocery provider, but we’ll have to see where the outcome lands.

Would Instacart sell to whole foods? Mehta says, at least for now, the answer is no:

“The reality is that Instacart works with lots of different grocery stores, it just doesn’t make sense for us to even think about selling to a grocery store, not to mention as a company what we want to achieve, the best path for us it to continue being an independent company,” he said.

We’ll see what the response is in a year or so, at least.