Grocery delivery startup Instacart recently closed a $400 million Series D round of funding at a valuation of $3.4 billion. Now, the company is putting that capital to work by accelerating its expansion across the U.S., and offering free Instacart Express memberships to entice new users wherever it goes.
According to the company’s vice president of product, Elliot Shmukler, the company is operating in 41 U.S. markets today and is launching into four new markets this week, including Detroit, Las Vegas, Columbus, Ohio and across Texas’ Rio Grande Valley. New customers in Texas and the Midwest will be able to try its Instacart Express membership free for one year, he said.
Typical Instacart Express members use the service 4-5 times per month and spend $450 per month on groceries and deliveries through the platform, the company claims. The geographic push and Instacart Express trials will require the company to hire at least 1,000 more shoppers to fulfill orders in the new markets, Shmukler said.
Overall, Instacart aims to make its service available to 80 percent of U.S. households by 2018. When news of Instacart’s latest funding round broke, some Silicon Valley observers cried “bubble,” and compared the company to Webvan, the dot-com-era e-grocery that raised $800 million and went public before eventually going bankrupt.
The two companies both had Sequoia Capital as an investor and Michael Moritz as a board member. But that’s about where the likeness stops. Moritz has spoken frequently about the reasons why Instacart’s model works today and Webvan’s didn’t back then.
For one, Webvan failed to become profitable in one market before proceeding to new ones, the investor has noted. Plus, Webvan’s timing was early. Home internet use was growing in the U.S., but e-commerce was barely nascent and mobile commerce still more than a decade away when it first started. Finally, Webvan fulfilled orders for groceries from its own warehouses, which proved more costly than taking advantage of other groceries’ infrastructure, as Instacart does.
It’s still fair to ask if Instacart’s latest funding round is excessive, and how the company could possibly deliver returns to investors at such a high valuation. Notably, the Instacart Series D looks outsized compared to on-demand delivery startup Postmates, which raised $140 million at a valuation over $600 million last year.
Postmates, which started before Instacart, has been delivering food from restaurants, as well as groceries, to customers’ doors. Instacart is focused solely on groceries. Still, the businesses look alike in other ways, with both companies relying on 1099 workers (with vehicles) to fetch and make deliveries to their customers’ doors. And both companies make a chunk of their revenue from delivery fees.
We asked Instacart’s chief of operations and chief financial officer Ravi Gupta why Instacart needs all that scratch, and how the company plans to generate good returns for investors. A condensed version of that interview follows below.
Why did you raise such a massive round of funding?
We really want to expand aggressively, blanketing the country with Instacart. We have found an economic model that works, and now we want the majority of the country to be able to use our service.
We’ve never done marketing in the history of the company and only brought on a CMO recently. So we will also invest in telling people about the product and service. And we will be investing in our product, building on the lead that we have already.
How did you convince investors to back you at this level?
There’s a lot beneath the surface here that is exciting to us and to our investors. This market is enormous, as you know. Our investors see both a big opportunity, and a big prize. There was so much demand [for equity in Instacart]…we didn’t even have to do a road show.
Were you profitable prior to closing the Series D?
We make money both on a gross margin basis and a contribution margin basis.
So, if you take out things like your corporate real estate and engineering salaries, you’re profitable?
How do you make money?
This is a good question. People don’t always realize how we do this. Whenever a customer places an order on Instacart for groceries delivered through a retailer, we generate multiple streams of revenue.
First, the retailers pay us a revenue share. They use Instacart to offer something their customers want, and expect, which is delivery. This is of real value to people. But we also generate incremental sales for our grocery partners, which is why they are willing to share a piece of revenue with us.
We also generate a fee for the delivery, which is the obvious piece of it.
The third, and fastest-growing piece of our business comes from consumer packaged goods, brands that have a chance to uniquely reach customers at the point of purchase through Instacart.
Do all the stores you work with pay Instacart a share of sales?
We have 135 grocery partners from small local favorites like Bi-Rite or Molly Stone’s here in San Francisco to Whole Foods and Costco. Eighty percent of the groceries have a revenue share arrangement with us. We drive incremental sales for them. We help them give their customers something of real value, and that customers just expect these days, which is delivery. And when they work with us to offer delivery they can start doing it within days without a huge capital outlay.
What would you say are Instacart’s biggest expenses?
Our biggest cost is payment to our shoppers, meaning the labor cost. In addition to that, we factor in credit card fees, transactional costs, insurance we have to pay which is worker’s comp and auto insurance, Costco memberships we buy and appeasement costs, which are when someone does not get exactly what they wanted and we work to make that right.
Ultimately, how are you going to give VCs those blockbuster returns they look for in a deal?
We have a data science and engineering team working to make sure our delivery is super efficient. That’s powerful and improving all the time. And we’ve been really thoughtful about choosing the markets we’re in. We know this works, absolutely, throughout the country. Not just the top 10 most populous cities. The funding allows us to go out, take the economic model we built and as we scale we make more money. It’s really straightforward.