(An earlier version of this story ran online.)
Sequoia Capital partner Michael Moritz has a favorite disaster. Its name was Webvan, and it operated for less than two years during the dot-com bust and burned through $375 million from its initial public offering before going out of business in 2001. So Sequoia’s July 10 announcement that it’s investing $8 million in a San Francisco-based online grocery upstart, Instacart, rekindled some dormant traumas. “We had still been receiving outpatient therapy for our Webvan fiasco,” says Moritz, who’s joining the year-old company’s board. Still, with Instacart, he says, “There’s little danger of a relapse.”
In contrast to the high overhead of Webvan, which had its own refrigerated warehouses and a fleet of trucks, Instacart is built on a crowdsourcing model. Its 10 full-time employees, mostly engineers, work from a small office in San Francisco’s South Park neighborhood. Its app sends customer orders to about 200 independent Bay Area personal shoppers, who receive commissions based on the number of items and orders they deliver in their own vehicles. The app features detailed maps of local supermarkets and can direct the personal shoppers to specific aisles. Founder Apoorva Mehta says Instacart’s “secret sauce” is its fulfillment software, which allows the online retailer to combine orders placed at different times and fill them from different stores—supplementing frozen food from Trader Joe’s with fresh fruit from Whole Foods (WFM) and cereal from Costco (COST). Customers assemble their orders with lengthy drop-down menus on Instacart’s website or app.
That’s an advantage Instacart will need as it tries to use its new funding to expand to 10 U.S. cities by the end of next year. Peapod, FreshDirect, and supermarket chain Safeway (SWY) are well established in what could be a big part of the $600 billion U.S. grocery business, and the field is about to get crowded. Amazon.com (AMZN) is expanding its AmazonFresh service to Los Angeles and San Francisco and is crafting a national rollout, say three people familiar with its plans who aren’t authorized to discuss them publicly. Wal-Mart Stores (WMT) is testing a delivery service in the San Jose and San Francisco metro areas.
Instacart’s Mehta says he can expand quickly to other cities because he doesn’t have to build infrastructure. The 26-year-old Toronto-born engineer spent two and a half years working in Amazon’s supply-chain division and witnessed the challenges of storing and shipping perishables. “How you keep tomatoes at the right temperature and prevent them from spoiling is actually a very difficult problem,” says Mehta. “The mechanics of perishable inventory are very different from delivering televisions.”
It’s difficult to find dependable shopping couriers who can master Instacart’s app and also reliably pick the ripest avocado or the milk carton least likely to spoil. Customers will pay a premium for that kind of service, says Linda Collins, who complements her day job as a cashier at Trader Joe’s by working about 30 hours a week for Instacart, stuffing grocery bags into the back of her red Mini Cooper. “People are very generous. They all seem to love the service,” says Collins, adding that Instacart delivers her more than $500 a week in commission and tips.
While some stores that Instacart shoppers frequent have competing online services, grocery operators should welcome the business, says Bill Bishop, an analyst at research firm Brick Meets Click. “Everybody is fighting tooth and nail to get sales today, so any source of incremental business to them is a plus, and they don’t have to pay markdown dollars or cut their prices to get it,” he says.
Instacart’s greatest challenge may be the very crowdsourcing model that limits its expenses and risk. The company will have to ensure quality customer service even though it can’t completely control factors such as the reliability of its contractors or the freshness of its food. Eventually it’ll also have to match prices with expert cost-cutters such as Amazon and Wal-Mart. Moritz says the business opportunity is big enough for more than a couple of players. “The one thing that we got extremely right about the Webvan investment was that there would be huge consumer demand for home delivery of groceries,” he says. “It’s just taken time for technology to finally catch up.”