By Arjun Sondhi
Instacart is a platform business that offers on-demand and same day delivery of groceries in hundreds of cities across 20 states in the US.
This is the story of how Apoorva Mehta, a serial entrepreneur with over 20 startups, was able to build a grocery-shopping app that became a $3 billion powerhouse that is dominating the food delivery market in just 3 years.
Apoorva Mehta founded Instacart in 2012; however leading up to that point his story had been a clear case of uncertainty, rejection and failed ventures, similar to what the majority of entrepreneurs and start up founders’ experience.
Having had a keen interest in technology from a young age when growing up in Canada, after graduating from the University of Waterloo with a degree in electrical engineering Mehta began his career in the technology industry. Mehta spent a number of years in positions at Qualcomm and Blackberry before taking a position at Amazon as a supply chain engineer. However after feeling unsatisfied in his role at amazon Mehta decided to take a risk and leave Amazon without having another job lined up.
Mehta spent the next 2 years building his own companies with 20 failed tech start-up attempts. These included an ad network for social gaming and a social network for lawyers among a number of other ventures. However Mehta states that he had so many failed ventures not due to the fact that he couldn’t find a product that worked but instead realised that he didn’t care about these products. Therefore setting about to build a company that had a meaningful impact in the world Mehta came up with the idea for Instacart. Based on his frustrations of the day-to-day problems he had with getting his groceries in his neighbourhood, with everything being done online in today’s society Mehta recognised that buying groceries was still being done in an archaic way. Therefore this provided the opportunity for technology to disrupt the market through an on on-demand grocery delivery service.
Being the Uber of the grocery industry, Instacart quickly gained traction, however during the early stages of the company Mehta still had a number of barriers to overcome, beginning with Instacart’s peculiar acceptance into famous start up incubator, Y-Combinator. After receiving numerous rejections, Instacart was finally offered a place in Y-Combinator months after the start of the programme, something that had never happened before. Instacart offer of a place on the programme came from Mehta using Instacart to send one of YC’s partners a 6-pack of beers using the Instacart platform. However after being accepted into the Y-Combinator and given access to a network of world leading entrepreneurs and venture capitalists Instacart went through a number of large funding rounds involving leading venture capital firms such as Sequoia Capital, Khosla Ventures and Andreessen Horowitz. Most recently its series D round of funding $400 million in 2017, valuing the company at $3.4 billion, which is being used to rapidly scale the business across the US to the point where they are not operating in 20 states.
Even though Instacart isn’t a completely new idea, as Webvan a company based on the same concept of online grocery delivery platform failed during the .com bubble. However following the emergence of the sharing economy, Instacart operates as a crowd sourced marketplace model, uses its platform to connect users to personal shoppers who shop for ordered items and deliver them to the customers doorstep. Through using such a marketplace model Instacart is easily scalable as it has no expensive infrastructure such as warehouses, a differentiating factor when compared to Webvan as Webvan used to store its own groceries in warehouses. Whereas Instacart model connects users to shoppers who shop in established grocery and retail stores.
Having such a business model means that Instacart revenue model currently consists of 3 separate revenue streams. Fees directly from customers such as delivery fees or monthly fees depending on what package each individual customer uses, whether a one-off order or a monthly Instacart subscription. A revenue sharing partnership has also been developed with a number of retailers as the platform generates incremental sales for retailers. Grocery retailers are paying a volume related fee through increasing the in-store prices by 15% for orders through Instacart from which the mark up price goes to Instacart. Therefore the platform provides a valuable tool for grocery retailers as it allows them to increase footfall through e-commerce without having the issues of developing the infrastructure and program in-house. The final revenue stream and the company’s fastest growing income source is the promotion of consumer-packaged goods on the platform. With Instacart rapidly growing across the US partners are paying to have their products promoted on the Instacart platform as it is providing a direct communication and marketing for companies.
Like so many other startups the main questions raised around Instacart is their ability to become profitable. As yes it is clear that they have scaled at a rapid rate but have been heavily backed by venture capital and outside investment, therefore does the company have the business model in place to be able to become profitable? Instacart recently claimed it is unit economic profitable in ten of its markets, through making money on average orders in a number of cities with the company making $6.96 per order in Atlanta and $4.29 per order in Chicago. However only time will tell whether this low-margin grocery business has the ability and business model to become profitable.
1) Founders motivations
It is widely recognised in the start up ecosystem that being an entrepreneur and start up founder requires an individual with certain characteristics such as resilience as in the world of entrepreneurship founders will experience numerous amounts of rejection and failure, as highlighted in Apoorva Mehta journey with 20 failed business ventures before founding Instacart. However the key learning point from Mehta journey is the importance of a founders intrinsic motivations. As it was not that Mehta couldn’t find a successful business idea but that he didn’t care about those businesses, which highlights the importance of having a passion for your business venture as an start up founder. As people may want to start their own companies for the glitz and the glam that is associated with being an entrepreneur, however that is a false representation of the life on an entrepreneur. With the constant rejection and failure an entrepreneur needs to be truly committed to their venture to stand any chance of the company becoming successful. Also starting your own company is going to take a large majority of your time therefore if you do not care about your business venture will that really be a fulfilling experience?
2) Adding value to all sides of the market
The reason that Instacart has been able to scale so quickly and is on their way to becoming profitable is because they have recognised an issue with the market but more importantly developed a solution that provides benefits for all sides of the market. As not only does it provide an on-demand service for users, extra income/employment opportunities for shoppers but also a tool to generate incremental sales for grocery retailers.