VCs growing wary of on-de­mand de­liv­ery

Kuwait Times - - ANALYSIS -

Michael Moritz - chair­man of Se­quoiaCap­i­tal and one of the most suc­cess­ful ven­ture cap­i­tal­ists in his­tory - says a sim­ple vi­sion led him to in­vest hun­dreds of mil­lions of dol­lars in on­de­mand de­liv­ery star­tups. “The move­ment of goods and ser­vices and peo­ple, by eas­ier, more con­ve­nient means,” he said in an in­ter­view. “That’s a huge trend, en­abled by smart­phones.”

Led by Se­quoia and an­other blue-chip Sil­i­con Val­ley firm - Kleiner Perkins Cau­field & By­ers - ven­ture in­vestors have poured at least $9 bil­lion into 125 on-de­mand de­liv­ery com­pa­nies over the past decade, in­clud­ing $2.5 bil­lion this year, ac­cord­ing to a Reuters anal­y­sis of pub­licly avail­able data. But that tor­rent of money has slowed to a rel­a­tive trickle in the last half of this year, and many VCs have lost faith in a sec­tor that once seemed like the ob­vi­ous ex­ten­sion of the suc­cess of ride-ser­vices jug­ger­nauts such as Uber.

The bulk of this year’s in­vest­ment about $1.9 bil­lion - came in the first half of the year. Only $50 mil­lion has been in­vested so far in the fourth quar­ter, the Reuters anal­y­sis found. Sev­eral prom­i­nent Sil­i­con Val­ley ven­ture cap­i­tal­ists said in in­ter­views that they now be­lieve many de­liv­ery star­tups could fail, leav­ing in­vestors with big losses. “We looked at the en­tire in­dus­try and passed,” said Ben Narasin, of Can­vas Ven­tures. “There is more likely to be a big, pri­vate eq­uity-style roll up than a ven­turestyle out­come.”

Reuters an­a­lyzed in­vest­ment in on­de­mand de­liv­ery star­tups us­ing pub­licly avail­able data from the com­pa­nies, their back­ers and third-party web­sites in­clud­ing Crunch­base, PitchBook and Mat­terMark. The anal­y­sis likely missed some in­vest­ments be­cause pri­vate firms and their in­vestors do not al­ways dis­close fund­ing de­tails. De­liv­ery star­tups con­tinue to grap­ple with fierce com­pe­ti­tion, thin mar­gins and a host of op­er­at­ing chal­lenges that have de­fied easy so­lu­tions or economies of scale, ven­ture cap­i­tal­ists told Reuters. Wide­spread dis­count­ing and ar­ti­fi­cially low con­sumer prices have made on-de­mand de­liv­ery “a race to the bot­tom,” said Kleiner Perkins part­ner Brook Porter in an in­ter­view.

That firm has not in­vested as heav­ily or broadly in the sec­tor as Se­quoia, but has backed US star­tups DoorDash and In­stacart and China-based Me­ican. This year has seen high-pro­file fail­ures, in­clud­ing US meal de­liv­ery firm SpoonRocket, which went down in March, and Pep­perTap, an In­dian gro­cery de­liv­ery ser­vice backed by Se­quoia that folded in April. DoorDash, an­other of Moritz’s in­vest­ments, was able to close its lat­est ven­ture fund­ing round last March only by cut­ting the value of its share price by 16 per­cent, ac­cord­ing to data from CB In­sights.

The en­try of Uber last year into the de­liv­ery busi­ness with UberEats, for food, and UberRush, for pack­ages, prom­ises to make life more dif­fi­cult for smaller star­tups. Es­tab­lished lo­gis­tics com­pa­nies in­clud­ing Ama­zon and DHL are also ex­plor­ing lo­cal on-de­mand de­liv­ery. Se­quoia has backed at least 14 lo­cal de­liv­ery firms, among them four in the United States, five in China and four in In­dia. Se­quoia did not re­spond to Reuters re­quests for a re­sponse to ris­ing VC skep­ti­cism of de­liv­ery firms.

Venky Gane­san, of Menlo Ven­tures, said the sec­tor has no clear way to cut costs or boost rev­enue. “You can’t raise prices on con­sumers, and you can’t cut la­bor costs,” he said. “The core unit eco­nomics didn’t make sense.” Dal­ton Caldwell, a part­ner at Y Com­bi­na­tor - the pres­ti­gious tech in­cu­ba­tor that birthed a num­ber of de­liv­ery star­tups - was also skep­ti­cal, though he thought com­pa­nies with top-notch op­er­a­tional ca­pa­bil­i­ties could suc­ceed. Many de­liv­ery star­tups, he said, “make the as­sump­tion that once you get big­ger, things will get eas­ier, and that’s wrong. There is driver churn, op­er­a­tions peo­ple that cost money, more sup­port costs.”

Lo­cal De­liv­ery ‘Dash­ers’

DoorDash, founded in 2013 by four stu­dents in a Stan­ford Univer­sity dorm room, has raised nearly $200 mil­lion from top ven­ture firms. Fo­cus­ing on food and al­co­hol de­liv­ery, DoorDash has agree­ments with lo­cal restau­rants, in­clud­ing fran­chised out­lets, in dozens of ci­ties in the US and Canada. But Doordash still has to fig­ure out com­par­a­tively sim­ple chal­lenges - like how to eco­nom­i­cally de­liver piz­zas to the fifth floor of a col­lege dorm with no easy street ac­cess. “There is an op­por­tu­nity to re­de­fine lo­cal com­merce in ci­ties,” says DoorDash co-founder Stan­ley Tang. “But we have to fig­ure out, what are the op­er­a­tional chal­lenges, and then how we can scale it up.”

De­liv, a same-day small-pack­age ser­vice aimed at on­line shop­pers, uses a model sim­i­lar to Uber’s, with con­trac­tor driv­ers de­liv­er­ing pack­ages. The com­pany has ven­ture in­vestors and has also lured funds from United Par­cel Ser­vice and some of the largest US mall own­ers and op­er­a­tors, in­clud­ing Taub­man Cen­ters and Si­mon Prop­erty Group. Founder and CEO Daphne Carmeli says that be­cause De­liv does not main­tain ware­houses or a ve­hi­cle fleet, tra­di­tional couri­ers such as FedEx would be “chal­lenged” to match the startup’s low costs.

Uber, how­ever, doesn’t face those same chal­lenges. The com­pany has not said how much it has in­vested in UberEats or UberRush, or whether ei­ther turns a profit, and a spokesman de­clined to com­ment on those busi­nesses. But Uber does turn a profit on rides ser­vices in many ci­ties across the globe and has amassed a war chest of $15 bil­lion, pro­vid­ing am­ple re­sources to ex­pand into de­liv­ery. Carmeli is san­guine about the Uber chal­lenge. “Mov­ing peo­ple is fun­da­men­tally dif­fer­ent from mov­ing pack­ages,” she said. “Pre­dictabil­ity trumps speed.”

Ro­bots to the Res­cue?

Sil­i­con Val­ley veter­ans have long rec­og­nized the dif­fi­culty in the lo­cal de­liv­ery busi­ness. The on­line gro­cery firm We­b­van and the ur­ban de­liv­ery com­pany Kozmo were two of the high­est-pro­file flops in the late1990s dot-com boom. Tech­nol­ogy was sup­posed to make things dif­fer­ent this time, and smart­phone apps that con­nect cus­tomers with fleets of in­de­pen­dent driv­ers have helped. But the tech­nol­ogy that some be­lieve could trans­form the sec­tor - driver­less ve­hi­cles and side­walk ro­bots - re­mains far from a prac­ti­cal re­al­ity, leav­ing many star­tups with no clear path to in­no­vate their way to prof­itabil­ity any­time soon. —Reuters

Newspapers in English

Newspapers from Kuwait

© PressReader. All rights reserved.