On demand companies, especially online food delivery services, are still considered by many VCs as a trendy, bubbly, and ambitious investment. After all, it was this industry that brought the internet revolution of the nineties to a hype and from there to a total crash during the dot-com tech market crisis of 2000. Yet, in 2017 some of the biggest private companies offer on-demand services (Uber, Airbnb), including food delivery startups such as Instacart, Delivery Hero, Blue Apron, Hello Fresh, and Postmates, each of whom has raised hundreds of millions to feed a generation of busy young professionals.
After a harsh previous year, the investors are back, hungry for the profitable and growing companies around the delivery space. Last August, UK based Deliveroo snatched $275 million in equity funding, while last month Instacart completed a huge round of $400 million.
It’s true that many companies in the space are experiencing heavy losses and are struggling hard to grow, a possible consequence of the low barrier of entry. M&A activity of food delivery startups has also seen a massive increase in recent years as smaller players are seeking a buyer, sometimes at any price. But, slowly and surely, some companies are surpassing the clutter with an effective modus operandi, as well as an excellent orchestration of technology, supply chain, marketing and food quality.
The startups are not alone in their quest to feed the world. They are surrounded by public competitors such as GrubHub, Just Eat, Yelp, and by other companies such as Amazon and Uber, that are now trying their hand at grocery and meal delivery.
The total food and grocery market in the U.S are currently $1.4 trillion a year. Currently addressed from that market on mobile is only 1.4%, so the growth potential is enormous. Zirra, a startup that has developed AI and machine learning technology to effectively analyze the private tech market, has already mapped the 5 highest valued automotive startups and built a list of the 10 highest valued UK startups. Now, Zirra is proud to present you with a brand new and updated list of the 10 highest valued delivery startups. Here are some insights we picked from the list:
*Food is just the beginning: Food is for some of the delivery startups what books were for Amazon – one category mastered before moving on to other categories. Instacart partnered with Target and Costco to offer various products beyond prepared food. Postmates couriers, who are more famous for meals delivery, are starting to deliver items from Apple Stores and will soon start to work with local groceries, allowing a deliverable grocery inventory of about 200 essential items.
*Silicon Valley is not the whole picture: delivery service is a territory and scale-based industry, which allows non-U.S players to thrive and even compete with pure American companies within their home market. According to Zirra, the biggest delivery startup is China-based Ele.me. Other leading startups, such as Delivery Hero and Hello Fresh, are Germany-based companies, and the latter expanded to the U.S, competing back to back with local services Blue Apron. Deliveroo, another startup listed in the top ten list, is based in London and now expanding outside of the British Isles into Asia and the Middle East. Historically, the biggest success stories of food delivery always grew outside Silicon Valley: GrubHub was founded in Chicago, Seamless in New York. Eat24 was founded in San Francisco and was acquired by local company Yelp, but it is a smaller player in the market.
*Learning from the mistakes of Webvan: Webvan, the grocery delivery company from the start of the millennium is the poster child of the dot-com bubble that led to the tech market crash 17 years ago. Its biggest mistake, perhaps, was its decision to build its infrastructure from scratch: buy a fleet of vans, hire full-time couriers and build huge warehouses. Today’s companies, such as Instacart and Postmates, are leveraging the sharing economy and the existing infrastructure of grocery stores to their service. They focus on customer service and delivery and use sophisticated algorithms to optimize the matching of orders with the couriers. Also, they focus on a customer base that is willing to pay more for convenience, in general, an audience of young professionals.
*Signs of profitability: The investors are flocking back to the on-demand economy, thanks to first signs of profitability that some of the mature companies show. Indeed, the vast majority of them are struggling with ever-growing expenditures and losses, but some on the top 10 list are talking about being profitable in at least some locations. Instacart announced only last month that the company is profitable in 25 of the 35 cities where it operates.
*Restaurant-less restaurants: Restaurant owners that offer only delivery service are realizing more and more that property costs for a kitchen are significantly lower than a restaurant as you don’t have to have a prime location or space for diners. Delivery companies, such as UK-based Deliveroo’s Roobox, are taking part in the trend to offer a delivery service for kitchen-only restaurants. A Kitchen-only attitude can solve problems like lunch rush hour for restaurants that serve large businesses, or for an expansion to new cities.
*Among the delivery startups we can find restaurant delivery services such as Delivery Hero, Doordash, Deliveroo, and Ele.me. Grocery delivery services such as Instacart, Dada and Postmates, and meal kit services such as BlueApron and Hello Fresh and Plated.
1. Ele.me
Shanghai-based Ele.me is, according to Zirra’s valuation algorithm, is the highest valued delivery service. Founded in 2009 and backed by Alibaba, Ele.me controls about a third of the Chinese food delivery market, according to Analysys International. It is grossing around $2-3 billion a year in a rapidly growing market that can expand as much as dozen of times within just a few years. After reporting that they will receive a further $1.25 billion in financing a year ago, Ele.me said it had a customer base of 50 million in 300 Chinese cities. [Read here for Zirra’s automatic Spotlight Report on Ele.me]
2. Instacart
Grocery shopping app Instacart raised a whopping $400 million a few weeks ago, a financial round led by Sequoia Capital. According to research firm Zirra, which uses A.I and machine learning technology to analyze private companies, Instacart’s valuation has reached at least $3.3 billion.
Instacart is a unique company in its offering and business model. First, the company is profitable in 25 of the 35 cities where it operates, which is not bad for an on-demand company that deals with grocery products, a low margin industry. Second, the company has developed three different channels of income: a double delivery fee from the shop and the customer and a promotion platform for coupons and branded products. The company isn’t profitable, but it’s growing quickly and shows profitability in some of its markets. According to sources close to Zirra, the gross profit per order can be as high as $7 in some of Instacart’s market.
This is done by using Instacart’s algorithms that compute the most efficient way to collect products and deliver them. According to data published by the company, in 2016 it increased efficiency by 20% and decreased late deliveries by 25%.
The big round is good news for the company after an extended period of bad PR. Some “1099 employees” said that the company treats them as full-time employees, demanding them to participate in workshops while paying them as if they were freelancers. Others blamed the company for making arbitrary salary cuts now and then, pointing to the fact that Instacart is struggling to be profitable, at least in some markets.
This caused the company to lay off dozens of employees, which may indicate aggressive hiring or a decrease in revenue. All of this has led Instacart to increase their prices. The $400 million round should calm the price hike a bit, opening a new window for Instacart to expand and attract many new customers and retailers in new locations. [Read here Zirra’s full report on Instacart]
3. Delivery Hero
Delivery Hero is the parent company of many popular brands in the online food order and delivery space. Globally the company has more than 30 brands, B2C and B2B. The company is headquartered in Berlin and runs out of 33 locations globally, partnering with over 271,000 restaurants around the world. For Delivery Hero. the number of processed orders in first half of 2016 grew like for like by 45% compared to the first half of 2015. This positive trend continued in July with year-over-year order growth of 55%. This was their fastest growth as a group since 2013. Revenues during the first half of 2016 grew by 53%, while Delivery Hero’s core business is operating profitably. According to Zirra, Delivery Hero’s valuation is estimated at $2.9 billion. If the company chooses to go public it can ask for a higher valuation, as much as $4.7 billion. Read here for Zirra’s full report on Delivery Hero
4. Deliveroo
Deliveroo sells and delivers restaurant meals to households or offices. It was founded by William Shu who moved from the US to the UK and didn’t find proper higher-end meals to order beyond junk food. After raising abruptly $275 million six months ago, a part of the on-demand investment spree culminated to $5.5 according to CB Insights; the British service became one of the highest valued worldwide on-demand startups. It became popular among customers who seek for a higher class meal, delivered directly from a premium restaurant. Despite this fact, most of the recommended offers in the homepage offer burgers, pizzas and pasta meals, which means that they are the most popular on the site.
The technology platform optimizes food ordering and delivery by integrating the web and mobile consumers with restaurant tablet-based point-of-sale order management terminals. Deliveroo promises its logistics optimization algorithm will make the business efficient for both sides, and in the end will allow the company to profit from a standard fee of 2.50 pounds per order. Already today the company boasts a few cities to be profitable but does not mention them by name. It said in the past that building a loyal customer base is the key to profitability: The drivers, who are paid by the hour, will deliver more meals. Shortly, the company wants to build more kitchens that restaurants could use exclusively for providing takeout.
The large financial round at August prized Deliveroo with a $1 billion valuation according to the press, but as for today, Zirra estimates the delivery service’s valuation between $1.2-$1.3 billion.
Deliveroo is expanding throughout Europe, and eastward towards Hong Kong, Singapore, and the United Arab Emirates. Even though, the company said it is unlikely to enter the US market, a decision that marks the overwhelming competition in the country and the fact that Deliveroo will not be the “Uber” of restaurant delivery service.
A leading meal delivery such as Deliveroo is dependent on yearly multi-million financial rounds. It has raised so far close to $500 million to maintain the fierce competition within a crowded market, to subsidize deliveries, and to expand to new territories. Deliveroo competes with incumbents such as UK-based Just Eat and Germany’s Delivery Hero, and other giants penetrating the food delivery business such as Uber and possibly Amazon. The latter has just tested its first drone delivery on UK soil last December.
The whole on-demand industry is on the hold, with smaller startups in the field having hard times to raise money. In recent months, several companies have shut down, while others have been acquired. Recently, Take Eat Easy filed for bankruptcy.
Also, the company will have to deal with potential legal actions and protests from drivers claiming to be underpaid. Recently, the Independent Workers Union IWGB has been pointing towards Deliveroo, claiming it underpays the drivers and that it over-hires drivers, creating a spare time with no work for the rest of them. There are many bodies who seek the same ruling last year that Uber drivers are employees and not contractors. [Read here for the automatic Spotlight Report on Deliveroo]
5. Dada
China-based Dada connects delivery workers with short-distance delivery jobs, backed by Yuri Milner’s DST, Sequoia, and Walmart. A year ago, JD.com, known as the “Chinese Amazon” merged its food delivery division with Dada. It helped Dada reach and deliver JD’s complete grocery offering around China.
6. Hello Fresh, 8. Blue Apron & 10. Plated
Blue Apron, Plated, and HelloFresh are among the most growing players in the meal kit market; a new industry turned into a booming trend. It offers busy millennials the opportunity to cook the food themselves but without the hustle of spending hours on it. Customers receive a box in the mail with all necessary ingredients and recipe cards estimating the preparation process to no more than 30-40 minutes. The cost is lower than ordering a prepared meal: about $8-$12 per meal, with a monthly or weekly subscription plans pushing it to the lower side. [Read here for the full spotlight report on HelloFresh]
The meal kits trend was the missing part of the chain of “real world products” apps like Uber, Lyft, Airbnb or TaskRabbit, that connected users with physical goods such as cars or rooms. But, Blue Apron or HelloFresh don’t see themselves as merely delivery services that bring food to customers. They see themselves as retailers aiming to fix the broken market of food, decreasing food waste from 10% as is today, to no more than 3%.
As the food delivery market is capital intensive, companies have raised hundreds of millions each to support expansion in the U.S and other markets. Germany-based HelloFresh has raised $367 million since 2012, while Blue Apron, it’s American nemesis, has raised $194 million since 2012. But new signs from the market show that it is about to slow down if it’s not already slowing down. Heavy losses, creaking logistics, and fierce competition are clouding over the companies’ endless appetite for growth. It is no wonder that Blue Apron and HelloFresh have each stopped talking about a possible IPO.
Earlier this month The Information reported that Blue Apron and HelloFresh weren’t able to keep up their breakneck growth at the end of last year and both saw a sharp decrease in growth in the second half of last year. To keep growing, the firms must convince customers that the convenience they provide outweighs the cost. Plated, another competitor, has increased at a slightly faster pace in the fourth quarter but it is a distant third in its market share.
As other on-demand startups such as Uber or Lyft are trying hard to do, Blue Apron and HelloFresh are struggling to reduce the cost of acquiring customers and to retain customers. The competition and scale demand high growth in customer acquisition, fueled by massive marketing campaigns and subsidies that make the price much more attractive. In Blue Apron’s case, the company runs about $800 million in total revenues but is struggling to improve profit margins.
The press rumors Blue Apron to be valued at $2 billion and that they wish to go public with a $3 billion valuation. However, Zirra, a company that analyzes private tech companies using AI and machine learning technology, values Blue Apron at $700-$800 million. The probability of an exit, such as going public, is low (40%-50%) according to the algorithms. If it chooses to make an exit, Zirra predicts a lower valuation that the press, with an estimate of $1.2-$1.3 billion.
HelloFresh has the same idea. Valued at $2.18 billion not a long time ago, Zirra now estimates its valuation at $1.1-$1.2 billion. The chances to make an exit are higher than Blue Apron’s, with a probability of around 60% in a window of 2-3 years. Think of the Seamless-Grubhub merger a few years ago that started a consolidation trend in the food delivery industry.
Blue Apron is suffering recently from growing criticism over its employment policy, and some have said it provides customers with small portions of food. This definitely happened due to an uninhibited push to grow at any price – possibly at the expense of quality of employees and ingredients.
Blue Apron and HelloFresh will now have to deal with two contradicting trends: the need to reduce costs, a trend that will necessary lead to surging prices, and the demand for cheaper meals or meals that provide higher quality. [Read here for the full spotlight report on HelloFresh, here for the automatic Spotlight Report on Blue Apron, and here for the report on Plated]
7. Postmates
Earlier this month restaurants and grocery delivery service Postmates announced it had grossed $250 million in the first quarter of 2017. Also, the company expects to be profitable at the end of 2017, or earlier, at an annualized run rate of $1 billion, and that the corresponding revenue run rate should be the same for 2018.
Originally a meal delivery service, Postmates is now turning to grocery delivery service. In January, the company launched an alcohol delivery service, partnering with 50 local liquor stores in LA and San Francisco. Based on that delivery model, Postmates now plans to work with corner shops to deliver up to 200 grocery items. [Read here for Postmates’ automatic Spotlight Report]
9. DoorDash
DoorDash is an on-demand restaurant delivery service that competes with Postmates, Munchery, and Sprigbox on the same audience. According to Zirra, the company is valued at $600 million. [Read here for DoorDash’s automatic Spotlight Report]
How does Zirra value private companies?
The Zirra Valuation Process uses AI and machine learning technology, and it involves both Intrinsic and Relative valuation algorithms. The intrinsic data includes revenue and expense estimations, traffic trajectories, investment history, and velocity, based on aggregated sources. In the relative analysis, data is compared and benchmarked with a database of thousands of companies with correlation to stage, space, size, and trajectory.
It then produces a map of competitors based on the data set, rated in accordance with the degree of direct competition, its size, threat, and proximity of the shared customer and partner base. Results are sent to relevant experts in our 450 strong expert community. Experts comment on both quantitative analytics (scores and metrics) and qualitative analytics (risks, opportunities, competitors).
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Data is extracted from 85 different data sources, regularly updated (daily to weekly). Sources include both open and licensed directories such as the company website, Bloomberg, Linkedin, SimilarWeb, and Adwords; It can be “derived data” such as Glassdoor reviews, consumer reviews, sentiment analysis from open web articles; or other data points such as academic researches, stock indexes, and macroeconomic parameters.
Why did we do it?
The private tech industry is one of the most secretive and mysterious – yet it is rich and growing rapidly. Those who are working in the startup ecosystem themselves, entrepreneurs, venture capitalists, reporters, are suffering from serious disinformation regarding the economy that surrounds them. The result of this panoply of secrets, taboos, and mysteries is enormous disinformation surrounding the startups market. Here at Zirra, we decided to do something about that. We have made it our mission to bring transparency to the private tech market.