On the way to $220M in funding, Instacart quietly changed its business model

In its early days, grocery store delivery startup Instacart made its money two ways: Through delivery fees and product markups. It charged customers more for individual groceries than their in-store price.

But in the last year, the company shifted its revenue strategy. It is allowing some grocery store partners to price their own goods on Instacart. In return, the grocers pay Instacart a fee to service their locations.  It explains why for some grocers the products cost the same on Instacart as they do in store, but for others the price is more (or, confusingly, less).

“We don’t want to be in the pricing game,” Instacart’s head of business Nilam Ganenthiran told me. “There’s exceptions, but that’s generally true. Retailers outsource their e-commerce to us for a fee.”

Although there’s variations in how each partnership is structured, Ganenthiran said the fee, charged to grocery store retailers, is now the company’s “primary model.”

Instacart never made any official announcements about its change in business strategy. I didn’t find out until questioning Ganenthiran about its profit margins. As a result, earlier this week when Instacart received its spate of news coverage over its $220 million funding and reported $2 billion valuation, some outlets misreported Instacart’s business model.

“There has been a perception of the markup model being our primary economic engine due to how we started 2.5 years ago,” Ganenthiran told me. “Our model actually has been evolving.”

Most publications didn’t realize that. The Wall Street Journal went so far as to write an additional story, separate from its funding brief, breaking down a potential Instacart profit on a typical grocery store transaction. The numbers didn’t look good, suggesting Instacart might make as low as $1.40 on an order of 15 basic items.

But since Instacart’s revenue isn’t primarily tied to product markups anymore, that may not be representative of its profit margins.

Instacart wouldn’t tell me whether its grocery store partner fee is calculated per item, per order, per customer, per month, or some other variant. It also wouldn’t disclose how much that fee is. Neither would Whole Foods when I reached out to them for comment, and Safeway didn’t respond. Without knowing what grocery stores are paying Instacart, it’s hard to deduce the company’s potential profit margins on each delivery. “There’s different strategies with different partners,” Ganenthiran explained.

In theory, it’s much smarter for Instacart to charge grocery stores a fee than for it to eke out profits on product markups. That kind of partnership makes grocery stores more amenable to improving Instacart’s efficiency (like offering the company its own personal checkout line). It also shields Instacart from the risk of variable food prices. Ganenthiran said, “Most grocers are past the tipping point where they understand consumers want this service.”

Food delivery startup Instacart raises $220M, now valued at $2B

The market for grocery services that deliver food to your door — a market that for many investors is still synonymous with the worst excesses of the tech bubble of the late 1990s — seems to be heating up: Instacart, which raised a $44-million financing round just a few months ago, has apparently closed a second round worth more than $200 million that values the two-year-old company at close to $2 billion.

Re/code disclosed the news of the new financing on Tuesday, based on a filing that the company made with the U.S. securities regulator, and said that sources believe the financing round — which is being led by Kleiner Perkins Caulfield Byers — could be as high as $220 million. The previous round was led by Andreessen Horowitz.

Instacart is one of a number of companies that are pursuing the home-delivery market, including Amazon’s Fresh, Google Express, Postmates and FreshDirect. One of the differences between Instacart and many of its competitors is that it doesn’t carry any inventory itself, but negotiates deals with a variety of retailers.

The company’s CEO, Apoorva Mehta, told the New York Times that Instacart is expecting to have revenues of about $100 million in 2014, which would be about 10 times what it made the previous year.

For many of those who remember the investment bubble of the late 1990s, grocery delivery brings to mind names like Webvan and Kozmo, both of which were highly touted as the solution to home delivery, only to flame out quickly as the market crashed. The assets of Webvan, which went bankrupt in 2001, were eventually acquired by Amazon and are now part of Amazon Fresh.

Where your Uber and Seamless tips go: a guide to gratuities

It’s the traditional season for giving — but when you order your taxi (or pizza, or cleaning help) through an app, it can be hard to tell how much of your gratuity actually makes it to the workers. Here’s a handy chart that sorts it out.

Two charts that show why Uber’s valuation isn’t ridiculous

Uber’s latest funding brings the company into the stratosphere of private company valuations.

At $40 billion, Uber is believed to be four times more valuable than Airbnb, Snapchat, Palantir or Dropbox. Its valuation is eight times larger than Pinterest’s, fifty-seven times larger than Lyft’s, 100 times larger than Instacart’s.

The news sent the tech world into a tizzy. People called Uber’s new valuation eye-popping, ridiculous, absurd. Just like Uber’s last round of funding, it was heralded as proof of a bubble, an upcoming crash, the tech apocalypse, etc.

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But when you plot Uber’s valuation compared to big public tech companies, it looks less dramatic. [company]Amazon[/company], [company]Facebook[/company], [company]Microsoft[/company], [company]Amazon[/company], [company]Oracle[/company] and others are — as you’d expect from mature companies — much larger by market cap than Uber’s current valuation. Twitter is much smaller. Investors are essentially saying that they think Uber will be nearly as valuable as [company]Yahoo[/company] or [company]eBay[/company] and more valuable than Twitter when it goes public. It’s not a totally outlandish conclusion for them to bet on, given current tech hype and market trends.

Uber’s staggering valuation says more about the changing nature of tech fundraising than it does about Uber investors’ ridiculousness. Companies are staying private longer, choosing to develop their product outside of the prying public market’s eyes. Uber is leading that trend, a pioneer for a new kind of growth model.

Without much precedent, it’s hard to know what Uber’s eventual IPO will look like. It has more money and time to hone its business, so it’s not entirely fair to compare is to the IPOs of yesteryear and call its valuation outsized. We’re playing by a new set of rules.

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There’s another way to look at Uber’s valuation. CEO Travis Kalanick isn’t content for his company to remain a car-hailing app. He plans to move into urban logistics and shipping, doing everything from delivering food to transporting supplies. When Uber drops off kittens on National Cat Day, it’s not just a publicity stunt — it’s logistics testing.

On that note, perhaps Uber should be compared to public transportation, logistics and automotive corporations. Companies like [company]Ford[/company] and [company]Tesla[/company] are distant cousins to Uber, but given that Kalanick wants Uber to replace car ownership, they may be competitors down the line. The same goes for [company]FedEx[/company] and [company]UPS[/company].

Uber’s valuation puts it at less than half the market cap of UPS, but close to the market cap of FedEx ($51 billion). From an automotive standpoint, the numbers are even more optimistic, with Ford and [company]General Motors[/company]’ market caps not that much bigger than Uber’s valuation. Tesla and Hertz’s market caps, $29 billion and $11 billion respectively, are smaller than Uber’s $40 billion valuation.

Uber’s investors are essentially saying that they think when the company goes public, it will be worth at least half as much as GM and Ford and more than Tesla and Hertz.

[dataset id=”898118″]