A little more than a decade after the first generation of grocery-delivery companies collapsed, the industry seems poised to finally take off. And two-year-old Instacart is accumulating a war chest to fuel the first nationwide expansion in this new wave.
The San-Francisco based company is announcing this morning that it has raised a giant new $44 million round of equity financing, with Andreessen Horowitz leading the investment. Existing investors Sequoia Capital, Khosla Ventures and Canaan Partners all participated.
Instacart currently operates in 10 cities, and says it will be in 17 by year’s end. CEO Apoorva Mehta says the company could launch in an additional 24 to 36 cities next year.
The company’s model is a big reason why.
Unlike food delivery competitors Amazon Fresh, FreshDirect and Peapod, Instacart runs a grocery delivery business without holding inventory. Instead, the company hires a group of contractors in each city who accept orders through their smartphones and drive their own cars to grocery stores where they pick up customer orders before shepherding them to customer homes.
The model lets Instacart shoppers place a single order that can include groceries from several stores, including Whole Foods, Costco, Safeway and some local and regional grocers as well. Customers pay a delivery fee or an annual subscription. Instacart also marks up the prices on some items.
The company operating with the most similar model is Google, which partners with grocery and clothing retailers to collect customer orders placed online through Google and deliver them to their doors that day or the next day.
Google launched the service partnering with retailers from the start; Instacart largely began taking orders without cooperation, but has since looked to the grocers it buys from for help promoting the service, and has discussed volume discounts and other ways to work together more closely.
There are a few differences, though: Google works with courier services to handle deliveries and not individual contractors. Google also operates a sorting facility in the regions in which it operates — right now just New York, Los Angeles and the San Francisco Bay Area — which serve as consolidation points for orders after pickup from stores and before delivery to customers’ doors. Each argues that its model is more cost-efficient.
Is there room for both approaches to succeed? Perhaps. Instacart is focused exclusively on groceries, while Google Shopping Express also delivers apparel and electronics. On a call last week, new Instacart investor Jeff Jordan even acknowledged that he had placed an order for a dog toy from Google Shopping Express that very day.
But over time, there’s the possibility grocers will only want to work with one delivery company. Instacart is stepping on the gas to prove its worth to as many grocery chains — and shoppers — as possible across the country. If Google wasn’t already on notice, it should be now.