Food Delivery Startups Look for New Ways to Sustain Growth

Food Delivery Startups Look for New Ways to Sustain Growth

Investors last year poured cash into online grocery startups, which saw roaring demand for home deliveries at the height of the Covid-19 pandemic. Now those firms are retooling to sustain growth even as shoppers venture back to bricks-and-mortar stores.

For some startups, that means pushing into more elementary products like sales and inventory management tools for grocery-store operators. For others, it means future-forward offerings like groceries delivered via drone.

Instacart Inc., a 10-year-old grocery-delivery and pickup startup, said it plans to expand its emerging enterprise technology business, going beyond deliveries by providing the underlying infrastructure and software tools for grocery-store websites, smart shopping carts, store checkouts and fulfillment centers, a company spokeswoman said.

“Pandemic or not, convenience never goes out of fashion,” said

Brett Thomas,

co-founder and managing partner at CAVU Venture Partners, an investor in online grocery store Thrive Market and other foodtech companies.

Venture-capital firms invested $18.4 billion in online grocery startups last year, plus another $6.8 billion in general food-delivery startups, including groceries and restaurant takeout orders, PitchBook Data Inc. said.

Together, online groceries and related apps accounted for more than half of the total $39.3 billion invested in 2021 across the foodtech sector, which also includes startups in areas like food waste and alternative proteins, with deal values roughly doubling from 2020, the research firm said.

Online grocery services allow shoppers to order online and get groceries delivered to their doorstep. While some services provide those deliveries for existing chains, others keep inventories of products in their own warehouses.

Instacart raised $265 million in March in a round led by Andreessen Horowitz, Sequoia Capital and D1 Capital Partners, among others. The added capital lifted the San Francisco-based company’s valuation to $39 billion, Instacart said.

Gopuff, another delivery company, raised $1 billion in July from investors like Fidelity Management and Research Co., SoftBank Vision Fund 1,

Blackstone Inc.’s

Horizon platform and Guggenheim Investments. The round valued the company at $15 billion.

Gopuff, which sources products from its own warehouses, in December filed to raise $1.5 billion in the form of convertible notes, for a maximum post-money valuation of $40 billion.

Chinese online grocery store Xingsheng Selected, also known as Furong Xingsheng, notched the largest deal of 2021, raising $3 billion in a late-stage funding round led by Sequoia Capital China, according to PitchBook.

Still, the value of VC deals across the foodtech sector tailed off in the last three months of the year, dropping roughly 13% from the previous quarter, while the overall number of deals fell 6%, PitchBook said. Those declines came as Covid-19 restrictions began to be lifted—and before the Omicron variant struck—as more shoppers were heading back to physical stores.

DoorDash Inc.,

which went public in late 2020, plans to raise fees on

McDonald’s Corp.

restaurants that are slow to produce orders, a move that comes as larger food-delivery services come under pressure to maintain the tempo of their pandemic-level sales.

Sumesh Sachar,

co-founder and managing partner at Rocana Venture Partners, said even as foodtech investments taper off, he expects net online purchases to keep growing.

“The continuing supply-chain pressures big consumer packaged foods are experiencing today will give way for more brand discovery,” he said, pointing to new brands like Splendid Spoon LLC, which delivers ready-to-eat vegan smoothies and grain bowls.

Joanna Rees,

managing partner at West Ventures, agreed.

“Over time the population of people utilizing the services will continue to grow, just not in the exponential way it did during a pandemic,” she said. Venture capital tends to come in waves, surging when investors race to back the latest market leader. “Each time there is a significant cycle of innovation, there will be increased levels of funding,” she added.

In May,

Kroger Co.

announced a partnership with Drone Express Inc. to develop drone grocery-deliveries at its Centerville, Ohio, store. The project, which ran for months, is currently on pause, but the aim is to deliver small online orders to homes via drone, said

Beth Flippo,

chief executive officer of Drone Express. Onboard cameras and sensors will determine the safest spot to leave the package.

Startups are promising to deliver groceries to your doorstep in minutes, stepping up competition in the industry. Their strategy: to operate out of “dark stores.” WSJ visits some of these hyperlocal warehouses to see how they operate and the challenges they face. Photo/Video: Michelle Inez Simon

Corrections & Amplifications
Gopuff in December filed to raise $1.5 billion in the form of convertible notes. An earlier version of this article incorrectly said Gopuff had already raised the $1.5 billion. (Corrected on Feb. 14)

Write to Angus Loten at [email protected]

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Rachel Meadows

Rachel Meadows

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