My thesis on startups in the delivery space and why Playfair backs Addy
Now, for a bit of background
The market for consumer facing startups that offer on-demand or scheduled delivery of products and services is clearly hot right now. There are apps that connect retailers/restaurants with customers, courier networks that move products from merchant to customer, and software providers that power different steps in the process. Some startups also operate central kitchens along with delivery networks to create a vertically integrated business model. As reported by CB Insights, close to $486M was invested across 109 deals within the food and grocery e-commerce and delivery industry alone between Q1 2013 and Q1 2014. To put this into perspective, that’s a 51% YoY uplift in aggregate investment dollars and a 55% increase in deal numbers. What’s more, 51% of these deals took place at the angel/seed stage in the past two years, suggesting that this particular segment of the industry is still in it’s infancy.
And it makes sense because mobile is eating the world. Over 300M smartphones are shipped around the world each quarter now. Two times as many 3G/4G phones were sold in China, India and Latin America in 2013 compared to three years prior. We’re shifting towards accessing the web on mobile vs. desktop, in part due to enhanced 3G/4G connectivity and serious progress in mobile UI/UX engineering. The convenience factor of browsing and ordering in a few taps on our mobile devices is huge and, I believe, has contributed to the growth of this industry in a meaningful way. Indeed, there are close to 2,000 startups on Angellist in the mobile consumer e-commerce space, including Shortcut, Zesty, and DoorDash.
From my perspective, what’s happening here is a voracious landgrab for consumers and suppliers fuelled by massive amounts of venture dollars. I’ll outline the thought process behind my hypothesis here, taking food delivery apps that don’t operate their own central kitchen or logistics network as an example:
From the consumer standpoint
- As a consumer, I care most about the restaurant from which the food I order is procured. This is because the product I am buying is the food, not the delivery. In fact, there aren’t a million permutations of delivering a good from A to B in terms of the experience felt by the consumer. So if my favorite pizza restaurant features its products on app X today, but decides to move to app Y tomorrow, the cost for me to switch gateway is negligible. This assumes the app does not use artificial intelligence to erect higher switching costs. For example, the app could personalise the menu to fit a user’s eating habits and dietary requirements.
- Consumers like to discover new restaurants to expand their horizons, especially when they move geographies. But I believe this tends to occur in transient bursts. Ultimately, taste loyalty establishes itself within food types to the point where I know which restaurants I like and I stick to those.
- Thus, I don’t see much lock-in from a consumer standpoint in food ordering apps that connect restaurants with hungry people. This is especially true when any given restaurant pushes its inventory to a multitude of competing apps.
From the restaurant standpoint
- As a restaurant, my primary concern is generating revenue and ideally so with loyal customers instead of multiple one-time purchases. It’s therefore in my best interest to be promiscuous with my choice of channel partners, i.e. food order apps. Each app can potentially provide me with a source of mutually independent customers and increase the probability that I recognise repeat revenue to grow my business.
- Running multiple apps in tandem therefore ensures I have maximum coverage of my potential client base. By not wedding my restaurant to any single food ordering app, I can be nimble in the market and move first to adopt the next best technology that will give me an unfair advantage over competitors.
- If this holds, it therefore follows that no one food ordering app can win in the long run.
From the delivery provider standpoint
- As a courier, I want to run as many jobs as possible to maximise the utilisation of my workforce. This ensures that I extract as much revenue from my cost base as I can. To do so, I must most likely work with more than one merchant to achieve volume.
- Building a private delivery network from scratch is onerous and expensive. Unless the restaurant (e.g. Deliverance) or food ordering app (e.g. Deliveroo) embarks upon this added mission, merchants and consumer apps need to source drivers from third parties (e.g. Postmates) or contracted drivers paid on an hourly basis with flexible contracts. These network providers are a prized resource for obvious reasons. As the on-demand and scheduled delivery space is heating up, more drivers will enter the market. I wonder whether there will be a point at which we’ve exhausted the supply of individuals willing to become drivers such that salaries will go up due to continued demand for their services. Drivers will gravitate to players that pay more and offer more business, just as taxi drivers have migrated from small private hire firms to Uber.
- Thus, logistics providers appear to become the limited resource that market players will fight over.
Why Playfair Capital invested in Addy
So this leads me to the thesis driving our recent investment in Khaled, David, and Mikel and the team behind Addy. As I’ve written elsewhere, we’d more often than not opt to invest in the spades that support a gold rush rather than take a punt mining for gold ourselves. This is especially true in hyper competitive markets where acquisition costs of both ends of a marketplace are likely to escalate. Instead of picking a vertical winner at the early stage in this frothy market and fight to retain customers, merchants, and drivers, our approach here is to invest in software infrastructure that enables this ecosystem to blossom for the benefit of all.
And that’s where Addy comes in. Their product, Trak, is changing the way products and services are delivered. They’ve built a sleek and powerful delivery management solution for merchants to coordinate their delivery operations with multiple providers and with their customers.
The suite includes a visually and intuitive web dashboard (above), driver apps with easy access to navigation and customer contact details (left), APIs for programmatic integrations, and real-time driver tracking with automated SMS notifications for the customer (left).
Having signed up, created a team, added drivers, assigned and completed tasks through Trak, I can vouch for the experience being quite literally delightful. What’s more, pricing is simple as it scales up and down with business volume.
Not only are the applications for this software diverse, ranging from food ordering to home services, but there are clear network effects in play. As merchants scale, they’re likely to require more than one courier to service their different product categories or geographies. Doing so will allow them to deliver products/services faster and cheaper than using a single delivery partner.
On the other end of the equation, couriers tend to work with more than one merchant, as discussed earlier. Thus, if our thesis plays out and the product delivers a return on investment swiftly, we envision the creation of a real-time marketplace built on a network of merchants and couriers. In this network, it will become clear which providers (both companies and independent drivers) are most reliable and cost effective for any given product type in a specific geography and time of day/year.
Any new merchant joining the network will immediately see more benefit than the one who joined before, and could access a rich dataset to figure out which courier is best given a set of input variables. By the same token, delivery companies or private drivers could access a thriving marketplace of jobs they can bid to fulfill. Given that the delivery market in most cities is still very fragmented, this marketplace has a clear value proposition. If a dominant player emerges in a given vertical because they have built their own network from the ground up (e.g. Uber), it may be less compelling for them to join. It will certainly be fascinating to see how this plays out. In the meantime, we look forward to building a more delightful delivery management network that will power an entire ecosystem for the benefit of both consumers, merchants, and logistics providers.
If you like what you see, the Addy team are hiring! They’re based at Galvanize in SF, along with another Playfair portfolio company, Good.Co.
Ping me on @nathanbenaich with any comments or criticisms ☺
