Another Delivery Startup? Please kill me.
I could have thought of a million ways to start a partner pitch meeting better than what just happened. In early 2015, I sat down to tell a prominent VC group about Homer, and before I could introduce myself, I hear a cantankerous voice from my left.
“Another food delivery startup?!? Is this serious? Please tell me you’re kidding.”
That was the managing partner of the fund telling me to basically get the f*** out of the room before I even explained the business. While I did finish the pitch, I wasn’t surprised they didn’t move forward on funding the company.
The experience taught me an important lesson: When you are in a crowded space, you better figure out a very clear way to explain “differentiation”. I took the lesson to heart and have been fortunate enough to continue building Homer with the support of other investors. In that time, I have had broad exposure to possibly the most saturated investment space of 2014/2015.
The following is a breakdown of where the food delivery space has been overfunded, where opportunities still exist and thoughts on the benefits/drawbacks of each model. If you are a founder, feel free to use any and all explanations to avoid being on the receiving end of a managing partner telling you to get the f*** out of his or her office.
The first category contains the largest, most publicly known companies. These are the behemoths like Grubhub and Delivery Hero.
Business Model: The company manages an ordering website and/or mobile app that allows consumers to choose from a variety of local restaurants and place orders for pickup and delivery. The company makes money by taking a % of the order value (usually ranging from 10–30%). The consumer typically pays the same price for the food on these platforms as they would had they called or gone into the restaurant; so for order received through these channels, the restaurant realizes 10%-30% less revenue than direct purchases. It is important to note that these companies only contribute to the ordering process of the delivery lifecycle. After sending the order to the restaurant, the restaurant is in charge of hiring and managing the delivery fulfillment to the consumer.
Benefits: These companies are high margin, software businesses (some are moving into delivery operations, but it still isn’t a core revenue stream). These companies offer a discovery platform for consumers, and their core value for restaurants is generating consumer demand. Owning consumer demand is lucrative. For example, GrubHub has historically been able to raise the fees they charge restaurants without significant restaurant churn. While these platforms must have a formal relationship with the restaurant (since they take a % of the order value), software platforms in Category 1 scale incredibly fast across geographies.
Challenges: Web and app based ordering systems are relatively inexpensive to build. This means there are low technical barriers to entry for competitors getting started. The winner among these companies tends to be the company willing to spend the most on consumer acquisition and retention; and, with the funny money being invested in Category 2 (see below), these companies are having to spend larger and larger sums.
Restaurants describe these platforms as a love-hate relationship. Rates continue to increase and drive the margins down for the business owners of these restaurants. There is a lot of restaurant industry animosity towards these providers right now, and if someone brought a lower cost solution to the table with just as much consumer demand, restaurants would jump ship in a heart beat.
Funding: This space has not been over-funded because it is already dominated by large incumbents. Some limited funding has been provided to groups specifically targeting Tier 2 markets where the large incumbents don’t have a foothold yet, but most investors didn’t want to go head-to-head with these groups and left the fight to the Amazon’s of the world.
The second category contains the over-funded and questionable unit economics group of companies. These are the classic restaurant delivery services reinvented for lightweight, modern deployment.
Business Model: Similar to Category 1, the company creates a website and/or mobile app which allows consumers to place orders for delivery from a local restaurant. In addition to placing the order, the company recruits and “manages” a pool of independent contractors as delivery couriers. When an order is placed, the company sends out a delivery request to independent contractors currently signed into the company’s courier-side mobile application. Ideally, an independent contractor close to the restaurant accepts the job and makes the pickup/delivery.
Contrary to Category 1, Category 2 companies may or may not have a formal relationship with the restaurant. If the company does not have a relationship with the restaurant, the company will not receive a % of the order revenue. If the company does have an established relationship with the restaurant, the company may make a % of the order revenue similar to Category 1. The company also makes money by charging a premium fee on the goods for the convenience of delivery. This is reflected in a variety of ways ranging from service fees to inflated costs of menu items on their web or mobile ordering application.
Benefits: Since these companies are able to fulfill delivery through a network of independent contractors, they remove the need for the restaurant to hire and manage a delivery staff. This allows the company to quickly add restaurants to the ordering platform that consumers may have not been able to order from on Category 1’s website/app. Additionally, the complexity of connecting the order to a set of independent contractors makes the technology and operation more defensible and harder to replicate. Due to the lack of management applied to independent contractors, and the ability to place restaurants on the platform that may or may not have a relationship with the company, this category scales quickly across various geographies.
Challenges: The fact that these companies don’t need a formal relationship with the restaurant in order to operate isn’t always a good thing. It can lead to restaurants being upset about being represented on the company’s platform without consent. Also, using independent contractors as the workforce for delivery fulfillment has some serious drawbacks. The current labor regulations don’t allow company’s to schedule, train, or direct this labor pool closely. Therefore, there are huge pitfalls in reliability and consistency for consumers when using these services. A continuous need to balance the supply of delivery labor (independent contractors) with consumer orders is very expensive. It usually requires unsustainable consumer discounts as well as unsustainable wages being paid to contractors. This has led to some serious questions about the long term unit economics of these models. Lots of questions have been raised around churn in the delivery workforces as well as retention of consumers.
Funding: This is by far the most saturated investment space in food delivery. In the United States, DoorDash recently raised over $100m and Postmates is out looking now. In the UK, Deliveroo pulled in a cool $195m last year.
The third category is another well funded segment of food delivery, but not to the extremes of Category 2. This category represents Restaurant 2.0, aslo referred to as delivery-only restaurants.
Business Model: These companies operate a delivery-only restaurant that has no retail presence. Instead these companies prepare food in a kitchen or commissary that can be located in a basement or low rent area. This avoids the typical high-dollar real estate spend of traditional restaurants and the overhead of staff like hostesses and waiters/waitresses. These companies also create their own website and/or mobile application for consumer ordering. This avoids the large fees associated with platforms like Category 1. Typically, the company manages the kitchen staff as well as the delivery staff in one, vertically integrated operation.
Benefits: Avoiding high cost real estate and fees from Category 1 helps create higher operating margins. By developing good communication channels and internal technology, it is possible to apply a very refined logistics approach to a business sector that has been living in the tech dark ages. Also, pizza has been the delivery dominator for the last two decades. It seems clear that Millennials in large cities have the spending power and desire for higher quality and healthier options.
Challenges: Don’t negate the value of established ordering channels such as Category 1. It is very expensive to create consumer awareness and demand for a restaurant that has not grown organically in an area with brick and mortar locations (old school impressions). To overcome this, these companies command huge marketing and advertising spends as well as the need for celebrity endorsement. Even with these massive budgets, it is very difficult to generate enough consumer density to make delivery economics viable at low price points. This geographically constrains these companies to dense, urban areas. Additionally, people have various tastes, so they aren’t likely to completely abandon legacy restaurants. At best, these companies can hope to mimic the success of large restaurant chains, possibly living at a slightly higher margin (assuming delivery density/economics are achieved).
Funding: These companies have not been as heavily funded as Category 2, but are still rolling in the cash.
The last category is perhaps the least funded, and most under-the-radar group. These companies have a limited consumer-facing profile. These are Logistics-as-a-Service companies (LaaS) targeting the restaurant vertical.
Business Model: These companies provide a third party logistics solution to restaurants in a similar way that UPS provides shipping logistics for Amazon. Restaurants have been early adopters because these companies can maintain high service levels required for the massive delivery volumes and quick delivery times in this industry. These logistics providers deliver omni-channel, meaning consumers are free to order from various channels (telephone, restaurant’s website or mobile, and Category 1) and restaurants are not required to hire/manage an internal delivery fleet. The restaurant chooses any ordering channels it prefers and then solely focuses on meal preparation and packaging. Delivery operations are completely handled by these LaaS companies. Depending on the company, the labor pool completing deliveries may be independent contractors (Zoomer, ValkFleet) or W2 employees (Homer).
Benefits: These companies don’t have to create consumer demand like those in Category 1, Category 2, or Category 3. Instead, they are able to target markets where large volumes of demand already exist and provide a focused logistics solution to restaurants trying to manage this demand. The technology created at these companies is very defensible and creates a large moat. It is operations research applied to a very localized delivery problem, where large data sets drive an ever-refining delivery infrastructure. Instead of selling consumer demand to restaurants, these companies solve a big pain point for restaurants that manage their own delivery. Also, by only focusing on logistics, these companies have a more targeted approach to tackling unit economics and avoid the continuous balance of a two-sided marketplace.
Challenges: Generating enough order density to make the unit economics of the delivery viable is limited to unique geographies. Managing large employee workforces presents large operational challenges such as assessment, scheduling, and forecasting. Managing large independent contractor models have similar limitations as Category 2, leading to low reliability and inconsistencies in delivery volume. Finally, because these companies do not own the consumer, they do not collect a % of the order revenue during the consumer ordering process (Category 1 and Category 2).
Funding: These companies have been very low key over the last couple of years and are quickly growing in size and complexity of logistics operations. The investor community has not flooded this space nearly as much as Category 2 or Category 3.
