Big Deal: Instacart raises $220m

Instacart, a US-based company aiming to bring the Uber model to grocery shopping, raised $220m last week in a huge series C round, illustrating the huge attraction to businesses aiming to disrupt everyday activities.

The round, secured at a $2bn valuation, was led by venture capital firm Kleiner Perkins Caufield & Byers and also featured Comcast Ventures, the corporate venturing arm of cable service provider Comcast, as well as Dragoneer Investment Group, Thrive Capital, Valiant Capital, Andreessen Horowitz, Khosla Ventures, Sequoia Capital, Aaron Levie and Sam Altman.

Instacart has now received $275m in funding since it was founded in 2012, and its value is five times what it was when the company raised $44m in June 2014.

The company’s product revolves around an app that allows customers to order groceries from a range of local stores that have signed up to the app. Their shopping is then done by one of Instacart’s crowdsourced personal shoppers, who deliver the items to a customer’s home on the same day.

The amount raised by Instacart is huge for a series C round, particularly as it is still at an early stage. Although the company plans to expand quickly in the upcoming year, it is currently present in only 15 American cities.

Instacart’s funding points to the current boom in startups transferring mobile taxi hailing company Uber’s model, whereby it aims to disrupt existing industries using an app-based service that relies on freelanced staff, to other industries.

The model is moving at different paces in different areas, with the frontrunner the transport sector where Uber, valued at $40bn as of the end of 2014, has been joined by several other companies hovering around or above billion-dollar valuations, including Didi Dache and Kuaidi Dache in China, Lyft in the US, GrabTaxi in Singapore and Olacabs in India.

Airbnb is the next largest ‘disruptor’ company, valued at $10bn as of an August series D round that raised $475m. It has competition, particularly in Asia where several startups have raised significant rounds over the past year, but Airbnb is currently the undisputed frontrunner in the short-term accommodation sector.

The dominance of Airbnb and Uber in their individual sectors, as well as their staggering valuations – Airbnb was founded less than seven years ago and Uber less than six – are what investors are hoping to secure when they inject substantial amounts of funding into startups like Instacart.

Although most industries are not progressing at the same pace as transport and accommodation, the disruption model is still springing up in several, including deliveries (Doordash and Postmates), house moves (Dolly and Lugg), laundry (Washio) and even marijuana (Eaze) and sex work (Peppr).

Instacart has now raised more cash than all those companies combined, due to grocery shopping being a larger sector that is unencumbered by the problematic issues that would mar quasi-legal services, but its valuation nevertheless is based almost entirely on potential rather than current business.

A big plus point for the disruption model is that without a permanent base of workers or the need for large-scale infrastructure, costs are relatively low. When these low costs are put together with revenue that Instacart claims has risen tenfold over the past year and doubled in the fourth quarter of 2014 alone, the potential returns that could be harnessed by rapid expansion – achieved before competitors would have the chance to stake a claim – are vast.

This is particularly true for Instacart. Individual supermarkets operate their own delivery services, as do specialised grocery shopping services such as Ocado, but Instacart’s model, which draws its products from a variety of sources, gives it the ability to differentiate itself from more established competition and clear a path through a sector that in time could appear to have been relatively underserved, and it could well end up replacing existing services altogether.