Silicon Valley VCs are growing wary of
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[December 13, 2016]
(Reuters) - Michael Moritz -
chairman of Sequoia Capital and one of the most successful venture
capitalists in history - says a simple vision led him to invest hundreds
of millions of dollars in on-demand delivery startups.
"The movement of goods and services and people, by easier, more
convenient means," he said in an interview. "That's a huge trend,
enabled by smartphones."
Led by Sequoia and another blue-chip Silicon Valley firm - Kleiner
Perkins Caufield & Byers - venture investors have poured at least $9
billion into 125 on-demand delivery companies over the past decade,
including $2.5 billion this year, according to a Reuters analysis of
publicly available data.
But that torrent of money has slowed to a relative trickle in the last
half of this year, and many VCs have lost faith in a sector that once
seemed like the obvious extension of the success of ride-services
juggernauts such as Uber.
The bulk of this year's investment - about $1.9 billion - came in the
first half of the year. Only $50 million has been invested so far in the
fourth quarter, the Reuters analysis found. Several prominent Silicon
Valley venture capitalists said in interviews that they now believe many
delivery startups could fail, leaving investors with big losses.
"We looked at the entire industry and passed," said Ben Narasin, of
Canvas Ventures. "There is more likely to be a big, private equity-style
roll up than a venture-style outcome."
Reuters analyzed investment in on-demand delivery startups using
publicly available data from the companies, their backers and
third-party websites including Crunchbase, PitchBook and MatterMark. The
analysis likely missed some investments because private firms and their
investors do not always disclose funding details.
Delivery startups continue to grapple with fierce competition, thin
margins and a host of operating challenges that have defied easy
solutions or economies of scale, venture capitalists told Reuters.
Widespread discounting and artificially low consumer prices have made
on-demand delivery "a race to the bottom," said Kleiner Perkins partner
Brook Porter in an interview.
That firm has not invested as heavily or broadly in the sector as
Sequoia, but has backed U.S. startups DoorDash and Instacart and
This year has seen high-profile failures, including U.S. meal delivery
firm SpoonRocket, which went down in March, and PepperTap, an Indian
grocery delivery service backed by Sequoia that folded in April.
DoorDash, another of Moritz's investments, was able to close its latest
venture funding round last March only by cutting the value of its share
price by 16 percent, according to data from CB Insights.
The entry of Uber last year into the delivery business with UberEats,
for food, and UberRush, for packages, promises to make life more
difficult for smaller start-ups. Established logistics companies
including Amazon <AMZN.O> and DHL [DHL.UL] are also exploring local
Sequoia has backed at least 14 local delivery firms, among them four in
the United States, five in China and four in India. Sequoia did not
respond to Reuters requests for a response to rising VC skepticism of
Venky Ganesan, of Menlo Ventures, said the sector has no clear way to
cut costs or boost revenue.
"You canít raise prices on consumers, and you can't cut labor costs," he
said. "The core unit economics didn't make sense."
Dalton Caldwell, a partner at Y Combinator - the prestigious tech
incubator that birthed a number of delivery startups - was also
skeptical, though he thought companies with top-notch operational
capabilities could succeed.
Many delivery startups, he said, "make the assumption that once you get
bigger, things will get easier, and that's wrong. There is driver churn,
operations people that cost money, more support costs."
LOCAL DELIVERY "DASHERS"
DoorDash, founded in 2013 by four students in a Stanford University dorm
room, has raised nearly $200 million from top venture firms.
Focusing on food and alcohol delivery, DoorDash has agreements with
local restaurants, including franchised outlets, in dozens of cities in
the U.S. and Canada. But Doordash still has to figure out comparatively
simple challenges - like how to economically deliver pizzas to the fifth
floor of a college dorm with no easy street access.
"There is an opportunity to redefine local commerce in cities," says
DoorDash co-founder Stanley Tang. "But we have to figure out, what are
the operational challenges, and then how we can scale it up."
[to top of second column]
Michael Moritz of Sequoia Capital interviews U.S. Treasury Secretary
Timothy Geithner during an event at the Commonwealth Club in Palo
Alto, California, U.S. October 18, 2010. REUTERS/Kim White/File
Deliv, a same-day small-package service aimed at online shoppers,
uses a model similar to Uber's, with contractor drivers delivering
packages. The company has venture investors and has also lured funds
from United Parcel Service <UPS.N> and some of the largest U.S. mall
owners and operators, including Taubman Centers <TCO.N> and Simon
Property Group <SPG.N>.
Founder and CEO Daphne Carmeli says that because Deliv does not
maintain warehouses or a vehicle fleet, traditional couriers such as
FedEx <FDX.N> would be "challenged" to match the startup's low
Uber, however, doesn't face those same challenges. The company has
not said how much it has invested in UberEats or UberRush, or
whether either turns a profit, and a spokesman declined to comment
on those businesses.
But Uber does turn a profit on rides services in many cities across
the globe and has amassed a war chest of $15 billion, providing
ample resources to expand into delivery.
Carmeli is sanguine about the Uber challenge.
"Moving people is fundamentally different from moving packages," she
said. "Predictability trumps speed."
ROBOTS TO THE RESCUE?
Silicon Valley veterans have long recognized the difficulty in the
local delivery business. The online grocery firm Webvan and the
urban delivery company Kozmo were two of the highest-profile flops
in the late-1990s dot-com boom.
Technology was supposed to make things different this time, and
smartphone apps that connect customers with fleets of independent
drivers have helped.
But the technology that some believe could transform the sector -
driverless vehicles and sidewalk robots - remains far from a
practical reality, leaving many startups with no clear path to
innovate their way to profitability anytime soon.
"We think automated deliveries can complement our human fleet of
dashers," said Tang, of DoorDash.
But the company has no timetable for deployment.
Deliv's Carmeli is more skeptical.
"An autonomous vehicle is not going to pick up a package at your
retailer, then walk the stuff up to the customer's doorstep and get
a signature," she said.
Any delivery company looking to replace humans with robots will have
to catch Uber. The company has hired robotics experts from
Pittsburgh's Carnegie Mellon University and executives with deep
automotive expertise, and is working with major automakers including
General Motors and Toyota.
In August, Uber acquired Otto, a startup outfitting long-haul trucks
with self-driving technology. Since the acquisition, the Uber-Otto
alliance has delved into logistics, mapping and tracking, which can
be deployed for delivery trucks even as work continues on
self-driving systems, said Otto co-founder Lior Ron.
But delivery companies who can't find a business model that pays
with human drivers aren't likely to find one that will work without
them, Ron said.
"I don't think you can bank on the robots to come and save the day."
(Reporting by Paul Lienert in Detroit and Heather Somerville and
Alexandria Sage in San Francisco; Editing by Joseph White, Jonathan
Weber and Brian Thevenot)
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