man riding bicycle near vehicles
Photo by Brett Jordan on Unsplash

Delivery startups don’t deliver — that is the gist of the big feature story on GoPuff, a delivery service that started selling hookahs and other smoking paraphernalia in Philadelphia. The company is the latest in what seems to be a long line of money-losing attempts at instant (or near-instant) delivery. From Amazon to Deliveroo to Instacart — all have learned that hard lesson. GoPuff isn’t the first.

The story might give you the impression that the “on-demand” economy that gained enormous traction during the pandemic was dead. Or that the nearly $10 billion of venture capital that went into quick commerce companies in 2021 was dead money. But I don’t buy that — on-demand has now become an endemic (urban) social behavior, and it will only become more pervasive. 

***

But first, let’s talk about GoPuff. Like many others before, you can easily tell GoPuff’s misery is mostly self-afflicted. 

It seemed like such a great story when I first heard about them. It was the brainchild of Drexel University friends Yakir Gola and Rafael Ilishayev. The scrappy startup was founded in 2013, away from the glare of Silicon Valley in Philadelphia. In 2016, it raised a modest $8.25 million. Three years later, it raised $750 million, with $250 million coming from Softbank. By March 2021, the company had raised nearly $3 billion, including Softbank’s Vision Fund.

Things started to go wrong for GoPuff (much like its competitors) when it got too much venture capital to expand, diluting its focus to justify the amount of capital it had raised. GoPuff had to grow (or give a perception of growth) to its new investors. GoPuff had 165 warehouses in 2020. By 2021 the number had ballooned to 550. It spent $700 million in 2021 alone.

It operated in 1000 cities. It employed 18,000 couriers — talk about putting the cart before the horse. It bought booze retailer BevMo for $350 million and expanded to the UK when it bought a service called Fancy. Add a few more acquisitions and things started to really come apart. What didn’t help was that GoPuff co-founders cashed out enough that they could live the cush life. They moved to Miami, far from the company headquarters — never a good sign when a company is trying to grow really, really fast.

It is a shame because before it got Softbank’s slug of cash, GoPuff had a lot of things going right. It knew its end customers well and served their needs profitably. The company’s core focus on the college market ensured it was doing well in college towns. It still does. Elsewhere, not so much. In the Bronx, for example, it lost $15 per order, proving that expanding into non-core markets was a bad idea. In short, their expansion was pretty haphazard.

We have seen this senseless growth at many companies, including Uber. But founders (and their backers) never learn — not all revenue is good revenue. This dilution of focus is a classic mistake many startups make when chasing growth which is for more investment dollars. It is a virtuous circle, a vortex of eventual capital destruction.

“As the saying goes, history is rhyming,” Joseph Park, founder of Kozmo.com, the first delivery startup to flame out after raising $300 million in the first Internet boom. He should know — because he made the very same mistakes when trying to grow Kozmo. I remember because I was writing about them and every early stage dot com at that time. Park could be excused. At that time, there wasn’t a playbook that told you what mistakes to avoid. The problem with the Silicon Valley ecosystem is that we don’t learn. Most people think of history and its lessons as a four-letter word. 

***

Bloomberg’s report on the quick commerce sector isn’t a good read. 

The market values of DoorDash Inc. and Uber Technologies Inc., both public companies, have fallen 67% and 33%, respectively, in 2022. Instacart Inc. pivoted toward developing software to help supermarkets run their websites and shelved plans to go public this year. Gopuff clones like the New York-based Fridge No More and Buyk went spiraling out of business; another, Jokr, withdrew from the US to focus on South America. Earlier this month, Berlin-based Gorillas, which has been desperately hunting for a cash infusion, entered into advanced talks to be acquired by Getir. Even mighty Amazon shed 40% of its mid-pandemic market cap, closed warehouses, and laid off employees.

Bloomberg BusinessWeek

Does it mean the end of on-demand commerce?

Some thoughts: The delivery boom was catalyzed by the pandemic. At this point, using on-demand apps for delivery, car rides, and other services has become part of modern life. Sure, people aren’t going to use them for everything, but the tap-to-order is a behavior that isn’t going away.

Just look at the revenues of DoorDash, Uber, and Lyft — they are still inching up. Sure, these companies are unprofitable, and that is squarely on the management teams and their incompetence.

Despite the tough economic conditions, the American consumer hasn’t abandoned the behavior. It is because we are addicted to convenience. I have previously said that the pandemic was a beta test for a harsher reality that awaits us. Delivery and on-demand are part of that future. We just have not found the right economic models for it.

October 26, 2022. San Francisco.