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There is an art to picking the perfect avocado—that is just one of the lessons Max Mullen learned in the process of launching his online grocery-delivery service, Instacart.
“In the beginning, everyone said it would never work,” recalls Mullen, 29. He knew that several startups had tried and failed to develop effective means of delivering groceries to consumers. “But people shop for groceries all the time, and that made this a valuable problem to solve.”
Mullen, who studied entrepreneurship at the University of Southern California in Los Angeles, set out to rethink those previous models. He and Brandon Leonardo, 29, and Apoorva Mehta, 28, launched Instacart in 2012 in San Francisco.
Unlike other services that stock groceries in warehouses and make deliveries using fleets of branded vehicles, Instacart relies on partnerships with local grocers and some 7,000 trained independent contractors who shop the aisles (picking perfectly ripe avocados) and deliver orders—often in less than an hour. On one occasion, the company claims, a customer received an order just 12 minutes after it was placed. “Nothing besides pizza gets delivered that quickly,” Mullen boasts.
Without the need for a capital investment in infrastructure, Instacart scaled quickly, growing from three to 15 major metropolitan areas in 2014, including Chicago; Boston; Washington, D.C.; and Portland, Ore. The company saw 2014 revenue of more than $100 million—10 times its figure for the previous year—and Mullen says the service is profitable in some markets, though he declined to elaborate. “We proved that customers wanted what we were offering,” he notes.
Investors have taken notice. In January, a $220 million Series C round led by Kleiner Perkins Caufield & Byers brought total investment in Instacart to $275 million. The startup has a $2 billion valuation.
“One by one, we proved everyone wrong,” Mullen says.
But this wasn’t easy. When Instacart launched, the software couldn’t forecast supply and demand, which meant that often the entire team was dispatched to grocery stores around San Francisco to pick, pack and deliver orders. “We were overwhelmed with orders and doing everything we could to meet customer demand,” Mullen recalls.
Now Instacart uses proprietary software to predict, via machine learning and data science, whether the site can accept orders and how long customers will have to wait to receive their deliveries. The high-tech approach to an everyday task is one of the reasons the startup has landed relationships—many of them exclusive—with more than 65 retailers, including Costco and Whole Foods.
Grocers, once reluctant to allow third parties to offer shopping and deliveries, are realizing the benefits. (Instacart research shows that shoppers spent 2.5 times more online than in stores). “We focus on technology and let the grocers focus on groceries,” Mullen says.
In exchange for handling online sales and deliveries, retail partners pay Instacart a percentage of total sales; the startup also collects delivery fees from customers.
In April, Instacart added Petco to its retail roster, allowing pet owners to order items ranging from dog food to toys and leashes. Though Mullen declined to disclose details about potential partnerships with other non-grocery retailers, he admits that it’s part of the strategy to fuel growth.
“When we started, we knew that if we could get good at delivering ice cream that’s melting within an hour, we could get good at delivering anything. This is our first move to adjacent categories,” he says. “The world thinks of Instacart as a grocery-delivery service; we think of ourselves as something bigger than that.”