Grocery shopping may never be the same.
Instacart , the number one company on this year’s Forbes America’s Most Promising Companies list, has rocketed up the Silicon Valley money list in just two and a half years with its one-hour grocery delivery service. This month, Instacart announced a new $220 million Series C funding round that valued the company at more than $2 billion–just six months after it previously raised $44 million.
Instacart founder and CEO Apoorva Mehta needs the money to expand his service to new markets. He’s already in 15 cities, contracting with over 4,000 personal shoppers. The company has grown exponentially–from 2012 sales of $1 million, to $10 million in 2013, up to $100 million last year. Forbes talked with Mehta recently about his latest funding round, not selling out to one of his massive rivals (Amazon, Google), and what the future holds for supermarkets. The following has been edited for length and clarity.
FORBES: How does it feel to be a $2 billion company now?
Mehta: All that really means is that we now have higher expectations from investors. If they are investing at a certain valuation, that means they want a multiple of that in their return. It’s a good testament that our product has been resonating, which is great. But this is not enough. We have to grow substantially bigger. We have to expand geographically. We have to expand into other categories. We have to continue to deliver for our customers.
The good thing is we’re very fortunate that the market size we’re targeting is enormous. It’s unnatural for a company to be working in a market size worth about $1 trillion. Most companies don’t have that. The grocery business in the US every year is about $700 billion. Plus $300 billion in convenience spending. We have an opportunity to bring all of those retailers in that ecosystem online. We have the opportunity to give them the 1 hour, 2 hour delivery options they’ve never had before. We’re pooling the labor, making it available to all retailers.
FORBES: You mentioned new categories. What kind of categories can you address with $220 million in new funding?
Mehta: Groceries are the hardest category. Picking avocados, delivering ice cream is harder than anything else. The fact that we have come so far with that—it points to the fact that we can do other categories with our platform. Whether we’re going to be doing it in this round or this year or not is something we’re not disclosing right now. The fact is we can do it.
The question is which categories make sense. There are some categories I can tell that won’t make sense—like big screen TVs or consumer electronics in general. The reason they don’t make sense is they don’t have the frequency. How many times do you need to buy a router in a year, for example? And do you really need it in one hour? More toward unconsidered goods where there is frequency and there is value and where the selection offered in one place is better than the selection offered somewhere else in the city. That’s how we think of the categories.
FORBES: So if you build out the sufficient infrastructure to deliver groceries, it’s easy to take that infrastructure and apply to drugstores and other stores that have lots small, frequent merchandise turnover?
Mehta: That’s correct.
FORBES: You’re in 15 cities now?
FORBES: How many markets do you expect to be in a year from now?
Mehta: We don’t have a number right now. It depends on a number of factors—how much we want to go deep into individual cities vs. expanding geographically. Fortunately we have proven we can do new cities very quickly. For the 15 markets we launched, we launched cities that took 2 weeks. We have the process down, the playbook.
FORBES: Are there smaller or less dense cities that won’t work for Instacart?
Mehta: Fortunately or unfortunately we don’t have a market that has not worked yet, so we don’t really know what size of cities work or don’t work. All the cities that we have now are working and growing. So it’s difficult to say concretely. But a lot of times people underestimate the agility of the model. With a city of 100,000 or 200,000 you don’t have to offer 1 or 2 hour delivery; maybe it’s same day delivery. In smaller cities than that, maybe you have a line to pick up in store. The question is what are the things we want to have consistent and what are we OK moving on?
FORBES: How many customers do you have now?
Mehta: I don’t think we disclose the number, but quite a few.
FORBES: What does the average Instacart customer look like?
Mehta: We have four different types of customers. First is the household mom, who’s shopping for her family and has big baskets, frequency very regular. Then we have customers like myself, young professionals with smaller baskets, more frequency. Then we have elderly or infirm, either them ordering themselves or kids ordering for them. Then office managers, offices in general. These are customers who never normally had the chance to order from multiple grocery stores at the same time. Much larger orders there.
FORBES: Instacart has flat delivery fees but marks up the prices of items in stores that don’t partner with you. Are those markups part of the value proposition, that people will pay more to get groceries delivered?
Mehta: Not really. It’s a matter of time until all grocers on Instacart have no markups. It just takes time to get there. There’s a delivery fee that’s clear to you. That’s something we share with customers. We believe in the long term its best for customers to pay what they would be paying in the store plus delivery fee.
Stores are now getting more customers through Instacart. Now they can offer one hour, two hour delivery for their customers. They’re getting larger, incremental business with no additional infrastructure cost. They can pay us for that, and several dozen retailers across the United States already do. We’re moving toward a partnership base. Will take time to integrate, but it’s absolutely important.
FORBES: When you’re dealing with 4,000 personal shopper independent contractors – how do you maintain quality the service while also dealing with them in a fair way?
Mehta: We’ve found that the technology can solve both problems. The best way is to ensure fairness is to keep the shoppers utilized, give them deliveries. The best way to do that is to match supply and demand successfully. That’s really a predictive modeling exercise. Over time, we’ve learned a lot about patterns and demands for different cities on different days, at different times. We’re becoming very good at that and of course there’s’ a lot more we can do there. That makes sure the shoppers are utilized and that gets the shoppers paid. As a result, they can earn a reasonable rate when they work for us, which is great.
Quality is very difficult with thousands of independent contractors. The way we solve that is having shoppers provide feedback to improve as soon as possible. When you rate an order on Instacart, the shopper gets a feedback. A customer indicated this item could have been picked better or this item was wrong for some reason. Those kinds of feedback are instructive to our shoppers so they get better at it and over time quality builds into our system.
FORBES: Instacart was founded just two and a half years ago. How do you manage that kind of growth?
Mehta: The fact is that Instacart’s basically a different company every month based on the number of people we’re hiring. It’s moving so fast that it becomes difficult to get your bearing sometimes. If you sort of think about traditionally how a person starts a career to becoming CEO, it might take 15, 20, 30 years. They might manage 30 people, then 50, then 100, and so on in a gradual process. For a company going through hypergrowth like Instacart, it’s not a gradual process at all. We’re in our third office—fourth if you include my apartment. It’s only been two months in this office and we have to move already.
That’s just an example, but it becomes difficult as you go through this hypergrowth to understand how are you supposed to lead and what processes you’re setting. Because every month it’s a different company, so the processes are breaking. There’s a lot of chaos and the structures never last very long. Your personal life is a complete mess.
FORBES: How do you adapt to those company changes?
Mehta: I have to be more introspective. What I’ve realized is that the only way to be successful in an organization like this is to change before it’s actually required. Otherwise, you’re always playing catch up. That’s what I’ve focused on in the last year. Most people, and I mean most people including me, are not used to this sort of growth. People are used to linear growth. You go from 100 deliveries today, 120 deliveries tomorrow, 140 deliveries, 160 deliveries. Or employees: add one today, two next month, 3 the next. The way it works at Instacart is you add one employee this month, add two next month, then after that 40. You’re growing exponentially on every single metric. How do you keep track of that? How do you make sure that you’re that person who can continuously harp on that with your team so they adjust to it as well? because most people don’t look at it that way, you have to help them.
FORBES: When the business is moving that fast, how do you even know what’s coming in time to change? What have you gotten ahead of? What have you fallen behind on?
Mehta: There’s a few thing that I’ve gotten ahead of. Mostly I’ve fallen behind—that’s the reality, and why it’s such an important focus of mine. One of the best ways to think about this is managing the engineering team. I’m great at managing an engineering team as long as there are five people. Anything above that is tough. Maybe six people, eight people, or ten people. But now we’re bordering on 50 people. So I’m thinking about what sort of engineering leaders we are going to need and hire them before the team becomes dysfunctional. That’s one of the reasons we’ve been able to scale. You see from other successful companies, that was not the case. They fell behind. I don’t want to name names, but it’s not insulting at all. You get to that point so fast that it becomes too fast for anyone to manage.
FORBES: So starting Instacart two and a half years ago in your apartment, did you ever expect it to be this big?
Mehta: [Laughs] No. Two and a half years ago, that’s a long time. I don’t think I even expected where we are today, one year ago.
FORBES: Then how do you plan a year in advance, when haven’t been able to anticipate any of the growth so far?
Mehta: You get better at it. [Laughs] I feel like I’ve gotten better at it, but of course time will tell. There’s some technical reasons you get better at. One year ago we have limited amount of data compared to what we have now. You’re also forced to do it and your board gets more sophisticated, and investors get more sophisticated. We’re responsible to set expectations. As you know, it’s not the public markets with quarterly expectations that you exceed or don’t. It’s just we get better at. I think I’ve gotten better at it than a year ago, but there’s still a long way to go on that.
FORBES: You said the valuation adds expectation from investors, and hiring more people is similar. How does one take that on?
Mehta: The way I think about it is personal responsibility. There are things I know and things I don’t know. The best way to get investors on board and employees on board is to share what you know and what you don’t know. What you know is look, this is how fast we’re growing, this is our current traction. And then here are the things we don’t know, the things we have to prove and challenges we face. And you allow them to make that decision themselves. As much as you can be transparent, it helps from both standpoints. I’m not saying I’m not taking personal responsibility, but the fact is that people need to understand the risk.
FORBES: What’s the top advice you give to others starting out as entrepreneurs?
Mehta: When I see entrepreneurs that are successful and not, the one thing that becomes clear is intentions. What are your true intentions? Are you in it for the money? Are you in it for the short term? Are you in it to change something in the world? Because of the amount of time and energy you put into the company, they will surface quickly. My advice for entrepreneurs is to have very clear intentions—very pure intentions. You understand why you’re doing this so you can focus your energies into that.
I personally only like and support entrepreneurs who have a clear and non-monetary, intrinsic purpose. Having that purpose in mind allows you to get past a lot of unnecessary things, helps you get past those hurdles along the way. To be honest, it’s so funny because most entrepreneurs won’t actually do that. But if you look at the most successful companies in the world, all have had pure intentions for what they wanted to do.
FORBES: What are your intentions?
Mehta: I want to create this service, I want to see this in the world. The fact that this does not exist is frankly, quite disappointing. It’s such an obvious thing that needs to exist in the world—a service that frankly everyone should have. To carry that thought in terms of what my other intentions could have been, they could have been monetary. We’ve had acquisition offers from every obvious company you can think of. And we would have definitely considered them, they’re very lucrative. And we wouldn’t have focused on customer service, or on creating a brand that’s catering toward customers, keeping long term focus. If we’re doing it to get acquired. If we’re doing it to create a short term exit for investors. Those kind of intentions are clear and you see them in the decisions being made.
FORBES: Why would everyone in the world need Instacart?
Mehta:Fundamentally, it’s about what you believe the future should have. Do you believe that 100 years from now… I shouldn’t go 100 years. Let’s go 5 years from now. Do you see customers will be going grocery shopping like they have been going for the last 80, last 100 years? I fundamentally think that should not be the case. Everything that we shop for is available right now online and it’s a much more efficient way of shopping than to one by one find individual items that may not be at the store. What takes the average American household five hours to do on a weekly basis, it now takes 2 minutes.
It is so painful to go to a grocery store. It was an activity that I would question every single time. It’s a high leverage thing to focus on the quality of food that you get. But the logistics of making that happen is such a low leverage thing to do on a weekly basis. It’s the same way if you think about people using computers instead of pen and paper for something. It takes forever to do and you don’t get anywhere further than you would have with a computer. It takes up so much of your time and mental bandwidth.
FORBES: You’ve scaled so quickly is by partnering with local grocery stores, but if the vision you suggest comes to pass—that most or all of grocery shopping is done online, wouldn’t it be more efficient to cut out the supermarkets completely like Amazon does? Why do we need the stores?
Mehta: You already see changes in the grocery stores. If you walk down to New York Whole Foods stores, you’ll see lockers and dedicated checkouts for Instacart. That’s today. How that evolves is going to be interesting for everyone to see.
I think there are different ways that companies… you know, get to a different point in time. If you think of Amazon when it started, it only delivered books and it didn’t have any warehouses. It was drop shipping the books from warehouses. I’m not saying that’s how we’re going to do it, in fact most likely we’re not going to do it that way. All I’m saying is sequences are very important. I don’t know how it’s going to happen over the next five years, but of course there are going to be changes.
FORBES: So is that your prediction for the future of supermarkets?
Mehta: I don’t have any predictions for that unfortunately. I’m pretty bad at predictions.