The online grocery delivery service aims to grow its customer base of retailers and consumers.

(Bloomberg)—Apoorva Mehta is thinking a lot about bottle deposits. Recycling fees vary by state and container size, but until recently, Mehta’s online grocery delivery startup Instacart Inc. hadn’t paid much attention to what it was charging customers purchasing soda or beer. Then they did the math and discovered that this oversight was costing the company on average 35 cents a delivery.

Instacart now charges the correct amount for bottle deposits. In the last year, it made a similar adjustment to how it accounts for local sales taxes, which has saved another 20 cents per delivery, according to the company. The penny-pinching is part of a new strategy designed to show investors that Instacart can rise above the pile of on-demand startups that have bled venture capital.

Enough VCs were convinced by Mehta’s pitch to contribute $400 million for Instacart’s latest round of funding, revealed Wednesday. With the additional cash, the investment increases the company’s valuation to $3.4 billion, an unlikely harvest in a down market. “This is not what I’ll call ‘funny math’ here,” said Mehta, the co-founder and chief executive officer. “One of the things we’ve had as a result of this round is a lot of scrutiny from the smartest investors in the world, looking at a lot of these numbers in detail.”

The largest investment came from Sequoia Capital, which had led one of Instacart’s earliest fundraising deals. It’s fairly unusual for the same VC to lead two rounds in a startup and can sometimes be seen as a less-than-rosy signal. Sequoia chairman Michael Moritz has faith. “I’m used to people being very skeptical about businesses we’ve invested in,” he said.

Sequoia was joined by other existing shareholders, including Andreessen Horowitz, Khosla Ventures, Kleiner Perkins Caufield & Byers and Joshua Kushner’s Thrive Capital. New backers include Y Combinator’s Continuity fund and Wellcome Trust, as well as consumer packaged goods companies that Mehta declined to name.


Mehta wants everyone to know that unlike a typical startup newly awash in cash, Instacart is going to spend it very carefully. The San Francisco-based company, which pays workers to pick up and deliver groceries from local supermarkets, is also eager to demonstrate that it’s taking in more revenue while spending less.

Instacart cut its burn rate by more than half in the past year, Mehta said. In addition to the bottle deposit and sales tax adjustments, the company focused on driving down “time per delivery,” a metric that’s the source of some obsession within the walls of Instacart. For inspiration, the company filmed its most efficient shoppers to learn what they did differently and then taught those lessons to new recruits. Quicker deliveries translate not only into happier customers but cost savings resulting from higher productivity.

Recent changes at Instacart haven’t resulted in happier workers, though. In October, the company said it was ditching the option to tip within the app, in favor of a new “service fee” set at 10%by default. Instacart said customers could elect to increase their contribution and that the company would distribute the fees evenly across its workforce. Instacart contractors revolted. Many contract shoppers made about half their income from tips and accused the company of trying to capture more of that money for itself. Instacart eventually said it would keep the tipping option but buried it an extra tap away in the app. The company still collects a service fee.

The controversy highlighted Instacart workers’ distrust of the company. Today shoppers print flyers to stick in grocery bags showing customers the new way to tip in the app. Longtime Instacart workers “still think that the service fee is a way to steal our tips,” said Simon Kwok, an Instacart shopper in Seattle who pens a blog about on-demand work.


Mehta said the service fee helps ensure compensation is equitably shared. “Some shoppers saw their wage go down, and some saw their wage go up,” he said.

The drive to lower expenses is producing results, Mehta said. Every Instacart market that’s at least six months old is gross-margin profitable, he said. This means 25 of the company’s 36 regions are making money before accounting for recruiting or central operations costs, such as salaries or rent for employees at headquarters. By this definition, 88% of Instacart’s volume is gross margin profitable, up from 40% a year ago. The overall business is still losing money.

Mehta said monthly revenue is now nine times larger than at the time of Instacart’s last major fundraise in January 2015, when it was valued at $2 billion. He declined to provide specifics. But the company said it’s focused on increasing two major sources of revenue: fees from grocery chains such as Whole Foods Market Inc. and advertising revenue from consumer brands. While Mehta said retail fees have become the largest revenue segment, ads are still somewhat untested.

Kimberly-Clark Corp., which makes Kleenex and Kotex, said it tried several different ways of advertising on Instacart. Last year, it paid about $20,000—negotiated down from about $40,000—for a banner-style ad that ran for four weeks, according to Francisco Silva, who manages grocery e-commerce for Kimberly-Clark. People browsing the paper goods category in the Instacart app would see ads for Cottonelle. Kimberly-Clark was more pleased with free-delivery campaigns, where it would cover that fee for customers buying, say, $25 worth of Huggies diapers.


Instacart is still experimenting. In January, it started offering promoted search results, like those on Google. Brands pay when a customer clicks on an ad or puts their product in the shopping cart. For small brands, it’s an attractive option, but costs can add up fast, said Emily Hsiao, senior brand manager for Bare Snacks, which makes chips out of apples, bananas and coconut. At $1 per click, Hsiao ran through her budget in no time. “I’m in a test-and-learn mode,” she said. Already, Instacart said 20% of its advertising revenue comes from search.

Like any e-commerce business, Instacart operates under threat from Inc., No. 1 in the Internet Retailer Top 500 Guide, which is pushing into fresh food delivery. Many retailers are afraid of Amazon, too, which Instacart can use to its advantage. Mollie Stone’s, a San Francisco-area grocery store, said it pays Instacart an 8% to 10% commission on each order. Instacart tells shop owners that 60% to 90% of sales it drives come from people who wouldn’t ordinarily shop there. Mollie Stone’s said the arrangement works, but it’s wary of Instacart sales eventually cannibalizing walk-in business.

Instacart is trying to lock in customers with its own Amazon Prime-like subscription, Instacart Express. Members pay $149 a year and get free delivery on orders over $35. Mehta, who worked for two years at Amazon, said about half of Instacart orders are from Express members, who order $450 a month on average. Investors like subscription businesses because revenue is predictable and often high-margin.

Even as Mehta emphasizes belt-tightening, he can’t resist looking at new venture capital and envisioning ways to spend it. He said Instacart plans to open in at least two dozen more markets by the end of the year. “We want to blanket the country with Instacart.”