Surviving vs. Thriving


March 10, 2017

There’s a lot of VC money getting slung around the Valley lately, and the reasons for raising couldn’t be more far apart.

On the one hand, Instacart just received a $400m cash infusion led by Sequoia Capital — which is somewhat surprising, considering that this time last year, they were losing money on most orders…

And, on the other, Airbnb closed a $1B round lead by Google Capital and Technology Crossover Ventures. Oh, and did we mention they’re now profitable?

Two companies, about $1.4B in fresh cash, and two very different unit economics (revenue and costs associated with each user). Let’s dig in:

First, Instacart yelling, “We’re not dead yet!”

According to their CFO, Ravi Gupta, the company now makes money on every delivery — before salaries, marketing, and office costs, that is. Gupta says in addition to delivery fees, annual memberships, and commissions on sales from grocery stores have helped stabilize their condition.

But, the unit economics of groceries are notoriously slim — around 1-3% for groceries stores. Of course, this doesn’t include delivery fees, but with those tight margins, Instacart still needs to pay for all the extras we mentioned above (Re: Payroll)… And you need lots of sales to make that work.

Unfortunately for them, Instacart’s sales decreased every quarter last year, while Amazon — the king of slim margin business — accelerated their grocery delivery sales (via Amazon Fresh) in the second half of 2016. So, maybe they’re back from the dead… or maybe it’s just rigor mortis.

Second, Airbnb. They’re profitable. Holy sh*t.

In the age “grow at all costs,” turns out some are actually making money, instead of burning through it. Huh, who’d have thought… And we’re not talking by a small margin here folks — they’re predicting $3B in profits by 2020.

As Fortune points out, “Airbnb is the first company to prove that the so-called sharing economy can be turned into a sustainable success.”

The company gets paid 6-12% from the guests and a small fee from the hosts to cover transaction costs. And, unlike groceries where customers may buy a $3 Gatorade, most Airbnbs run at least couple of hundred a night.

It’s unclear how they’re going to use the new money, but recently they’ve been expanding revenue streams by investing in new business lines to provide guided tours, payments and property management.

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