Instacart gets $2 billion valuation: Here’s why it might not last.

Why Instacart's $2 Billion Valuation Might Not Last

Why Instacart's $2 Billion Valuation Might Not Last

Moneybox
A blog about business and economics.
Jan. 13 2015 2:28 PM

Instacart Has a $2 Billion Valuation. Here’s Why That Might Not Last.

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The on-demand economy at work.

Photo Illustration by Joe Raedle/Getty Images

Late Monday night, grocery-delivery startup Instacart confirmed reports that it had raised $220 million in a funding round led by Kleiner Perkins Caufield & Byers. The new financing values the company, which facilitates same-day shopping orders from local grocery stores like Costco and Whole Foods, at $2 billion.

So, the big question: Should Instacart be worth $2 billion? Apoorva Mehta, Instacart’s CEO, told the New York Times that part of his company’s value lies in its flexibility. “We don’t hold inventory, we don’t own warehouses, we don’t own trucks,” he said. “The changes we make are software changes.”

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Like many other companies in the emerging “on-demand” or “1099” economy, Instacart relies heavily on contract workers to stay competitive and make thin margins viable. Instacart employs about 100 people but has more than 4,000 contractors who make its shopping and delivery services possible. That’s thousands of people whom Instacart doesn’t need to furnish with salaries and benefits and everything else that makes running a company expensive.

In May 2013, Fast Company wrote in a “most creative people” blurb on Mehta that Instacart “takes advantage of two peculiar things about cities in 2013: the ubiquity of smartphones and persistently high underemployment.” Matt Yglesias offered a similarly optimistic view on delivery services in Slate that September when former anything-you-want-on-demand platform and glorious dot-com-bubble bust Kozmo announced it was relaunching. “Kozmo [first] launched in the middle of an awesome labor market boom,” he wrote. “The current environment is just the opposite. Lots of young people aren’t entering the labor force at all. Wages haven’t risen in forever. This is terrible news for America, but great news for a company looking to hire a bunch of guys to run around town delivering stuff.”

The problem is it’s unclear how much longer that economic environment might hold. Wages are still mostly stagnant, but the unemployment rate is falling. The number of people employed part-time for economic reasons (who would prefer to be working full time) also ticked down ever so slightly in the latest jobs report. Some economists, like the Upshot’s Justin Wolfers, are even optimistic that slow wage growth means we will continue putting people back to work and that the so-called natural rate of unemployment is lower than previously believed.

All of that would be good news for the U.S. economy, but less promising for Instacart and startups like it, whose workers for the most part don’t seem to love their jobs. On Glassdoor, an online jobs database, Instacart contractors give it an average of 2.9 out of five stars and complain that the company doesn’t pay enough to offset out-of-pocket costs like gas or make up for insufficient customer tips. If the economy continues to gain strength and more full-time jobs become available, who’s to say those Instacart employees won’t depart for a better employment situation?

In terms of logistical challenges, it’s possible that Instacart has learned from the failures of Kozmo and Webvan Group and other instant-delivery services of the early 2000s. Online shopping and same-day or rapid delivery is much more common now than it was back then. Companies like Seamless and Uber and Amazon have trained us to expect instant service with nothing more than the touch of a button. More than ever, Instacart is a service that people want.

That said, the grocery business is notorious for its tiny margins, and Instacart still isn’t profitable—even now, with its contract-work-heavy structure, in the current, still mostly Instacart-favorable economy. When you think about it like that, a $2 billion valuation feels like a big bet.

Alison Griswold is a Slate staff writer covering business and economics.