MorningWord 12/13/16 – Deliverance

by Dan December 13, 2016 9:59 am • FREE ACCESS

This morning Venture Beat ran an article (via Reuters) Silicon Valley VCs are growing wary of on-demand delivery, as an investment in such businesses is waning:

many VCs have lost faith in a sector that once seemed like the obvious extension of the success of ride-services juggernauts such as Uber.

the bulk of this year’s investment – about $1.9 billion – came in the first half of the year. Only $50 million has been invested so far in the fourth quarter

This quote from Canvas Ventures’ Ben Narasin stuck out to me:

“We looked at the entire industry and passed… There is more likely to be a big, private equity-style roll up than a venture-style outcome.”

From VC funding to Private Equity roll up in one cycle. It seems a bit aggressive. But when you consider Uber and Amazon’s entrance into on-demand in the last year, its gonna be an uphill battle to differentiate your service when competing on price with these juggernauts who are used to losing millions to establish market share in a new vertical.

A little more than a month ago, Postmates raised $140 funding (which places some doubt to Reuters dated listed above) at the same valuation (about $600 million) of its prior investment round, which the WSJ highlighted at the time, see as a sign of investor caution.

In a business to consumer space like on-demand (especially for middlemen), there is still a first-mover advantage. And it competition comes not just from upstarts but well-funded behemoths, like Grubhub (GRUB) and Seamless. Those companies merged in 2013 when combined had $100 million in revenue on joint sales of $875 million in food sales on 90,000 orders a day. In 2016, Grub is expected to grow earnings 33% yoy to 58 cents a share (GAAP), or 90 cents on an adjusted basis on 36% sales growth to nearly $500 million.  GRUB trades at 5x next year’s expected sales, expected to grow 25%, not terribly expensive for that sort of growth, but M&A has been a bit sparse with these sorts of internet services companies. For example, real estate sites Zillow (Z) and Trulia’s $3.5 billion merger in 2014 has had mixed results, and Priceline (PCLN) just wrote down $941 million of their $2.6 billion acquisition price of restaurant booking service OpenTable (a deal from 2014 as well).

Lastly, Jack Dorsey’s other company has been on my radar, Square (SQ). They bought meal delivery service Caviar for about $85 million back in 2014 but recently was rumored that they might be looking to unload it to Grubhub. In SQ Q3 reported last month, Caviar’s sales fall into “Software and data product revenue” which was $35 million growing 140% yoy, only about 20% of SQ’s total. Investors appear to be more jazzed about Square Capital and Square Cash that fall into this bucket, which likely is experiencing hyper-growth.

And that reinforces Narasin’s point as far as what’s to come for these sorts of on-demand services.

And that’s the way Wall Street and Silicon Valley hype works more often than not. In 2014 it seemed like on-demand delivery (and 3D printing) was all anyone could talk about. In 2017 we may see the great unwind highlighted by write-downs, down rounds, and fire sales.