Tech Pique (6 May)

Is 10-minute grocery delivery peak tech?

Firstly, 10-minute grocery delivery is not a tech business. It’s a tech enabled business. But so are Uber and AirBnB. More on that below.

Sentiment towards tech has shifted

We hit peak public tech company valuations in December 2021. Since then, caution has turned into a significant sell off catalysed by the war in Ukraine with rising commodity and food prices leading to broad based inflation globally. Central banks have responded by raising interest rates for the first time in what feels like a decade, but the Federal Reserve in the US did raise rates in 2018. So the rotation out of tech (and growth stocks more generally) into defensive stocks and perhaps even out of equities is well underway.

Public tech company multiples have fallen significantly.

When public market multiples fall, there’s always a conversation about the lag in private market valuations – it feels like we’re talking about infrastructure companies in 2008. Should investors decrease the valuation of their private holdings as a result? There are two schools of thought:

1.      Yes, private company multiples should mirror those of public companies because at some point private company shareholders will want to exit: IPO is an exit route and so is a trade sale (and acquirers will look at public market comparable companies to inform valuations or they are a publicly listed company themselves and so their own valuation will be factored into any acquisition);

2.      No, especially if there is no publicly listed comparable company and there has been no slow down in the demand for the private company’s good or services.

Both sides have been taken by Canva investors (more here).

When public market multiples fall, later stage tech companies generally feel the impact first. This makes sense as a) theoretically they are closer to exit and b) they are more likely to be funded by crossover investors (those that can chose whether to invest in public or private markets). “It stands to reason that if they have a broad mandate as a fund strategy, they may see better deals on the public market front,” said Patrick Healey, president of Caliber Financial Partners – more here as to why some crossover investors are doubling down in the private markets and others are retreating. I don’t believe we have enough data yet (only one quarter) and think that the next two quarters of data will be more telling. My bet is more crossover investors will retreat.

We’re now hearing more VCs talk about revenue or earnings quality – a hark back to “All Revenue is Not Created Equal”. This is a far cry from the 2021 “growth over everything” mantra that was prevalent in the market. 

All of this means later stage companies will likely need to show more progress from their last funding round to get the next and / or will need to do more with less capital. Unfortunately this means redundancies and we’ve already seen a few later stage companies announce these in the last week (more here).

In Australia, Cut Through Ventures data shows April Australian funding is down and that’s mainly due to lack of large deals vs. previous months. 38 deals were completed with $371m being invested in the startup ecosystem.

There’s obviously been a shift in sentiment towards the tech sector but there’s still a significant amount of dry powder globally, some estimates put that at c.US$300bn. VCs won’t be giving that money back to their investors and so deal flow won’t fall off a cliff. Great businesses will still get funding at fair valuations.

In Australia, as CTV point out, there have been 12 new funds announced through April and EVP announced their fourth fund in May. Again, while valuations may be down vs. 2021, great business will continue to be funded.

Shippit raises $65m

Only 2 months after announcing it’s first acquisition, delivery and fleet management software company Premonition, Shippit has announced a $65m funding round at a $300m valuation. The company has tripled its valuation in the last 18 months.

Logistics and logistics-tech companies were one the main beneficiaries of COVID-19 associated regulations with eCommerce volumes increasing dramatically over the last two years. However, as we move into a new normal – some mixture of working from home and working from the office, it’ll be interesting to see if eCommerce order volumes are maintained, especially with rising inflation and thus the subsequent impact on the cost of living. I suspect discretionary spending will decrease. Amazon, which is now the largest shipper in the US, reported operating cash flow decreased 41% to US$39.3 billion for the trailing twelve months, compared with $67.2 billion for the trailing twelve months ended March 31, 2021. While Amazon is more than just a delivery company, and unfortunately they don’t break out segment earnings in their Q1 results, I suspect a fair amount of the decrease in operating cash flow was due to lower shopping volume. Shippit is obviously no where near the size of Amazon and has significant market share to capture but it will be interesting to see how it’s volumes fair the rest of this year. As I noted earlier, great businesses will still get funding in this environment and there’s no doubt Shippit has scaled incredibly over the last two years. More here.

Airtasker buys services marketplace Oneflare

Oneflare along with Service Seeking and HiPages were the three services marketplace pioneers before Airtasker came into the market to tackle the smaller jobs that the three former marketplaces didn’t focus on. For now at least it looks like Airtasker’s strategy has come out on top as Oneflare has been acquired for a quarter of its 2016 valuation. Services marketplaces are tough business models because there’s a huge incentive for customers to continue to use the service off-marketplace (thus avoiding the marketplace fee). They’re also tough because there’s usually limited exclusivity on the supply side and if you’re a service provider there’s no reason not to list your services on all the marketplaces. Consolidation therefore makes sense. Don’t be surprised to see more consolidation and eventually an increase in marketplace fees. These business need make more money off the first transaction. More on the deal here.

Send goes into voluntary administration

The 10-minute grocery delivery app which raised $3.1m in September last year had 13 sites and 300 employees across Sydney and Melbourne. More here. There are likely two key factors in Send’s decline:

1.      Competition: Milkrun raised $75m from Tiger Global and a host of other investors in January 2022 and Voly raised $18m from Sequoia Capital India in December 2021. Marketing budget can be a big driver of success or failure for an undifferentiated product and Send just didn’t have the firepower of its peers.

2.      Business Model: more relevant in the long term is that the 10-minute grocery delivery model just isn’t profitable. At least not when the company is only charging a couple of dollars for a delivery fee and maintaining supermarket prices. As we’ve seen with the food delivery market, the game here is to spend big on marketing, gain market share and then increase prices on both the items and the delivery fee. I’ll be interested to see whether Milkrun and Voly can raise more capital to justify this strategy. The question longer term is how big is the Australian market – our cities aren’t as densely populated as the US or European cities where 10-minute grocery delivery took off.

With VCs focussing on revenue quality and long term sustainable business models, we may look back at 10-minute grocery delivery funding as “peak tech” funding – pure focus on growth velocity at high valuations with little regard for how much of the tech is defensible / differentiated.