Startup Australian grocery delivery companies face funding difficulties as venture capital exits | party economy

Inner city dwellers who enjoy delivering groceries within 10 minutes of services like Milkrun should enjoy it while it lasts.

Analysts say rising inflation and interest rates have made venture capitalists – who, over the past decade, been willing to pour billions of dollars into “idled” businesses like Uber on the chance that they might one day turn a profit – much more conservative with cash. cash.

Two companies that provide express grocery delivery within select suburbs of major Australian cities have collapsed in the past two months: Send, which promised delivery within 10 minutes to locations in Melbourne, and smaller Quicko, which operates in Sydney and allows itself two hours. To get to the doorstep.

The meltdowns leave Milkrun, which operates in Melbourne and Sydney and is backed by investors including Atlassian billionaires Mike Cannon-Brooks and Scott Farquhar, and Volly, which operates in Sydney, battling it out for groceries orders.

Both are backed by venture capital funds that have made large sums of money: $85 million in the Melkron case And the $18 million for Foley. But Send’s collapse shows that startups can burn money as fast as they can offer fruit and vegetables.

A report to creditors filed with the Australian Securities and Investments Commission by Send’s principals, Matthew Kociansky and Matthew Jess of Woerless, shows that it burned a total of $11 million over the eight months it was traded.

As sales grew, losses increased. In October of last year, Send had sales of $81,113 and lost more than $658,000. By March, sales were up more than 50 times, to nearly $417,000 a month, but losses also shot up to $2.38 million a month.

Melkron bike
The main expense incurred by Milkrun’s competitor Send was in recruitment, according to a report submitted to Asic. Photo: Blake Sharp Wiggins/The Guardian

Officials said staff costs of $5.5 million were the main expenses over the eight-month period.

“Significant salary and wage expenses incurred are linked to the company’s 10-minute groceries business model, as the company was required to hire a large number of employees in order to meet its business model,” they said in the report.

Accordingly, despite management’s attempts to minimize losses incurred, it is clear that without external funding, the company’s business model will not be sustainable.

Patrick Coghlan, chief executive of credit reporting group CreditorWatch, says startup companies may find it difficult to get critical financing as they turn a profit.

Supply chain problems, interest rates and inflation. They will be topics of discussion for at least another six months.

“So we won’t see a quick fix, and that will put pressure especially on those companies that depend on raising capital to survive, primarily, not even for continued growth.

“If you’re…a company that requires a fundraising round right now, and there’s not some kind of clear path to profitability, you’re likely going to run into difficulties.”

Even supermarkets – experts in warehousing and logistics – have struggled with home delivery, which has thrived during the Covid lockdowns over the past two years. Neither Coles nor Woolworths offers delivery as fast as 10 minutes. Instead, delivery periods that can take several hours are reserved hours or days in advance.

Even so, while they both make money from online shopping services, the margins are lower than those they enjoy in a store.

Woolworths, which has driven fees online, has suffered the biggest erosion of its profit margin from the turnaround, analysts at UBS investment bank said in a note to clients in April.

Businesses like home delivery are expensive to start and run. In addition to employees, they need a network of warehouses close enough to customers to make deliveries – and the faster deliveries are supposed to be, the more warehouses are needed.

Milkrun delivery rider on a bike
Melcron founder Danny Milhan says, “Our ambitions have not been influenced by recent examples [grocery delivery services] It is poorly managed and implemented.” Photo: Blake Sharp Wiggins/The Guardian

Coghlan says the costs involved mean businesses that rely on heavy transportation must be able to get big to survive.

“If you look at it from an investment or venture capital perspective, you need scale, and you need a lot of investment to actually hit profitability,” he says.

“The most extreme version – though with no hookups – is Uber. Ten years later, whatever they spent, [they’re] It is still not necessarily profitable – and arguably has a global reach.”

He says the huge reach in Australia has also challenged the delivery companies.

“Australia [is a place] Where there are not as many people as you have, say, New York and other large cities globally – you are more spread out.

“So how many of these companies can actually survive? Is it some sort of winner-take-all scenario?”

Voly’s founder, Mark Heath, could not be reached for comment.

However, Melcron founder Danny Milhan says, “His company’s business model is certainly sustainable and we are outperforming original expectations and expectations.”

Reject any comparison with Send or Quicko. “Companies enter management every day in categories where competitors thrive and do very well,” he says.

“We have (confidentially) reviewed Send’s financial information and can confirm that we are a completely different company in every aspect.

“The fundamentals of scaling this business model have not changed since its launch eight months ago and our ambitions have not been affected by recent, poorly managed and poorly executed examples.”