20 years ago, Webvan was born in the midst of the dot-com bubble and appeared to be well on their way to dominating the grocery delivery market. They had nearly $800 million of funding, automated warehouses, and fleets of delivery trucks across the United States. However, when you think about grocery delivery today, you may think of Instacart who launched just 9 years ago in 2012. Some businesses are ahead of their time which was the case with the once billion dollar grocery startup, Webvan.
The Early Days of Webvan
Webvan launched in 1996 by Louis Borders. If his last name sounds familiar, it’s because he also founded Borders bookstore. The premise of the company was to make it possible for people to order groceries online and have them delivered to their doorstep within a 30-minute window of their choosing. That’s not an easy goal to achieve today much less in 1996. The excitement behind Webvan and many other internet companies during the late 1990s was high. Investors were pouring cash into companies with .com suffixes; Often times ignoring revenue, product-market fit, or the valuation of the company. It was a rush to try to capture people’s transition to life with the world wide web.
Webvan was definitely no exception. Overall the company had nearly $800 million dollars invested into it. $396 million coming from venture capitalists including Sequoia, SoftBank, Goldman Sachs and Yahoo. They quickly expanded from their starting point of San Francisco to new areas including Sacramento, San Diego, LA, Chicago, and Seattle. They used their excess of cash to place an order for $1 billion dollars with Bechtel to build state of the art warehouses that cost $35 million dollars a piece. The cash kept going out and there wasn’t nearly enough coming in. Pressure from venture capitalists to grow too big, too quickly was one of the main reasons for the company’s failure. Webvan had plans to launch in 26 markets within 24 months, building a new $35 million dollar warehouse in each market. They bought fleets of vans similar to UPS trucks to make grocery deliveries and even began buying out some of their competitors. All of this before figuring out how to make the business model successful in just one city. Dot-com companies were in the mindset that if they build it, customers will come in droves and well, they didn’t.
Why Did Webvan Fail?
Looking at the difference between Webvan and companies around today like Instacart, there’s two main distinctions. One, Webvan built their own infrastructure which caused them to burn through their funding. Their warehouses were considered among the best of the best for the late 1990s. They also housed the food people were ordering which added more expenses and logistics to the equation. Companies today primarily operate from the existing infrastructure of grocery stores. They don’t need to build warehouses full of food and complicated logistics because shoppers can go into the nearest Walmart to pick up the customers order. They also don’t require you to place your order two to three days ahead of time, forcing you to be home during the time that you chose your groceries to be delivered. When I was sick back in August I downloaded Instacart, ordered groceries, and had them at my door 3 hours later.
In late 1999, Webvan went public and raised another $375 million dollars even though they had reported less than $5 million in revenue. The stock doubled in the first day of trading, valuing the company at around $6 billion dollars… A year and a half later, you could buy a share of Webvan for $0.06. They had outlived their cash reserves, shut down operations in several markets, and even warned people that they needed another $25 million to stay afloat. Their board of directors voted to shut the company down in mid 2001. However, not everyone stopped making money. Their short lived CEO, George Shaheen left his position as CEO of Andersen Consulting where he was earning $4 million a year to join Webvan. His deal stated that he would receive 50% of his salary for the rest of his life which equals out to be 375,000 a year. He is still collecting that to this day.
Victim of the Dot-Com Bubble
It’s easy to look at the story of Webvan 20 years later and place blame on them trying to expand too quickly. That's not quite fair. Overall, Webvan was a case of overfunding and over confidence in the dot-com era. Louis Borders came back in 2020 to give grocery delivery another go with his new company, Home Delivery Service.