Postmates’ difficult fundraise not a bad sign for on-demand delivery

On-demand delivery service Postmates announced just days ago that it had closed a flat round of follow-on funding after a difficult fundraise. The announcement raised questions about the health of the young on-demand delivery industry.

While there are a number of players in the food delivery space, including juggernauts like Amazon, all of whom receive a reasonable amount of traction from consumers, Postmates has emerged as the next generation in on-demand.

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The company entered the highly competitive market five years ago offering an entirely new level of convenience: hot delivery (restaurant meals) as well as groceries and personal items all within a precise delivery window. In large cities, the demand for this type of convenience is high, which accounts for the company’s workforce of more than 40,000 people transporting goods on demand. But what puts Postmates at such a distinct competitive advantage is the fact that other carriers are simply not wired, both in terms of technology and existing networks, to compete on the same delivery playing field.

So why then, despite having such a seemingly bright future, did Postmates cofounder and CEO Bastian Lehmann describe the company’s new $141 million funding round as “super, super difficult”?

Election-induced anxiety

The U.S. food delivery market is projected to grow to as much as $210 billion over the long term, from around $11 billion today, according to a recent report from Morgan Stanley Research. But anxiety around the election was felt by all, including investors. Despite the popularity of the on-demand delivery market, the election season likely took a toll on Postmates’ fundraising efforts. Had this funding round been made during a non-election season, chances are the results would have been more favorable.

Additionally, investors are becoming more prudent as concerns over economic growth continue to rise. According to a recent report, venture capital funding hit a two-year low in 2016, making fundraising increasingly more difficult.

So why choose to raise another round of funding in this current volatile market? The impending holiday season was likely a major contributing factor as the demand for on-demand delivery services increases during that time. The need to ramp up prior to the holidays and raise additional funds before then put Postmates squarely in the chaos of the final election countdown and was likely a contributing factor as to why it had to sweeten the deal for investors.

Commitment can be polarizing

Earlier this year, Postmates debuted an Amazon Prime-like subscription plan that offers customers unlimited delivery for $9.99 per month on orders over $25. It’s an interesting move considering that, in the food delivery space, order sums typically trend towards the lower end of the cost spectrum. This, coupled with the fact that Postmates does not have exclusive access to all of the restaurants or retailers in its membership, may have been a contributing factor in this particularly difficult round of funding. Given that there are other players in the space, the question investors were faced with was whether people will be willing to subscribe to just one player.

The bigger picture

As the delivery ecosystem becomes increasingly crowded — take what’s happening in the U.K. market as an example, where even the largest U.S. players, such as UberEATS, struggle to gain foothold against incumbents Just Eat and Deliveroo — services like Postmates should begin to turn inward, focusing more narrowly on regions where they’ve already seen good traction.

On an annual basis in the U.S., about $210 billion worth of food is ordered for delivery or takeout, yet, the two industry leaders — Grubhub/Seamless and Eat24 — only generated a combined $2.6 billion in food sales last year. In itself, $2.6 billion seems like decent volume, but given the market size, this is only one percent of the opportunity up for grabs. Adding fuel to the fire, these first generation services rely on restaurant couriers, meaning that they cannot control and/or optimize the speed and quality of the delivery service. They are at their mercy (so to speak). With a network of thousands of couriers, and features enabling customers to track their orders in real time, Postmates will continue to have a tremendous growth opportunity … here in the U.S., at least.

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Postmates is certainly on its way to becoming an industry leader through its founding promise — making “instant-anything.” However, given that aggressive growth is unlikely in the short term, the door is wide open for other players to enter.

Stephan Schambach is founder and CEO of NewStore, a mobile retail platform. He previously founded Demandware in 2004, which was sold to Salesforce.com for $2.8 billion in Q2 2016 and is now known as Salesforce CommerceCloud. He founded Intershop in 1992. Follow him on Twitter: @SchambachSays.