Michael Moritz—chairman of Sequoia Capital and one of the most successful venture capitalists in history—says a simple vision led him to invest hundreds of millions of dollars in on-demand delivery startups.

“The movement of goods and services and people, by easier, more convenient means,” he said in an interview. “That’s a huge trend, enabled by smartphones.”

Kleiner Perkins Caufield & Byers— and other well-respected VC's have collectively invested >$9 billion into 125 on-demand delivery companies over the past decade, including $2.5 billion last year, according to a Reuters analysis of publicly available data.

But that flood of money has slowed to a relative droplet in the last half of last year, and with many VCs appearing to have lost faith in a sector that once seemed like the obvious extension of the success of ground transportation beasts such as UBER, it is also seeming likely there is a "lack of appetite" (excuse the pun) from current investors to invest in follow-on rounds to protect their position and avoid dilution, which obviously doesn't exactly make the cap tables for new investors very attractive.

The majority of last year’s investment—about $1.9 billion—came in the first half of the year. Only $50 million had been invested up until the fourth quarter, the Reuters analysis found. Several prominent Silicon Valley venture capitalists said in interviews that they now believe many delivery startups could fail, leaving investors with big losses.

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

Reuters analyzed investment in on-demand delivery startups using publicly available data from the companies, their backers and third-party websites such as Crunchbase and MatterMark. Inevitably the data isn't scientific and doesn't include some investments made by private firms and individuals who do not always disclose investments.

Delivery startups continue to fight it out, with fierce competition, tiny margins and a host of operating challenges that have defied easy solutions or economies of scale, venture capitalists told Reuters. Widespread discounting and artificially low consumer prices have made on-demand delivery “a race to the bottom,” said Kleiner Perkins partner Brook Porter in an interview. His firm has previously backed U.S. based startups DoorDash and Instacart and China-based Meican.

2016 saw high-profile failures, including U.S. meal delivery firm SpoonRocket, which shut down in March, and PepperTap, an Indian grocery delivery service backed by Sequoia that shut down in April. Elsewhere, DoorDash, another of Moritz’s investments, was able to close its latest VC Investment round in March only by cutting the value of its share price by 16%, according to data from CB Insights.

The entry of uberEATS and Amazon into food delivery promised to make life more difficult for smaller startups but is still yet to happen.

Sequoia has backed at least 14 local delivery firms, among them four in the United States, five in China and four in India. Sequoia did not respond to Reuters requests for a response to rising VC skepticism of delivery firms.

Venky Ganesan, of Menlo Ventures, said the sector has no clear way to cut costs or boost revenue.

“You can’t raise prices on consumers, and you can’t cut labor costs,” he said. “The core unit economics didn’t make sense.”

Dalton Caldwell, a partner at Y Combinator—the prestigious tech incubator that birthed a number of delivery startups—was also skeptical, though he thought companies with efficient operational capability could succeed.

Many delivery startups, he said, “make the assumption that once you get bigger, things will get easier, and that’s wrong. There is driver churn, operations people that cost money, more support costs."

DoorDash, founded in 2013 by four students in a Stanford University dorm room, has raised nearly $200 million from top-tier VC firms.

Focusing on food and alcohol delivery, DoorDash has agreements with local restaurants, including franchised outlets, in dozens of cities in the U.S. and Canada. But Doordash still has various operational challenges.

“There is an opportunity to redefine local commerce in cities,” says DoorDash co-founder Stanley Tang. “But we have to figure out, what are the operational challenges, and then how we can scale it up.”

I was part of the team that built JUST EAT from startup in the UK and I have since advised various companies in the global #FoodTech space, as well as top tier Venture Capital and Private Equity firms (who have already invested and others who are looking at potentially investing) so I know the space well.

My opinion is that the on-demand food delivery players are nowhere near the scale of JUST EAT, especially here in the UK, where combined they don't even get 10% of the monthly orders JUST EAT receive and whilst the common perception is that on-demand delivery has an AOV which is far greater than JE, the fact is that in many geographic areas (hyperlocal and in some cases across entire cities and countries) - this is far from the case, this combined with a chronic lack of scale, results in terrible unit economics and unsustainable burn rates.

uberEATS is treated as a startup within UBER with very little investment poured in from them thus far, inevitably resulting in limited success. I know they are specifically struggling around acquiring customers and riders, except when they give unsustainable referral credit. This expensive acquisition model works well in ground transportation for UBER (because they have raised substantially with that in mind) but it will not work in food - for anyone, as margins are notoriously low and even a viable financial model requires huge scale and efficiency.

 

Deliveroo had VC's clambering to invest when they proved their model in two London boroughs, Kensington and Chelsea and Westminster, the two boroughs have tons of restaurants and residents with high disposable incomes, so naturally the AOV and Unit Economics were impressive enough to attract top tier investors. There are lots of things I admire and respect about Deliveroo, such as a really talented team, rapid expansion, key partnerships, and great technology, sadly for them, their huge potential hasn't been matched commercially and their initial model hasn't worked in new markets. Up until their latest raise, "the word on the street" was they were burning £8m per month and could only close £100m of their £200m raise as their largest investor from the previous rounds, declined to participate and avoid the inevitable dilution. There were also rumors that Deliveroo had hired an investment bank to explore the potential of an M&A, I have no idea how much truth was in that, but in the end, they took investment from Private Equity firm Bridgepoint - As many in the investment world will know PE money differs greatly from Venture Capital and it is a risky tactic for a company with operational and scalability question marks. It is also risky as PE money is almost always linked to controlling voting rights and liquidity preferences.

Amazon entered the market last year and have also struggled to scale for many of the same reasons as uberEATS and Deliveroo.

The fundamental issues shared by all are user, restaurant and rider acquisition and the liquidity between these.

Riders simply aren't getting enough work from any of them and have very little loyalty, with many viewing this as a perfect storm to manipulate for financial gain e.g taking an hourly rate from uberEATS whilst moonlighting and being paid per drop by Deliveroo. 

This has resulted in poor rider efficiency/utilization and often riders sitting around doing nothing is a common sight, even at peak times such as Friday and Saturday nights.

In my JUST EAT and GETT days whenever I was speaking with partners, I regularly used the phrase "If the wheels aren't turning, we aren't earning" which I think is also very relevant in this case, except when the wheels of the on-demand food startups riders aren't turning, the startups runway is burning.

All three on demand players are accounting for a tiny amount of the UK food delivery market and the "word on the street" in the investment world, is that these are very much distressed assets, so I wouldn't be surprised that within the next 18 months, we see M&A's and in some cases even shutting down happening.

I am sure in 2015 there were one or two VC's considering which Porsche they would buy with their carry from their deals in the space, but if the climate of uncertainty is the case, their funds potentially stand to make losses, so the Porsche may have to wait,

That is not to say I do not think there aren't opportunities within the on-demand food space and I would honestly like to see Deliveroo in particular, do well as its good for the UK tech startup ecosystem. So I actually would smile and congratulate them if they prove me wrong.

I also know of a startup in stealth, who I believe could have potential to tackle the white space and large opportunity that the likes of Deliveroo, uberEATS and Amazon have so far been unable to or it seems are unlikely to ever capitalize on due, to the way they are structured.

I will keep the stealth startups identity under my hat, as they are still very early but I am told they are growing 25% week on week and are revenue generating, so It will be observing their growth with interest.