Investors Poured Millions Into These MBA Startups. Will They Crash & Burn?

For the past five years, Poets&Quants has ranked recently-founded MBA startups on one sole datapoint: investment raised. Each year, our annual list of the Top MBA Startups boasts entrepreneurial heavy-hitters that have raised hundreds of millions of dollars. As Poets&Quants' staff writer Nathan Allen points out, the ventures have ranged from a disruptive loan refinancing goliath to a satellite imaging software platform to a now defunct social media marketing app.

And something unprecedented happened this year. A food delivery platform rose to the top. And two other food delivery platforms followed, placing third and fifth. Between top-ranked Deliveroo, third-place DoorDash, and fifth-place Grofers, more than $800 million in venture capital and angel backing has gone into these three startups founded by MBA graduates over the past five years. All three are on different continents and all three have roots in different business schools.

“It’s hugely popular,” says Rachel Greenberger, who heads up Babson College’s Food Sol, probably the most advanced food incubator on a B-school campus. According to a publicly available Reuters analysis, tech investors have poured more than $9 billion into on-demand delivery services in the past decade. This year’s top MBA startup list supports the notion. Deliveroo, founded by a team from Wharton, raised a $275 million Series E round last April. DoorDash, which was founded by a team from Stanford, raised $127 million in a Series C round last March. In August, Techcrunch gave Deliveroo a $1 billion valuation, granting it unicorn status.

But things are not going nearly as well for these new players. At a time when losses are piling up along with legal troubles, these MBA Davids are facing increasing competition from such Goliaths as Amazon, Uber, and GrubHub. What once seemed like a great idea is now looking like those big investments could turn into massive losses. That’s not the way it was supposed to be when investors poured all that money into these campus-founded startups.

Consider Deliveroo. After losing £1.4 million ($1.75 million) in 2014, things spiraled rapidly. According to public filings, Deliveroo lost a whopping £18.1 million (about $22.7 million) in 2015. Of course, aggressive startups are willing to bleed red ink in the pursuit of rapid growth, but the increase in the year-over-year loss was a big one for such a small company.. Last August, an attempt to change up the company’s pricing model led delivery agents to protest in London. After the company changed from the £7 per hour plus £1 per delivery to a fixed £3.75 per delivery, deliverers charged they were making less than minimum wage. Deliveroo boasts 30-minute deliveries, so assuming deliverers could make two deliveries in an hour, they would still lose about £1.50 with the new pricing structure.

No less problematic, Amazon, UberEATS and GrubHub now all pose significant competition to Deliveroo, DoorDash, and other upstarts looking to break into the space. Amazon, of course brings massive knowledge and background in distribution. “They understand the interaction of ordering something online and how to do that well,” Greenberger says.

In the past month alone, UberEATS has expanded to Milwaukee, Wisconsin, Hartford, Connecticut, and Tacoma, Washington. They’ve also launched breakfast options in New York City and London. GrubHub’s quarterly revenues have risen consistently since 2012, although the company has recently failed to meet investor expectations. Quarterly profits have fluctuated wildly quarter-to-quarter, but has seen consistent gains since 2012.

To add more fuel to the fire, Amazon and Google are both experimenting with drone delivery. Last December, Amazon announced a 1- minute click-to-delivery drone drop-off in the U.K. and is experimenting with food delivery. In September, Google experimented with drone-delivery of Chipotle burritos on the Virginia Tech campus. And Just Eat, a significant Deliveroo competitor, staked claim to the first ever customer-ordered drone-delivery of a meal in London late last year. With that kind of competition looming and losses piling up, the once-talkative founders of Deliveroo, DoorDash and Grofers all declined interviews for this article.

At first, there clearly was a lot to like from an investor’s perspective. Food has been a relatively under-innovated industry for decades. And with a generation increasingly expecting anything they want with a finger tap on a screen, tech investors have been trigger happy in deploying cash into the broad umbrella of food delivery.

Baboon's Greenberger says one main reason behind the influx of investments from blue chip tech venture capitalists is they simply get it. “If someone is presenting their deck to an investor and says, ‘OK, we’re going to take the food from here and put it over there,’ people can quickly conceive of that,” she says. “Tech investors understand the tech part of how that would work.”

Indeed, such well-established Sand Hill Road investors as Khosla Ventures, Kleiner Perkins Caufield Byers, and Sequoia Capital each led Angel and Series Rounds for DoorDash. Sequoia Capital is also behind Grofers and Instacart. But the Reuters report, which was published in December, also suggests some gloomy news for the DoorDash’s and Deliveroo’s of the world — and the investors behind them. Of the $2.5 billion invested in delivery services this year, which includes the massive hauls by DoorDash and Deliveroo, $1.9 billion came in the first half of the year and only $50 million had been invested during the fourth quarter when the report was published. Greenberger says that the deluge of dollars that turned into a trickle has to do with the often overlooked complexity of moving perishable items rapidly and an increasingly crowded market.

“You see companies like Uber and Airbnb that let you know where things are and then coordinate people together. Tech investors see that potential and that part is exciting for them and they act on it, often without an appreciation for how incredibly risky and expensive it is to move a perishable product, without understanding the unique unit economics of food delivery, and the fact that some of these companies built business models that are not based on a subscription,” Greenberger explains. “So what happens is someone tries the service and leaves, or tries the service for free and leaves. Customer acquisition and customer retention are expensive and not necessarily working.”

Drones could be the answer to what Greenberger describes as one of the toughest logistical issues that have been giving food deliverers headaches for decades. "Even in the traditional grocery industry, making money on distribution is very, very tricky," she says. "And now you're not talking about pallets upon pallets of food to one particular Whole Foods Market in downtown Manhattan. You're talking about this last mile delivery where you are going to people's doors."

Another issue that is leading to the growth in amounts of food delivery ventures is customer loyalty. "If I'm a household, and I really want food from a certain restaurant, I'm craving the food from that restaurant. I don't have any loyalty to you as Deliveroo," Greenberger says. "I'm going to find the service that is going to bring me food from that restaurant."

And as much buying power as millennials might have, they are equally finicky, Greenberger maintains. "Who is going to give me the next deal? Who is going to give me something for free? Many millennials don't feel loyalty to a company," she says. "The customer retention and getting people into a rhythm — making this a part of the way they eat all of the time — this is a huge challenge."

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