Greycroft’s first significant grocery industry investment took place in July 2014 when we led the Series A in Plated, which was one of the original meal-kit companies. We believed then, as we do now, that the grocery industry is ripe for innovation.
As a venture capital firm in the emerging technology sector, we try to invest as early as we can in new companies. The logic is, put capital behind startups in very large sectors that haven't yet transitioned their marketplace and operations to the internet. There have been prior, well-funded attempts made to bring the grocery industry online. Everyone reading this likely remembers, or has heard about, the Webvan debacle, which took place about two decades ago (if not, you should go read up on it).
At some point in the next 10 years, more than half of U.S. commerce is going to be transacted online. Grocery—this enormous industry that represents almost $1 trillion of the total domestic consumer spend—was, back in 2014, less than 1% online. We predicted that this was soon to undergo a dramatic change because of improvements in cold-chain technology and new dynamics in the gig economy that made same-day delivery affordable for the first time. As a result, we started investing in the platform companies that we thought were going to disrupt the way that consumers bought grocery online.
The Launch of the Greycroft Albertsons Fund
This brings us back to Plated. We built the company to the point where millions of people across the U.S. were using meal kits and ultimately exited our investment to Albertsons Cos. after three years. This connection paved the way for the late 2018 launch of the Greycroft Albertsons Fund, a $50 million venture fund for investing in emerging companies and technologies in the grocery sector. Startups that receive capital from the fund gain access to Greycroft’s experience and connections into the early-stage tech company ecosystem, along with the Albertsons brands’ nationwide footprint, infrastructure, and base of 34 million regular customers.
Albertsons’ objective is strategic; it has a window via the fund into the newest emerging grocery industry technologies. However the portfolio companies have to be able to operate independently of Albertsons, and stand-alone viability is one of the key tests before we make an investment.
From a venture capitalist perspective, the initial results are highly encouraging, to say the least. Out of 16 startup companies that received seed financing since the fund’s launch, three of them already have valuations of more than $100 million. On paper, the fund is already up over 100%.
Where Does the Fund Invest?
We are focused on the future of retail, which encompasses a couple different things. Any startup founder with a technology application or platform that converts retail traffic to e-commerce and delivery will most definitely get our attention. We also look at some direct-to-consumer products where we think a company is inventing a new category, as well as technology and software solutions that can be applied across many industries, including retail and grocery space.
On the direct-to-consumer product side, one of the criteria is finding companies that have amazing customer/user retention and good unit economics for delivery, such as favorable dollar-to-weight ratio and high gross margins. A lot of these products are found in the pharmacy department. For example, beauty, cosmetics, drugs, contact lenses, clear aligners and hearing aids.
Another component of the grocery space we feel positive about is membership retail. Any retailer that offers a robust, well-managed, membership program can effectively earn all of its profit on a customer annually in advance. It is a brilliant business model for e-commerce, because the retailer can collect all this money upfront and use it to fund marketing expense and drive faster growth. Many of these businesses are not focused on generating profit on the products (because they’re making it upfront on the memberships), so they are well-positioned to vigorously defend against underpricing by competitors and Amazon.
At Greycroft, we started investing in membership retail businesses in the grocery category, and some well-known examples include Thrive Market, Boxed, Mercato and Shipt. For the Greycroft Albertsons Fund, we're continuing to look at opportunities within grocery, where there may be a dearth of strong incumbents with membership business, such as pet care, pharmacy, convenience and other categories.
Finally, every venture capitalist is always asked how we discover great founders with viable ideas. For Greycroft, although it’s by no means a hard and fast rule, we tend to invest behind repeat entrepreneurs. Domain expertise and industry experience is valuable, especially in retail, and founders with track records of starting, running and scaling businesses are more likely to receive funding.
Ian Sigalow is a co-founder of Greycroft and a partner in the firm’s New York office. Prior to Greycroft, he founded StrongData, a pioneer in payment encryption, and spent several years as a venture capitalist with Boston Millennia Partners.
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