Grocery delivery startups with low margins might drop IPO dreams for M&A reality

Getting a bunch of bananas and avocados from your favorite 15-minute grocery delivery company at 3 a.m. might be the greatest thing since sliced bread, but some of these companies are finding themselves in somewhat of a cost-related pickle in such a low-margin business.

While covering the recent news of Misfits Market acquiring Imperfect Foods, Misfits Market founder and CEO Abhi Ramesh noted it was difficult to reach profitability in the industry as sales leveled off in the past two years. Some companies have made layoffs or left markets due to “burning a tremendous amount of cash and not raising capital.”

With online grocery shopping in the U.S. poised to be a $187.7 billion industry by 2024, up from $95.8 billion in 2020, we found ourselves exploring whether other consolidation possibilities are in the pipeline, as well as the future of IPOs for startups in this space.

Experts say grocery startups are keeping a watchful eye on what happens with Instacart’s looming IPO as an indicator of additional public listings to come. But M&As could be part of the path to the public markets: Ramesh, for instance, said his company aimed to go public. The Imperfect Foods deal was a strategy for reaching profitability as one strong company.

Consolidation station

Instacart itself has been in acquisition mode lately. The delivery giant has acquired four companies in the past 12 months, including two in the past two weeks: Rosie, an e-commerce platform for local and independent retailers and wholesalers, and Eversight, an AI-powered pricing and promotions platform for consumer packaged goods brands and retailers.

Grocery delivery startups with low margins might drop IPO dreams for M&A reality by Christine Hall originally published on TechCrunch

Online grocery company Misfits Market to acquire Imperfect Foods

Misfits Market is acquiring Imperfect Foods in an all-stock deal, Misfits Market founder and CEO Abhi Ramesh told TechCrunch.

Both online grocery platforms, Misfits Market raised nearly $530 million since being founded in 2018, most recently a $200 million Series C round in 2021 that put its valuation at over $1 billion. Meanwhile, Imperfect Foods, founded in 2015 to rescue and redistribute goods, brought in a total of $229 million, including a $110 million Series D round last year.

Though Ramesh declined to disclose the valuation of the deal, he did say that as combined online grocery platforms, it would accelerate Misfits Market toward $1 billion in sales and reach profitability in early 2024, something that would not necessarily be possible as two separate companies.

“Scale is what will drive long-term profitability in online grocery and unit economics efficiency,” he said. “Until probably close to a billion dollars in revenue, it is very hard for any online grocery company to be even close to profitable.”

Indeed, both companies have similar financial and cultural synergies, Ramesh said, including a focus on eliminating food waste. In the U.S. that affects between 30% and 40% of the food supply, driving up costs, according to the companies. They’ve estimated to have collectively “rescued nearly 500 million of pounds of food that may otherwise have gone to waste,” Imperfect Foods CEO Dan Park said in a statement.

This is Misfits Market’s first acquisition and is particularly fitting, given the online grocery environment over the past few years, Ramesh said. He has long believed that the food e-commerce and grocery commerce space was “ripe for consolidation” and saw a wave of it happen in 2020 and 2021; for example, HelloFresh acquiring both Factor75 and Youfoodz.

Having a strong balance sheet, the company saw a few deals come its way, but Ramesh said the company was not super interested in pursuing them. Then a few months ago, he was introduced to one of Imperfect Foods’ investors and discussed Imperfect going after a round of funding, but it was a challenging market for capital.

“We’ve known Imperfect for a few years because we’re in the same space and we’re the two big names people talk about,” he added. “Those discussions then turned into ‘there are no two businesses that are as synergistic as these two businesses, what if we discussed something more strategic?’ That’s when we seriously started looking at this.”

The acquisition is still subject to regulatory approvals and closing, but Ramesh expects after the closing, it will take about a year for the two companies, which will have a combined 3,000 employees, to fully integrate. He will serve as CEO of the combined company, and Imperfect Foods’ executives will join the Misfits Market leadership team.

Park, who joined Imperfect Foods as CEO in January, will advise the transition and integration, then “will likely transition out post-integration,” Ramesh said.

The online grocery industry in the U.S. is poised to be a $187.7 billion industry by 2024, up from $95.8 billion in 2020. However, as Ramesh mentioned, it is difficult to reach profitability in this industry as sales have leveled off in the past two years. Some companies have had to make layoffs and leave markets due to “burning a tremendous amount of cash and not raising capital,” and public markets don’t like that, he added.

Rather, Ramesh is adamant that Misfits Market is going to be the exception and become a public company, eventually.

“That would be the next immediate step for us,” he said. “When we are profitable, we will be able to take on all of these massive incumbents.”

Wilson Sonsini Goodrich & Rosati is serving as legal advisor to Misfits Market. Solomon Partners is serving as exclusive financial advisor to Imperfect Foods, and DLA Piper is serving as legal advisor to Imperfect Foods.

Online grocery company Misfits Market to acquire Imperfect Foods by Christine Hall originally published on TechCrunch

Discount grocery startup Misfits Market raises $200M

Misfits Market, a startup known for selling “ugly” fruits and vegetables at discount prices, announced this morning that it has raised $200 million in Series C funding.

The company says this brings its total funding to $301.5 million and moves its valuation into unicorn territory (i.e., above $1 billion). It isn’t getting any more specific about that valuation, though Bloomberg reports that it’s $1.1 billion.

Founder and CEO Abhi Ramesh told me that the Delanco, New Jersey-based startup has expanded beyond produce into a variety of grocery categories. At the same time, he said all of its products remain united by a focus on “a single word, which is value.”

Misfits Market products are discounted by up to 40 percent compared to what you’d find in other grocery stores (in-person or online), which Ramesh said the company achieves by purchasing products that regular stores won’t buy or sell, often for “crazy, random” reasons. For example, he said the company had recently purchased 50,000 bottles of perfectly good olive oil “where the labeling was just angled the wrong way.”

The company says its active customer base and order volume grew 5x last year, when it shipped 77 million pounds of food to more than 400,000 customers. Ramesh said it was a big challenge to meet increased consumer demand (and it did have to create a long wait list for a while), but Misfits had advantages that many other grocery companies did not.

Misfits Market CEO Abhi Ramesh

Misfits Market CEO Abhi Ramesh

“Fortunately, because we operate our own fulfillment centers and we have our own internal tech built around this, we were not constrained by the same constraints that physical grocery stores have, where we have to close at 9pm every day, where we have to make room for regular foot traffic and Instacart shoppers,” he said. “For us, we just have to scale our fulfillment centers, which is easier said than done.”

The new round was led by Accel and D1 Capital, with participation from Valor Equity Partners, Greenoaks Capital, Sound Ventures, Third Kind Ventures and others. Accel’s Ryan Sweeney is joining Misfits’ board of directors.

“Direct-to-consumer models aren’t anything new in the food industry, but the approach Misfits Market has taken is,” Sweeney said in a statement. “Instead of focusing only on their end customer, they’ve managed to create a dynamic solution that also supports food suppliers at every level.”

With the new funding, Misfits Market plans to continue expanding into new grocery categories and new geographies. For example, it’s taking its first orders from Oregon and Washington today, and Ramesh said his goal is to be shipping to “100 percent of zip codes in the 48 lower states” in the next 12 months.